The presentation catalyzed a movement. Start-ups everywhere adopted a lean, low-burn, low-investment model. To this day, companies seeking funding at our venture firm, Andreessen Horowitz, proudly proclaim in their pitch decks that they are raising tiny amounts of capital so they can run lean.

On the one hand, it is a fact that capital invested is negatively correlated with returns in the venture capital industry. Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors.

So what’s a start-up to do? Much of what has been written and said about lean start-ups makes good sense. However, that advice is often incomplete, and some of the things left unsaid are the least intuitive. In this article, I will articulate some of those things left unsaid in arguing the case for the Fat Start-up.

Here is my central argument. There are only two priorities for a start-up:
Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

What the hell do I know?

“Al Pacino couldn’t be no gangsta, DeNiro in ‘Casino’ he no gangsta
Wanna be, wanna see, wan’ get a shovel
dig Tookie up n*&%^!, cause he know gangstas”

–The Game

At this point, some of you are asking yourselves, “What the hell does Ben know? If he were really smart, then he’d know that thin is in.” It turns out that I have some experience in managing a fat start-up through the dot-com implosion of the early 2000s. This chart offers a brief summary of equity market history when I was CEO of Loudcloud and Opsware (click to enlarge):

Note that the Nasdaq index is very highly correlated to the start-up funding environment. During the two years I was CEO of Opsware, the Nasdaq fell 80 percent, far more than it has fallen during the current 2008-10 downturn. So the 2000-02 environment was at least as traumatic as this one for Silicon Valley companies–and arguably much worse.

Here is a brief summary of Loudcloud/Opsware’s fund-raising history during that time:

• September 1999: Loudcloud founded
• November 1999: Loudcloud raises $21 million at a $45 million pre-money valuation (Benchmark Capital is the lead investor)
• January 2000: Loudcloud borrows $45 million from Morgan Stanley (MS)
• June 2000: Loudcloud raises $120M at a $700M pre-money valuation
• March 2001: Loudcloud goes public on Nasdaq, raises $160 million and is valued in the public markets at approximately $480 million. Total funds raised to this point: $346 million.
• August 2002: Loudcloud sells the managed services business to EDS (this was the only actual business we had at the time) for $63.5 million and becomes a software company (and changes its name to Opsware).
• September 2002: Opsware trades for 35 cents per share or approximately a $28 million market cap.
• September 2007: Hewlett-Packard (HPQ) acquires Opsware for $1.6 billion

During this period, Loudcloud/Opsware had over 20 direct competitors. Almost all the competitors from the Loudcloud era went bankrupt, including MFN/SiteSmith, Exodus, LogicTier, Williams Communication, Global Crossing, WorldCom/Digex and Storage Networks. Those that survived got bought with valuations of less than $100 million (e.g., Totality) or still have very low valuations (e.g., Navisite).

How did we do it?

“I had a dream I could buy my way to heaven
When I awoke, I spent that on a necklace”

–Kanye West

So how did we navigate through the great dot-com crash, crush the competition, emerge as the No. 1 company in our space and sell the company to HP for $1.6 billion? Did we “cut spending, cut now, and preserve capital?” Did we make cash preservation our No. 1 priority?

No, we didn’t. To underscore the point, here are Loudcloud’s average monthly cash burn figures for the quarters ending in:

• Apr 2001:  $39 million
• Jul 2001:  $35 million
• Oct 2001:  $29 million
• Jan 2002:  $25 million
• Apr 2002:  $22 million
• Jul 2002:  $19.4 million

As you can see, we were aggressively investing in the business throughout 2001 and 2002. While we did reduce our cash burn, we did not make cash preservation our No. 1 priority. As it was, over the course of the transition from Loudcloud to EDS, we sadly laid off 400 employees and transferred another 150 to EDS. However, we didn’t scrimp and save our way to a $1.6 billion acquisition: Instead, it’s what we chose not to cut that ultimately got us there.

