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Analyst: Apple grabs huge chunk of phone profits

Company enjoys a larger share of overall profits in smartphones than do Nokia, Samsung, and LG combined, even though it sells fewer phones, says a financial analyst.

Apple turns a significantly bigger profit from each smartphone it sells than do handset makers in general, giving the company a huge chunk of the overall market's profits, according to an analyst's assessment.

Apple analyst T. Michael Walkley of investment firm Canaccord Genuity said in a note to investors this week that Apple sees a gross margin of 50 percent and operating margins of around 30 percent on its iPhone. That's within an industry where most handset makers struggle to turn a profit, or reach operating margins of even 10 percent.

As a result, he said, Apple took home 39 percent of the mobile phone industry's overall profits by selling around 17 million iPhones during the first half of 2010.

That percentage beat the 32 percent combined share earned by the top three mobile phone makers: Nokia, Samsung, and LG. Although Walkley's figures compare the iPhone with all the handsets, both low-end and high-end, made by the top three, Walkely told CNET that the comparison is valid. Manufacturers such as Nokia make money on low-end and high-end phones, with both contributing to profit margins.

Apple holds only around a 2.5 percent share of the entire mobile phone market, but it's grabbing nearly a 40 percent share of overall industry profits, he said.

And although Walkley believes Apple can attribute its smartphone success to a number of factors--its overall iOS platform, the iTunes music store, and the iPhone's user-friendy interface--he said he feels the company's ability to compete with other high-margin products will continue to drive strong earnings growth.

There's another factor not mentioned in Walkley's report that some analysts say helps Apple achieve huge profit margins on the iPhone: AT&T pays Apple a large subsidy as the exclusive U.S. supplier of the phone. With the subsidy deals between the two, a Yankee Group report from a year ago found that AT&T doesn't break even on an iPhone until the 17th month of a 24-month contract. A study done last year found that AT&T's $375 subsidy on each phone was at the time boosting Apples' iPhone profit margin to 60 percent, according to VentureBeat.

But Walkley told CNET he doesn't believe the AT&T subsidy plays a major role in Apple's total profit margins. Though the subsidy is included in his firm's estimates for Apple's operating margins, he said it's actually contributing a small percentage relative to the iPhone's global sales and distribution. Even if the subsidy were to magically go away, Walkely doesn't see any real impact to Apple's overall profit margins. He pointed out that when Apple has ended its exclusivity agreements with carriers in other countries, iPhone volume has in fact gone up, more than offsetting any small amount of revenue from subsidies paid by a single carrier.

Walkley's investor report also noted that the iPhone 4's antenna reception issue have had little effect on sales as the phone was AT&T's top seller during the first half of the year. Although the analyst said the glitch led to frustrated customers, store reps that he spoke with claimed the free bumper case fixed the problem, resulting in almost no returns of the iPhone 4. Walkley expects strong sales of the iPhone 4 in the second half of 2010.

The analyst also told CNET that he sees a strong likelihood of Verizon launching a CDMA version of the iPhone early next year, possibly in the first quarter. That new phone along with the iPhone 5 will drive even more growth in market share. Looking ahead, Walkley is forecasting sales of $63 billion for Apple in fiscal 2010, $82 billion in 2011, and $93 billion in 2012. That compares with $42 billion in 2009.