A Derivative of Apple’s (NASDAQ:AAPL) Success?

So after the market closed yesterday, I took a ride down the street to my dentist’s office for my every-six-months hour of fun and excitement with the hygienist. On my way home, I decided to take a different route that took me right past the Highland Park Apple Store, about a block away from my home. I had heard a rumor about a guy who had been camping out since last Friday for the new iPhone 4 and I had to check this out. Sure enough, with tent, Bunsen burner, lawn chairs, and an endless supply of water (it’s 103 degrees today, with not a cloud in sight), I saw him.

A Derivative of Apple's (AAPL) Success?

Justin Wagoner is a local celebrity and maybe a bit crazy for waiting in the 100+ degree endless summer solstice sun. According to him, he has been the first in line for the all of the iPhone releases at this store.

He was greeted with some honking by passing Dallas-ites during the three minutes I was there, but many just think he is crazy, according to local blogs and articles. I would call him determined and passionate to say the least. I mean, you can’t get a iPhone 4 right now, so maybe he’s not so nuts. They did pre-sell 600,000 in one day.

But this story isn’t about Justin or his fellow crazed Apple fans braving ridiculous weather conditions alone to get the iPhone 4, it’s about the slew of 3Gs and 3GSs that will be hitting the secondary market, namely by way of places like eBay, craigslist and Gazelle.com, who has received a record number of iPhone trades. By my estimates, there are more than 49 million 3Gs and 3GSs in the hands of folks around the world. When Apple rolled out the 3GS, a large amount of legacy owners upgraded their phones, and that change was largely to do with speed rather than the phone itself.

As an iPhone owner, my biggest complaints are dropped calls, but after that, first and foremost is the battery life. The iPhone 4 hopefully addresses both of these with a larger antenna, more powerful signal strength, and a much larger battery, although much of the former problem (according to industry professionals) is with the overloaded AT&T T network itself. The iPhone 4, more than any other model in my opinion, has some real “I have to upgrade” type of appeal.

For many of the folks who are currently under contract with AT&T, they have a couple choices. If they just got their 3GS between May 7 and June 15, 2010, AT&T has modified its return program and will allow customers to return their phone in exchange for the iPhone 4. iPhone users who bought before May 7 but have not had AT&T service for six months will have to pay the full $599.99 to upgrade.

Those who had service from six months to 16 or 18 months (depending on your revenue) may be eligible for an early upgrade, which means paying $399.99 for the 16-gig model. Lastly, if you have had a contract for greater than 16-18 months (or no contract), you get the special upgrade price of $199.99. Apple and AT&T are offering anyone with upgrade eligibility in 2010 the ability to get the $199.99 price. So if you are eligible for an upgrade on December 31, 2010, you would be able to upgrade on June 24 at the fully subsidized price (assuming you can get your hands on a phone). This is essentially a six-month gift from the companies.

The point of all this is that whatever you end up paying (hopefully the data above helps you figure that out) many consumers will be selling their unlocked iPhones to existing AT&T users and/or customers on other carriers. This may be an additional boost for AT&T, which prices the iPhone plans at the top of its range. So maybe traders should begin examining not only Apple’s performance, but the possibility of AT&T reaping some additional rewards from this new iPhone.

Keep in mind that there is rumor/chatter of the iPhone being available in a CDMA version for Verizon VZ and also don’t forget that the iPhone can be “unlocked” to work on other networks. AT&T also stopped offering unlimited data usage for new iPhone customers, which could work against it.

Anecdotally, I have noticed a marked improvement in the handling of calls and the overall friendliness and effectiveness of customer service at AT&T. (I have spent many hours speaking with well over a dozen reps in the past six months.)

Apple is great at creating hype and urgency when it comes to the sales of their products and is doing so again with this release. While both Research in Motion RIMM and APPL looked like they could both continue to be strong early in the year, RIMM just seems to take too long to get things done and get new products released to a smartphone-hungry public. Android and Apple have been amassing market share while we wait for a new contender from the Canadian phone maker and by the time their new OS and phone rolls out, the iPhone 4 may have sold 20 million units.

Do your homework when investing in this sector. The growth of the entire smartphone universe should help fill the cups of all the companies that are prepared and positioned with a big enough glass. For the companies that are falling behind, their cups may be too small to please thirsty investors.

Photo Credit: OptionsHouse/Jared A. Levy

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