Loudcloud was a Web-hosting business. Today, we’d call it a “cloud services” business, but people weren’t quite ready for the “cloud” in 2001. We supercharged our hosting business with software (called Opsware) that automated our Web-hosting operations. The other cloud services businesses of our day also had software investments. However, as the macroeconomic climate changed, they all “cut deep and cut now.” In the end, they ended up putting their software in maintenance mode and stopped building new features.

As we weighed a decision to make the same deep cuts in our own software R&D efforts (a move advocated by the intelligentsia of the day, as well as nearly every MBA we had working in the company), I faced a hard decision: Cut deep and get to cash flow break-even quickly or continue to invest heavily in software?

In the end, I decided to run fat so that we could continue to invest in the Opsware software. At the end of the day, I realized that much larger companies like IBM (IBM) could hire smart people and train them. But without a lasting technology-based advantage, it would be increasingly hard for us to defeat them and build our customer base despite early wins with Ford (F), Fox Sports, and the U.K. government (to name just three of our early customers).

Running fat meant that I laid off zero software engineers so that we could keep on investing in our technology, find our product/market fit, and build a lasting technological advantage.

Still, we had to reduce costs or we would clearly go bankrupt. With this new view of the world, I decided that rather than divesting our intellectual property, I would divest our business. Now, that may sound logical the way I’ve described it, but consider these facts:

• We were generating $65 million/year from the Web-hosting business.
• We were a publicly traded company with a market capitalization of close to $200 million.
• All of our investors (pubic and private) believed in and invested in the Web-hosting business.
• We had close to 500 employees at the time. Nearly all of them were supporting the Web-hosting business.
• We had no other business. We had software, but we did not have a software product and certainly did not have a software business.

Despite all of this, we sold the Loudcloud hosting business to EDS and became Opsware the software company. It was not clear that this was a good idea at the time. In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank.

During the transition, we shrank our payroll from 450 employees to fewer than 100. Even with this massive reduction in expenses, it would take another three quarters to reach cash-flow break-even, a milestone we finally reached in Q2 of 2003.

One could argue–and many did–that we should have cut a lot deeper than we did given that we only had one customer. Although EDS was a very large customer (it generated $20 million/year in revenue), a brand new software company doesn’t need 100 people. We could have taken steps to reach cash-flow break-even immediately (clearly, that might have helped us get above 35 cents per share). In other words, we could have “gone lean” by cutting deep, cutting now, and preserving capital.

But rather than do what seemed obvious, I decided to keep on investing. Here’s why: In an economic boom, cash is great, but not necessarily a meaningful competitive advantage. If every company is well funded, being super-well funded doesn’t help you win. In fact, being super-well funded can actually screw you.

But in a bust (like the one we were in), having a lot of cash can be a huge competitive advantage because you can use that cash to put enormous pressure on your underfunded competitors. And that’s what we did.

We spent aggressively to match our best competitor’s product, feature for feature. And we used our public currency to acquire important adjacent functionality (network, process and storage management) that our competitors did not have and couldn’t acquire because they didn’t have the cash (or the equity).

In doing so, we were able to beat a really high-quality start-up (Bladelogic) that did not have the massive technical and cultural baggage that came from exiting the managed services business. Bladelogic was eventually sold to BMC (BMC) for $800 million. But I’m firmly convinced that had we not spent the money, Bladelogic would have emerged as the No. 1 company in the space and gotten the $1.6 billion exit instead of Opsware.

In the end, by continuing to invest aggressively in our technological advantage despite a hellacious funding environment, we were able to turn a doomed business into a winning one.

That is the very short version of how we won the market during the great tech recession of the early 2000s.

So did we learn?

“Hegel was right when he said that we learn from history that man can never learn anything from history.”

–George Bernard Shaw (1856-1950)

Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash. As a result, the top two priorities are always to:

1. Find the product that 1,000 enterprise or 50 million consumers want to buy and grab those customers before your competitors do.
2. Raise enough cash and spend it intelligently so that you don’t go broke along the way.

Clearly, you can’t succeed if you don’t achieve both priority No. 1 and priority No. 2. So why is taking the market more important than not running out of cash? Because the only thing worse for an entrepreneur than start-up hell (bankruptcy) is start-up purgatory.

What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.

