Is the iPhone Good for Best Buy? Bernstein May Have the Answer

The New York Times posted an article on the news that consumer electronics giant Best Buy (BBY) would begin carrying the iPhone. Referencing a research report from Sanford C. Bernstein retail analyst Colin A. McGranahan, the NYT wrote the following:

"Best Buy may well make no profit on the phone itself, and even if it does, its markup will amount to $50 or less. Mr. McGranahan says this is nonetheless a good deal for Best Buy because it will be able to sell $50 to $100 in very high-margin accessories with each phone. Moreover, it can attract customers to its stores with a semi-exclusive arrangement.

Mr. McGranahan said Best Buy wouldn’t give him any information on its deal, so this is all inference based on his understanding of the economics. (When I called Best Buy, a spokesman wouldn’t comment on its arrangement with Apple and AT&T.)

Here’s how Mr. McGranahan works through his numbers, relying in part on information from other Bernstein analysts. The wholesale price of the base model iPhone, according to Bernstein’s estimates, is $550. When AT&T sells the phone for $199, it plans to make up the $350 subsidy from the monthly voice and data fees. When Apple sells that model, Bernstein estimates, it receives a $450 subsidy from AT&T.

For Best Buy, however, the deal would not be as good, Mr. McGranahan figured. If it paid a $550 wholesale price for an iPhone that it then sells for $199, it may only receive $350 to $400 back from AT&T, leaving it with a $0 to $50 profit. On another smart phone with a price to consumers of $199, Mr. McGranahan estimated the profit could easily be $100 to $200."

While it usually makes sense to be skeptical of Wall Street research, Bernstein's work tends to be truly excellent and up there with the absolute best. It is a plus for Best Buy to be carrying the iPhone, but it looks like it will make any notable difference to the bottom line, given the fact that the iPhone is only likely to offset the cannibilization of other phones, and at a lower margin. I'm still a bear on Best Buy, and this deal is more positive for Apple than it is for the retailing giant.

Still not a buyer of Apple yet, but I'm lusting after a MacBook.