The pre-paid market: Where a $199 iPhone 3G sells for $778 by Philip Elmer-DeWitt @FortuneMagazine June 23, 2008, 4:25 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Selling iPhones in the U.S. is pretty simple for Apple. There’s only one carrier — AT&T — and it only sells them one way: subsidized, with a 2-year contract. In the rest of the world, it’s not that simple. As many as 70% of all mobile accounts worldwide are pre-paid accounts — in which you buy the phone and pay in advance for a fixed number of minutes. In third world countries, the percentage is even higher; in South Africa, for example, 9 out of 10 mobile customers get their phones pre-paid. The problem for Apple is that iPhones sold pre-paid are unsubsidized. In Italy, for example, Vodafone and Telecom Italia Mobile have already let it be known that pre-paid iPhones will cost 499 euros ($778) for the 8GB model and 569 euros ($888) for the 16GB. (link, in Italian) The cost of an iPhone 3G in South Africa is expected to be 7,000 rand ($877), which probably puts it out of the price range of most of the population. In a report to clients on Monday, Piper Jaffray’s Gene Munster and his team address concerns on the Street (stemming from a June 10 report by Bernstein’s Toni Sacconaghi) that Apple might have trouble making inroads in the countries where pre-paid phones predominate — which is most of the nearly four score countries where Apple has iPhone contracts. Munster et al. have had to adjust their model to take pre-paid markets into account, but conclude that Apple should still make Piper Jaffray’s (aggressive) numbers. Their assumptions: That 53% of Apple’s addressable subscribers will be pre-paid, not 70%. That carriers will charge pre-paid customers not much more than $600 per iPhone That Apple currently has 20% of the U.S. smartphone market and 5% of the world market (according to Gartner) That 9 out of 10 iPhones will be bought under contract; 1 out of 10 will be sold pre-paid (see AppleInsider) That the smartphone market in 2009 will be 270 million units, or about 20% of the total phone market That a 17% share of the world smartphone market is “achievable” for Apple in calendar 2009 Bottom Line. “Despite lower percentages of contractual subscribers in the global wireless market, the iPhone’s international rollout adds confidence to our estimates of 12.9m units in CY08 and 45m units in CY09.” Munster acknowledges that early spot checks show carriers charging considerably more than $600 for pre-paid iPhones. But, he adds, “Our belief is the price will average out to $600 U.S. once there is global availability, and the phone is available at multiple carriers within a region. “The carriers have huge mark-up on the phones, because they don’t want to sell an unlocked phone,” he says. “They want to force people into contracts. If we are wrong, and the carriers sell the phone for $800 US, this would be a negative for our prepaid units, with a slight offset as some may buy a contract instead of going prepaid.” In other words, he believes Apple AAPL will collect the iPhone sales revenue one way or another.