You recruited all the employees, you raised all the money and you made all the promises. You either see it through or leave–without your good reputation. No one wants to work for an entrepreneur who quits his or her own company. This is start-up purgatory, where you work just as hard, reap none of the rewards, and watch all your best people leave you. It sucks to be you.

The Bottom Line

Spending a little or spending a lot is a means, not an end. Choose the right strategy to win the market or you may end up going straight to purgatory.

As you listen to the virtues of the lean start-up–lightweight sales, light engineering, and so on–keep the following in mind:

• If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.
• You cannot save your way to winning the market.
• The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition.

Thin is in, but sometimes you gotta eat.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

That was way back in October, though, and since then, production delays have slowed the Nook’s entry into the market. The devices were hard to buy online for the 2009 holiday season. And they haven’t been available at all in stores–you could talk to a store rep about one, and if you were lucky, you got to fondle one, but that was it.

Now Barnes & Noble (BKS) says that starting Wednesday, the $259 device will be available in the “majority” of its 775 U.S. stores.

Better late than never. But not a lot better.

Barnes & Noble’s problem, of course, is that in the last couple weeks, the e-reader market has been completely redefined, at least among the chattering classes: It’s now Amazon’s (AMZN) Kindle vs. Apple’s (AAPL) iPad.

It’s still theoretically possible for Barnes & Noble–and Sony (SNE), for that matter, as well as Plastic Logic and the other would-be competitors–to elbow their way in, since the e-book market itself is still pretty young.

But they had better move very, very fast. Even if they offer devices that are as good or better than Apple’s or Amazon’s, they’ll be hard-pressed to combat the other huge advantages those two have over the rest of the pack–established e-commerce relationships with a huge customer base.

The deal, which is expected to close in the third quarter, involves a three-year traffic agreement under which Monster will become the provider of career and job content on the Yahoo (YHOO) homepage in the U.S. and Canada.

Obviously a smart move for Yahoo CEO Carol Bartz, who has been trying to narrow the company’s focus to its core portal business–most recently by selling email technology provider Zimbra to VMware (VMW).

Now, if only Bartz can unload Yahoo Games and Yahoo Shopping.

The release, below.

Monster to Acquire HotJobs Business and Enter into Multi-year Traffic Agreement with Yahoo!
NEW YORK & MAYNARD, Mass., Feb 03, 2010 —— Monster Worldwide, Inc. (MWW 16.42, +0.38, +2.37%) announced today that it has entered into a definitive agreement to acquire the assets of Yahoo! HotJobs, a leading online recruitment website, from Yahoo! (YHOO 15.46, +0.29, +1.91%) for $225 million in cash. Monster and Yahoo! have also entered into a three year commercial traffic agreement, to take effect upon the closing of the acquisition, in which Monster will become Yahoo!‘s provider of career and job content on the Yahoo! homepage in the United States and Canada. The traffic agreement calls for performance based annual payments calculated by clicks and expressions of interest, subject to annual floors and ceilings. In addition, the traffic agreement provides Monster with an exclusive right for a period of time following the closing of the acquisition to negotiate similar traffic agreements with Yahoo! properties on a global basis, including countries in Europe, Asia and Latin America, subject to certain limitations.

“HotJobs with its significant customer base plus the traffic agreement are an ideal complement to Monster’s innovative recruitment solutions and global reach,” said Sal Iannuzzi, chairman, chief executive officer and president of Monster Worldwide. “These agreements, combined with Monster’s career Communities and our recently introduced 6Sense(TM) semantic search technology, will bring substantial new benefits for employers seeking more qualified candidates and job seekers searching for more relevant opportunities across a wider range of industries—globally.”

“Bringing together Monster and HotJobs creates even greater access and opportunities for both recruiters and job seekers,” said Hilary Schneider, EVP, Yahoo! (NSDQ: YHOO). “The transaction with Monster enables us to continue to provide an important service to our users through the traffic agreement. Yahoo! remains focused on its core businesses and delivering exceptional experiences to users, partners and advertisers.”

