Apple's Quarterly Earnings Show The iPhone Revolution Is Succeeding

Apple shipped 270,000 iPhones in the first weekend of sales and plans to ship 1 million in the first quarter they're available, a rate of sales seven times greater than the initial sales of the iPod, the company said in an earnings announcement Wednesday. In the long term, Apple wants to make the iPhone a third line of business, alongside the Mac and iPods.

While early iPhone sales fell far short of Wall Street expectations, that's because expectations were ridiculous. The iPhone is a smash hit.

Consumers snapped up 270,000 iPhones in the first 30 hours of sales, beginning June 29, Apple said Wednesday in a conference call announcing earnings for the quarter ending in June. AT&T sold more iPhones in the first weekend of sales than it sold any other wireless device in the first month of sales.

Moreover, customers are very satisfied with their purchase, Apple said. The company touted a USA Today report on iPhone customer satisfaction that found 90% of Apple customers were "extremely" or "very" satisfied, and 85% were "extremely" or "very" likely to recommend the product to others.

"Customers are clearly loving their iPhones," said CFO Peter Oppenheimer.

COO Timothy Cook said, "Our view is that the starting gun has fired and we're off to a great start. However, our primary focus is not on the initial sale. We're focusing on building a third great business for Apple, alongside the Mac and iPod business."

That won't be easy, because the competition is large and entrenched, Cook said. It will require "years, not months." But Apple is committed to the course. "We hope to grow ourselves step by step, year by year, model by model," Cook said.

One big gap in Apple's comments: It would not say how many iPhones shipped to date, or for any period after the first 30 hours that the device was on sale.

Total revenue recognized for the iPhone in the June quarter was $5 million, which does not include payments from AT&T, which will be included in September's quarterly results, Apple said.

Apple will move into European iPhone sales during the next quarter, starting with major countries and then adding smaller countries and expanding iPhone sales into Asia through 2008.

Gartner analyst Charles Smulders said the iPhone shipments were good news for Apple.

"I think by a normal company's standards, sales of the iPhone were very brisk," he said. "I think any sense of disappointment came from over inflated expectations in the market, which were driven in many by Apple's marketing machine."

AT&T, the exclusive service provider for the iPhone, reported on Tuesday that it activated 146,000 iPhones in the first two days of sales. Apple stock slumped, because analysts were expecting much higher; Goldman Sachs estimated sales of 700,000 units that weekend.

It remains to be seen, however, whether Apple will hit its goals for iPhone sales over the next 18 months, Smulders said. "We have to see a full month's or quarter's data to really understand the trend. There was so much marketing, so much hype and expectations in a small amount of space," he said.

Apple hopes to sell 1 million iPhones by the end of the first quarter of sales, Sept. 29. By comparison, Apple needed seven quarters to sell 1 million iPods, Oppenheimer said. And the company said it is on target to reach its previously stated goal of selling 10 million iPhones in calendar 2008.

The iPhone has pushed the mobile phone market past a "tipping point" for capabilities, said analyst Charles Le Tocq of Guernsey Research. "You've got a real browser, you've got gigabytes of memory, you have a serious processor, and you have a serious operating system. This is the type of platform that the next-generation of mobile phones will have to compete with," Le Tocq said.

Nonetheless, Apple faces steep competition, especially from Nokia with its N95 cell phone, which beats the iPhone in a feature-for-feature comparison, LeTocq said. The Nokia has a better camera -- 5 megapixels, versus 2 megapixels in the iPhone. The Nokia, like the iPhone, uses a Safari browser. But the iPhone "has that indefinable Apple cool," Le Tocq said.

Indeed, feature for feature, the iPhone is actually lacking in comparison with other smartphones, Le Tocq said. In addition to the camera's low resolution, the iPhone relies on low-speed EDGE wireless networking when not connected to Wi-Fi, rather than the much faster 3G. The iPhone's advantage is its sophisticated user interface.

Nokia will be Apple's toughest competition, and it will go head to head with Nokia when the iPhone goes into Europe, Le Tocq said.