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Apple's profits soar despite recession

With 5.2 million iPhones sold in the third quarter alone, Apple is laughing in the face of those who thought the OEM would have to significantly lower its smartphone prices during the recession.

Apple claims that it could not keep up with consumer demand for the new iPhone 3G S, indicating that sales of $99 iPhones isn't the primary driver of the company's ballooning profits, which increased 15 percent from the previous quarter. All of which proves that smartphones in general -- and the iPhone in particular -- are indispensible platforms for mobile marketers.

"When Apple launched the iPhone, they said they wanted to reinvent the mobile phone experience and these latest results good indication they're executing on that plan," said Carl Howe, director of anywhere consumer research for the Yankee Group, Boston. "They're not players at the low-end of the market -- they're at the high-end, high-margin end of the spectrum.

"Clearly they've created a phenomenon in making a smartphone that's easy to use, and they've changed the expectations of consumers about what they get with a phone, and changed their expectations about wireless networks," he said. "The iPhone is driving a huge increase in amount of bandwidth that consumers are using.

"The bottom line is, if you make something easy to use, people use it."

And the more people use something, the more attractive it is for brands as a platform to reach consumers.

The success of the iPhone is having an effect on the old guard of device manufacturers such as Nokia and Motorola.

"The No. 1 thing that differentiates both RIM and Apple is software -- it's almost a cliché that a lot of the hardware vendors aren't as good at software," Mr. Howe said. "Apple said ?We can make downloading software a lot easier for consumers' and we're seeing a big shift in the marketplace because of it.

"The wild card is the newest kid on the block," he said. "The Palm Pre has lots of software and is a nice device, not knock-it-out-of-the-park amazing, but it's differentiated by its software.

"LG is at a different point of the spectrum, and while they sell high volumes of phones, they're more on mainstream side of the market, so I guarantee you won't see the same profitability numbers as Apple."

While the conventional wisdom is that Apple's iPhone is too expensive to be successful during a recession, retailers can't keep the $299 3G S model on the shelves.

"Apple proved that differentiation and brand are really important when marketing to consumers, and while for marketers it's Marketing 101, for technology companies it's heresy," Mr. Howe said. "A lot of companies pay lip service to differentiation, but don't want to be different.

"It sounds like the ?think different' motto is working for Apple," he said. "The real test of any business is ?How do you do in a recession?'

"Never confuse brains with a bull market -- a down economy tends to separate companies that execute well from those that don't, and Apple is executing well."

During Apple's fiscal 2009 third quarter that ended June 29, the company posted revenue of $8.34 billion and a net quarterly profit of $1.23 billion, or $1.35 per diluted share.

These results compare to revenue of $7.46 billion and net quarterly profit of $1.07 billion, or $1.19 per diluted share, in the year-ago quarter.

Gross margin was 36.3 percent, up from 34.8 percent in the year-ago quarter. International sales accounted for 44 percent of the quarter's revenue.

Quarterly iPhones sold were 5.2 million, representing a 626 percent unit growth from the year below.

Consumers have downloaded more than 1.5 billion applications from the App Store in its first year.

Looking ahead to the fourth fiscal quarter of 2009, Apple expects revenues between $8.7 billion and $8.9 billion.

The Wall Street Journal recently reported that BlackBerry-maker Research In Motion and Apple, despite having only 3 percent of the market share in the U.S., reap 20 percent of the profits.

In addition, Google is on record as saying that of all mobile phones they process, 50 percent of their mobile Web traffic comes from iPhones.

Mobile ad networks weigh in
The iPhone has seen a 626 percent increase in unit volume year-over-year.

"We are currently seeing what I have dubbed the ?Walmart iPhone Effect' in mobile Internet usage," said Paran Johar, New York-based chief marketing officer at JumpTap. "Whereas a few years ago mobile Internet usage was niche, it is becoming mainstream thanks to the iPhone and retailers such as Walmart selling it in mass.

"Not having mobile Internet access on your mobile phone will be like not having broadband or not having WiFi in the house and will weave into our everyday culture," he said. "As such, we are seeing dramatic demand from brands and agencies looking to leverage the mobile medium."

As mobile Internet usage continues to surge, brands will see return on investment from mobile campaigns increase accordingly.

"There is no doubt about it, the iPhone is a transformational device for the mobile advertising industry," said Marcus Startzel, senior vice president of sales at Millennial Media, Baltimore, MD.

"Mobile advertising performs five times greater than online and the iPhone is a major factor in the growth of the mobile ad industry," he said.

In fact, impressions for the iPhone and iPod touch grew 68 percent on Millenial Media's ad network in June.

"With iPhones limited to AT&T, competitors on other networks like Palm, RIM and Android are introducing innovative smartphones as well, so it will be interesting to see how the rest of the year progresses," Mr. Startzel said.

"One thing is certain, in order to reach the 59.8 million people who browse the mobile Web on various smartphones, gaming handsets and other mobile devices, marketers need a comprehensive reach strategy," he said.

The iPhone is definitely not flying under brands' radar, and the buzz surrounding it is driving more investment in the mobile channel overall.

"We are excited by the growth of iPhone OS devices, and Apple's recent announcement of 45 million devices sold worldwide is no surprise to us," said Jason Spero, general manager, North America, at AdMob, San Mateo, CA. "What's most exciting is the intensity with which browsing and applications are being used on the iPhone and iPod touch.

"In just a year, these devices have emerged as unqualified media platforms with broad and growing reach," he said. "Marketers are eager to reach this audience and are moving quickly to embrace the iPhone as an advertising platform.

"This bodes well for Apple and for the mobile marketing industry more broadly."