Monster believes that the acquisition of HotJobs and the traffic agreement with Yahoo! will provide a number of benefits to jobseekers and employers, who today have more diverse competitive choices than ever before, and a value to all of its stakeholders, including its shareholders. These include:

Anticipated increase in job matches and search efficiencies–By bringing more diverse job and career opportunities, tools and resources together in one place, employers and job seekers will enjoy greater convenience and more precise search results and better matches with Monster’s patented 6Sense(TM) search technology and other innovative products.

Expected expansion of job seeker pool for employers–Monster will be able to offer its employers a significantly larger pool of candidates across diverse geographies and industries. Based on Media Metrix comScore (NSDQ: SCOR) reporting, last year HotJobs averaged 12.6 million unique visitors per month.

Expected expansion of the number of job postings across industries for job seekers–Through the combination of Monster and HotJobs job postings, job seekers will have access to more job opportunities in one place in those industries currently leading job creation, including healthcare, finance and insurance, retail, manufacturing, information and wholesale trade.

Broader reach anticipated for recruitment advertising through additional media alliances and reseller agreement–With the addition of HotJobs’s network of more than 600 daily and weekly newspapers, Monster’s alliances with local papers will grow to a total of approximately 1,000, giving Monster reach in all 50 states. The additional newspaper alliances, through their online and print classified ads, will further Monster’s current strategy of connecting job seekers with smaller, local businesses, particularly in healthcare, education, and skilled and hourly job categories.

Yahoo! will continue to manage its broader Newspaper Consortium (NPC) partnership, including providing both search and display advertising, content distribution, and its ad-serving platform, to newspapers in its NPC.

The transaction is subject to clearance under Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. The transaction is currently expected to close sometime during the third quarter of 2010, subject to regulatory review. Monster expects to realize operating synergies from the acquisition and currently anticipates the transaction will be breakeven on a pro forma full year earnings in 2010 and accretive thereafter, inclusive of the costs incurred under the traffic agreement.

Stone Key Partners LLC and Bank of America Merrill Lynch acted as financial advisors to Monster in connection with this transaction. Allen & Company LLC provided a fairness opinion to Monster’s Board.

Now, that figure includes sales made abroad, so we don’t yet know how many were sold by AT&T (T), but it’s clear that the number was substantial. In its third quarter last year, AT&T activated 2.4 million iPhones and 40 percent of those were for subscribers who switched from other carriers. So the fact that Apple (AAPL) sold as many iPhones as it did in the company’s most recent quarter, bodes well for the carrier.

As Craig Moffett over at Bernstein Research notes, “It is entirely conceivable that AT&T’s iPhone alone will account for more than 100 percent of the entire industry’s post-paid subscriber growth in the third quarter.”

But therein lies the rub. For while sales of Apple’s handset remain strong, the heavy subsidies it requires have pushed AT&T’s wireless margins down. And the heavy data traffic associated with the handset have led to widespread complaints about AT&T’s network, forcing infrastructure upgrades. Worse, AT&T’s dependence on iPhone exclusivity at a time when Apple is clearly transitioning away from such a model leaves it quite vulnerable.

“While the strong sales of the iPhone are positive for AT&T in the near term, they increase the company’s reliance on a product for which we do not believe it will be able to maintain exclusivity,” Pali Research analyst Walter Piecyk wrote in a note to clients Tuesday. “We believe more than one third of AT&T’s post paid customer base is tied to an iPhone user and that mix is likely to rise significantly over the next few quarters.”

But not this quarter. This quarter, AT&T is expected to add 1.5 million to 1.7 million net wireless customers, driven by demand for the iPhone 3GS, which was released early on in the quarter. And while another drop in wireline customers is likely to weigh on results, it will be tempered once again by the iPhone. AT&T is expected to earn 50 cents a share, compared to 55 cents in the year-earlier third quarter, according to analysts polled by Thomson Reuters, who see revenue falling to $30.9 billion from $31.3 billion.

Now, that figure includes sales made abroad, so we don’t yet know how many were sold by AT&T (T), but it’s clear that the number was substantial. In its third quarter last year, AT&T activated 2.4 million iPhones and 40 percent of those were for subscribers who switched from other carriers. So the fact that Apple (AAPL) sold as many iPhones as it did in the company’s most recent quarter, bodes well for the carrier.

