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Predicting iPhone sales for dummies

Apple’s second fiscal quarter has just ended. Time for analysts to put forward their predictions for the quarter’s report (due in about 3 weeks.) If history is a guide, the estimates will range quite widely and accuracy will be determined mostly by the ability of an analyst to predict iOS device sales (and iPhone most of all).

How hard can it be?

It depends on what you choose to prioritize as the proxy for sales. In competitive markets there is usually a constraint on demand and rivalry among suppliers. If that’s your assumption you might want to use samples from the sales channel as a proxy. That means sampling distribution channels and sales through to end users at retail. You might even watch competitors and index them to each other using historic market shares.

In markets where demand outstrips supply, the best method would be to determine the constraints to production and measure those.

In Apple’s case we know from company statements that Apple faces more demand than it can supply. That makes things easier for the amateur because she can just figure out production. In other words, the logical way to forecast Apple’s iPhone sales is to guess how many they can make.

That is not trivial since production data is not public. However, we have historic sales data. We also can make assumptions about how much inventory is carried (some data is actually available here as well.)

Combining these public data sets we can build up a model of production ramps and look for patterns of growth.

So here are the patterns of sales for the four versions of iPhone sold to date with some production ramps overlaid. The monthly sales are approximations based on actual quarterly sales divided over the months according to the number of days available.

The assumptions are:

  1. Inventory during any one month has to be greater than zero.
  2. Inventory must be minimized. Ideally it should not exceed 2 million units and preferably should be around 1 million units at any given time.
  3. There is a limited amount of overlap between production of various generations. I.e. once a new version is launched, the older product should end production. Continuing sales of older model should be made available from inventory.

The following chart shows the ramps for the various versions of iPhone that satisfy these assumptions and are shown relative to the same time frame (each line shows the number of units produced per month for each generation of iPhone):

I need to stress that this is just my estimate. It’s an approximation and not reality. What it does is give reasonably accurate predictions for units sold.

What I’ve always assumed is that each new version of the iPhone sells twice as many units as the last. This is roughly translated into: each ramp is roughly double the previous ramp (at least on average). The data bears this out. Apple has been very considerate in keeping products on similar cycle times so that we can see this pattern emerge.

Once you build these models, forecasts are not that hard to make:

  • The current generation will probably sell around 60 to 65 million units.
  • The product will still sell for at least one more quarter (CQ2, FQ3)
  • We know how many have been sold so far, so we can be pretty sure what will happen in the quarter just ended and the one just starting.
  • Looking at the pattern between generations, we can guess what the iPhone 5 curve will look like and build up the units forecast by month and quarter.

You can sanity-check the forecast by looking at overall market shares for Apple and overall market growth. If share moves too far up or down it might makes sense to revisit the data.

  • kwyjibo

    The question is, how much will the next generation sell. So far, each generation doubles, do you think that will be the case for iPhone 5?

    • asymco

      Considering upgrades and the previous prediction (http://www.asymco.com/2011/03/22/saturation-and-mobile-broadband/) that there will be 500 million new smartphone users buying smartphones in the next two years, I'd say Apple has a good chance at maintaining 20% share and thus selling over 100 million iPhone 5s.

      But that misses the point of the post: you don't begin by asking how many will sell. You begin by asking how many can they make.

  • Pieter

    The real 'dummy' answer would of course be: 'More!' or 'A lot!'
    :-P

    Unless you are an Apple Hater / Hardcode Android Fan (Are those the same people, BTW?), than it will be 'Fail!'…
    ;-)

    See, this prediction-thingie is easy! :-D

    • http://www.noisetech-software.com/Perspectives.html Steven Noyes

      OK, I found that post funny. Thanks, I needed the laugh.

  • http://www.jeremycole.com/blog Don

    What boggles my mind is how they can actually make so many! The demand is intense, I still can't believe that every now & then a small line forms for the iPhone 4 over lunchtime at my local Apple store.

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  • http://www.dimspace.com Ben

    Of course, the continuing curve for the iPhone 4 and the new curve for the iPhone 5 may be very different than your projections based on recent events in Japan; earthquake, tsunami, reactor breakdown and rolling black-outs can severely affect production, and it's my understanding that many of the components required for the iDevices (i.e. NAND flash) are largely dependent on Japanese production facilities.

    I imagine that subsidiaries and competitors in nearby regions will jump in to fill the void, but you can't make up for a 40% drop in world production capacity overnight. How do you see this bearing out in general, and specifically on the Apple production capacity curves?

    On a related note: if your assumption is that their goal state is to have a million finished units on hand at any given time, what is your assumption with regards to the on-hand stock of pre-fab components? Do they already have a quarter's worth of NAND flash? Six months? Six weeks?

