The iPhone Economy: A Pocket Full of Miracles
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The Fiscal Times
October 4, 2011

Another phone, another frenzy. When Apple’s new CEO Tim Cook takes to the stage today in Cupertino, Calif., he’ll be watched for how well he fills the shoes of master pitchman Steve Jobs, who stepped down as CEO in August. But whether or not Cook demonstrates the same showmanship—and whether he announces dramatic new features in the iPhone 5, or simply an updated version of the iPhone 4, or both—he’s almost certain to set off another global shopping spree.

For Apple fans and gadget freaks, it’s been a longer-than-usual—endless, some would say—16 months since Apple released the iPhone 4. Rumors, leaks, and theories about the new model have been multiplying daily, building to a crescendo that will surely have fans lining up once again to get Apple’s latest gadget.

Even as consumer confidence nosedives and spending stagnates, Apple has had little trouble ginning up voracious demand for its new phone, leading headline writers to ponder the outlandish question of whether the new iPhone can save the U.S. economy.

Then again, maybe it’s not a completely outlandish question. Various surveys conducted well before the phone was officially unveiled found that more than 30 percent of consumers planned to buy the phone, with that number topping 45 percent in some cases. Clearly, there’s no other product that could carry such hopes—no GM car, no Ford truck, no Walmart rollback. The iPhone is the biggest product for the biggest company—by market capitalization—in the world, the company that has more cash on its books than the federal government ($76 billion for Apple, as of its last earnings announcement at the end of June vs. $44 billion for the government as of last week.)

Yes, Apple polished its somewhat elite product line with the release of candy-colored iMacs, followed by the release of the mass-market iPod. And yes, the iPad has built on the success of Apple’s mobile operating system and opened the door to a whole new tablet category for consumers. But the iPhone is responsible for much of Apple’s current success. The company has sold more than 125 million phones, and it takes in about $650 for every one it sells (including those bought by AT&T or Verizon customers for a carrier-subsidized price of $199 or $299.)

When the iPhone4 was released last year, Apple raked in well over $1 billion in sales within three days. For the 12 months through June 2011, iPhone sales accounted for more than 45 percent—that’s right, nearly half—of Apple’s revenues, which totaled $28.6 billion for its fiscal third quarter. With robust gross margins near or above 50 percent on its phones, Apple by itself now has about two-thirds of all profits made by the top eight mobile phone makers.

All that, and the iPhone isn’t even the most popular smartphone system.  Devices using Google’s Android operating system shot past Apple and Research in Motion’s BlackBerry this year to take a commanding 43 percent share of the smartphone market, according to market researcher Nielsen. Apple has 28 percent of the market—though the iPhone 5 could change that. A recent survey by ad network InMobi found that the new phone, if it’s more than just a slightly updated version of the existing model, could catapult Apple into a tie with Android. Even if Android’s multiple hardware manufacturers continue to outpace Apple, the overall growth of the smartphone market leaves plenty of room for the iPhone boom to continue.

Apple’s phone has had ripple effects far beyond the company itself, altering the tech landscape—and the global economy. If Google’s Android and its own app market are booming, it is in many ways due to the smartphone success that Apple modeled. Apple has exerted its might with companies in its supply chain and inverted the traditional power structure between handset makers and service providers like AT&T and Verizon so that it now sets the terms for those who sell its hardware. It has created a whole new ecosystem for software developers by opening its App Store, and has paid out more than $2.5 billion to makers of apps sold through its store—Zinio’s popular Angry Birds games alone have been downloaded more than 350 million times—on top of the estimated $14 billion-plus it has paid to music companies for songs sold through the iTunes store.

Yet Apple has also been criticized for manufacturing the phones overseas, with parts made by Taiwanese, Japanese, and Korean companies, among others, and with assembly taking place in factories in China. A report by economists with the Asian Development Bank Institute found that Apple’s phone—and, to be fair, other tech gadgets like it—play a large part in widening the U.S. trade gap with China. Much of that imbalance hinges on accounting quirks that credit the full wholesale price of the phone to China, where it is assembled. But other numbers have spurred critics, too. For example, the Chinese workforce of Foxconn, the Taiwanese company that makes the iPhone and iPad in China, passed 1 million employees last year. Apple, which has been rapidly expanding its headcount, reportedly has about 50,000 employees, with more than 30,000 of those working in its retail stores, according to its most recent quarterly SEC filing.

While the critics continue to take issue with Apple’s manufacturing, the company’s legions of fans will no doubt be extolling the iPhone, and the mobile revolution it unleashed. “Certainly, the idea of a computer in our pocket was not new,” independent Apple analyst Daniel Tello, who blogs at Deagol’s AAPL Model, wrote in an email to The Fiscal Times. But—and here Tello lets his passion show through—the iPhone’s “revolutionary touch interface, ease of use, and seamless integration of media, browsing, and communications was so obvious a model for the future of phones that we have trouble conceiving how things could have been so bleak for so long, and how come no one had brought us the future earlier.”

The next step toward that future will be announced at 1 p.m. ET.

Executive Editor Yuval Rosenberg oversees coverage of business, the economy, technology and Wall Street. A former web editor at WNYC, Fortune and Newsweek, he also writes on a wide range of subjects.