    -B

    • asymco

      Apple has between 2 and 4 percent market share in mobile phones and about 17 to 20 percent market share in smartphones. If supply chains cannot deliver 100% of the components required for the market, will all vendors and product lines be equally affected or will some vendors be able to secure supplies more easily than others. If the latter then who has the best chance to ensure supply?

      While I was working at Nokia it was commonly understood that the company had a supply chain advantage due to order book power. This came in handy when the market switched to color screens. Competitors were frequently shut out if supply wavered. I think this advantage has passed to Apple, at least in the high end.

      It's impossible to be certain, but the odds are that Apple will see the least disruption in its supply chain. I have not heard about problems with other vendors (i.e. with the 95% of the market) so I'm not convinced Apple has seen any problems yet.

      • CndnRschr

        I agree about Apple's supply-side advantage. This exacerbates the situation in the reverse manner to what many pundits have predicted (in that Apple competitor products will be in shorter supply allowing, during the period of constraint, for Apple to proportionately increase marketshare). You can only sell what you can build.

        NAND flash is currently driven by Toshiba and Samsung and their plants are minimally or not at all affected (although some of their suppliers may be).

        At some point, Apple will be able to saturate demand. Indeed, this naturally occurs towards the end of the annual life-cycle. The question is how well Apple can predict demand and prevent over-stock. If, as some predict, the iPhone5 is not released until September, will demand over the Summer drop precipitously? Is the delay because Apple needs increasingly more time to ramp up production for launch as the popularity grows?

  • gprovida

    If Apple keeps the iPhone 4 in a ramping production mode as it may delay the iPhone 5, then, the numbers continue to rise, by about 500,000 per month or over the April to June quarter 20 Million and Jul to Sep quarter [presuming a Fall iPhone 5 with iOS5 and cloud stuff], 22 Million more iPhones? This makes for a lot of iPhones in FY2011. These numbers seem really big, and yet the growth in production may be a lot larger if ramp down is around Fall/Christmas.

  • kevin

    Did you account for the fact that the last model continues to sell over the next year (beginning with the iPhone 3G)? Looking at the dots and the curves, it looks like you haven't. By the way, the iPhone 3GS is still selling well enough in the US to make it onto NPD's Top 10 sales charts for the Feb 2011.

    Also, in 2011, we have the CDMA iPhone 4 and the soon-to-launch ("in spring") white iPhone 4. Those might change the curves somewhat.

    Finally, there are rumors that iPhone "5" will not arrive until late summer (possibly as an LTE-enabled iPhone 4G).

    • asymco

      My third assumption covers the n-1 version. It's imperfect but I'm comfortable enough with it. They may keep a line running a year after the next generation is launched which means the next gen ramp is lower but it does not affect the overall picture much.

      If more data comes in, I can adjust this model. It's not cast in stone.

      • Iosweeky

        What about the addition of the CDMA iPhone 4 production line in Dec? Wouldn't this be additional ramp up? Or do you think they decreased orders for GSM iPhone 4 units at the same time? if not then wouldn't this be at least an additional 1 million units a month?

        I see this as a bit if a break from previous ramp up schedules, particually if more CDMA markets are finally added (china).

      • asymco

        As you can see sales for January this year are predicted to be a bit higher than Dec. The production line assumes that and would have produced the CDMA units beginning earlier in 2010.

      • Iosweeky

        Ah, I see, apologies.

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  • davel

    Why does your model hit a wall of 5.5 million in month 6 for the 4th gen phone?

  • http://twitter.com/hannes_1961 @hannes_1961

    So a rescaling/restructuring of Apple's supply chain and factoring volume seems to be needed.

    100 Million of iPhones and 40-50 iPads – how will Apple succed in delivering such a huge volume within a narrow time frame?

    • asymco

      This is the $60 billion dollar (in cash) question…

      • HockeyFan

        To put 100 million in perspective this is 1 in every 70 people on earth having an iPhone.

      • Camden1

        Don’t you mean 1 in 70 purchasing an iPhone in a year?

      • Camden1

        Don’t you mean 1 in 70 purchasing an iPhone in a year?

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  • timnash

    For the CDMA iPhone, Apple took on a new production source – Pegatron – as well as new production lines at Foxconn. So if Verizon sold 1.5 – 2 million, they should be in addition to Foxconn's GSM iPhone production.

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  • Hamranhansenhansen

    It seems like Apple needs additional new manufacturing partners. I've purchased 3 iOS devices since mid-2007, and it took 3-4 weeks to get each one. Is there really a danger in making too many?

    This year Tim Cook talked publicly about making cheaper iPhones, and the WWDC announcement says it will feature previews of iOS v5, so we are looking at an iOS v5 launch in September, at the iPod launch. Are they combining iPhone and iPod into one broader phone line? Will iPod touch and iPod nano get 3G and low monthly bills (no voice or text plan)? If so, they may need much more manufacturing volume. If so, 2012 could be like 2004, when iPod really went mainstream and the world just could not get enough iPod nanos.

  • Jonathan O

    With indicators that Apple will not have a new device until at least Q3, does this approach suggest a looming decline (drop in sales not picked up by replacement?)

    • asymco

      Only if people stop buying iPhones.

  • r.d

    Horace,

    Have you heard of Eureqa. It might be interesting to run your data
    thru it.
    http://www.youtube.com/watch?v=NhC1Qb-PQ5Q
    http://www.youtube.com/watch?v=k7GCqfV5Uk4&fe

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  • CndnRschr

    Stupid question – why are ramp ups so linear over the first 4-6 months? Is the ramp delay primarily due to iPhone line assembly rate or component supply? I'd have thought production optimization would occur within a month or two of line activation. Is Apple's tight control over device design placing it at a disadvantage over others? Is anyone else producing this volume of the same (sophisticated, high specification tolerance) device (aside from single component cpus, etc.) Are Foxconn, Pegatron etc. pioneering this capability or is there a role for Apple (aside from the design and specs)?

    • asymco

      You can shape the curve to match sales in which case you keep less inventory or you can shape the curve to have a consistent output (and absorb more inventory.) I was torn as to which way to do it. I still don't know what Apple chose to do but I got a clue that they kept inventory pretty low so I assume they have more ability to dial-in production more slowly. One could just come up with a constant figure for production that provides non-zero inventory given shipments data. It would not be efficient in terms of capital but it would perhaps be more efficient in terms of production costs.

  • handleym

    Horace, if it's not a secret on your part, what I would be most interested in is what constrains the number Apple can make? At the grossest level this splits into: are they constrained by parts, or are they constrained by (Foxconn's) manufacturing capability?
    If it is parts, which part(s) — screen or flash seem the most obvious candidates. Are the screens still single-sourced, or are there now multiple vendors who can deliver that quality of screen?
    And if it is Foxconn, what's the plan —- to lend money to Foxconn to allow it to expand faster?

    • WaltFrench

      Yes, here's the $64K question. If these things are as profitable as everybody thinks, and the perception of market share is so important to developers' efforts and contributions, why hasn't Apple risked more complexity and possibly QC issues with multiple suppliers, or demanding (paying for) more of Foxconn's efforts?

    • asymco

      Anybody who knows the answer is obligated to keep it a secret. I don't know it myself.

  • Ziad

    Vw

  • Ziad Fazel

    Very good, Horace. I question one of your assumptions, though:

    "2. Inventory must be minimized. Ideally it should not exceed 2 million units and preferably should be around 1 million units at any given time."

    I think it may be better to consider inventory as a portion of sales, rather than a fixed dollar amount. 1.5m units to lubricate 1m units of annual sales is very different than 10m units, or 60m units. While this may be distorted a bit by entry into new markets or Verizon US, perhaps you can determine a pattern for inventory as a portion of sales?

  • http://franksting.net.au Gavin Costello

    Horace
    2 questions.
    1. Have you matched this against the growth curve in the "smartphone" market and what that means for likely future growth of the iPhone?
    2. Do you agree that as the product matures, the likelihood of a slowdown in release cycles grows? And with both those questions in mind (sorry a third question)…
    3. Do you agree it is actually possible the iPhone 4 has now become a mainstream "consumer" device and therefore moving the iPhone 5 timeline to the Holiday quarter starts to make sense both from maximising the value out of a still growing, still popular device (v4)?

    • asymco

      1. I compare Apple's smartphone growth vs. the market every quarter. The growth used to be faster than the market but now it's about inline with the market. Much will depend on how quickly the industry moves, not just how quickly Apple moves.

      2. "The product" may change definition. I assume that the notion of smartphone as Apple sees it will change in one or two new OS release cycles.

      3. I don't think the slip for iPhone 5 is by design. I believe there are some issues with components being available. May be something to do with the 4G chipset.

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  • asymco

    If the life span of iPhone 4 is extended by a quarter, I would extend the red lines above horizontally an additional quarter. I won't make any changes to the data until earnings are announced.

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  • http://twitter.com/lemonsanver @lemonsanver

    Nice graphs – ( the legend on the 1st one needs to switch 3G & 3GS in its list for consistency )Nice graphs – ( the legend on the 1st one needs to switch 3G & 3GS in its list for consistency )

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