As Craig Moffett over at Bernstein Research notes, “It is entirely conceivable that AT&T’s iPhone alone will account for more than 100 percent of the entire industry’s post-paid subscriber growth in the third quarter.”

But therein lies the rub. For while sales of Apple’s handset remain strong, the heavy subsidies it requires have pushed AT&T’s wireless margins down. And the heavy data traffic associated with the handset have led to widespread complaints about AT&T’s network, forcing infrastructure upgrades. Worse, AT&T’s dependence on iPhone exclusivity at a time when Apple is clearly transitioning away from such a model leaves it quite vulnerable.

“While the strong sales of the iPhone are positive for AT&T in the near term, they increase the company’s reliance on a product for which we do not believe it will be able to maintain exclusivity,” Pali Research analyst Walter Piecyk wrote in a note to clients Tuesday. “We believe more than one third of AT&T’s post paid customer base is tied to an iPhone user and that mix is likely to rise significantly over the next few quarters.”

But not this quarter. This quarter, AT&T is expected to add 1.5 million to 1.7 million net wireless customers, driven by demand for the iPhone 3GS, which was released early on in the quarter. And while another drop in wireline customers is likely to weigh on results, it will be tempered once again by the iPhone. AT&T is expected to earn 50 cents a share, compared to 55 cents in the year-earlier third quarter, according to analysts polled by Thomson Reuters, who see revenue falling to $30.9 billion from $31.3 billion.

That works out to $24 per share in cash for iPCS. This is a 34 percent premium over the company’s closing price of $17.88 per share on Friday, but perhaps a small price to pay for putting an end to the two iPCS lawsuits–one over Sprint’s acquisition of Virgin Mobile, the other over its investment in Wimax operator Clearwire.

As a result of the iPCS deal, Sprint (S) will no longer be required to divest its iDen network in certain iPCS (IPCS) territories, though iPCS had won a court ruling requiring Sprint to do so. Now, Sprint will not only keep those assets, it can peddle their services to some 700,000 iPCS customers in a territory that covers 81 markets in seven states.

Below, the official announcement:

Sprint Nextel to Acquire Wireless Affiliate iPCS, Inc.

More than 700,000 PCS Wireless Users and 270,000 Wholesale Customers to Become Sprint Direct Subscribers
Extends Company’s Direct Service Territory to an Additional 12.6 Million People
Sprint Ends Plan to Divest iDEN Network Assets in Certain Midwestern States Pending Transaction Close
OVERLAND PARK, Kan. & SCHAUMBURG, Ill.–(BUSINESS WIRE)–Oct. 19, 2009– Sprint Nextel Corp. (NYSE: S) and iPCS, Inc. (NASDAQ: IPCS) today announced an agreement for Sprint Nextel to acquire iPCS for approximately $831 million, including the assumption of $405 million of net debt. This transaction value represents 6.4x projected 2010 Adjusted Earnings Before Income, Taxes, and Depreciation (“Adjusted EBITDA”*). Sprint expects to achieve approximately $30 million of synergies annually in the transaction and expects the transaction to be free cash flow accretive to Sprint in 2010.

Under the terms of the agreement, Sprint Nextel will commence a cash tender offer to acquire all of iPCS’ outstanding common shares for $24.00 per share. This price per share represents a 34 percent premium to iPCS’ closing stock price as of October 16, 2009. The agreement also requires a minimum of a majority of the shares outstanding (on a fully-diluted basis) to be tendered in the offer. Following completion of the tender offer, any remaining shares of iPCS will be acquired in a cash merger at the same price per share. Shareholders with approximately 9.5 percent of the outstanding common shares of iPCS have already agreed to tender their shares pursuant to the tender offer and to vote their shares in favor of the merger.

The acquisition is subject to customary regulatory approvals and other customary closing conditions, and is expected to be completed either late in the fourth quarter of 2009 or early 2010. As part of the agreement, Sprint Nextel and iPCS will seek an immediate stay of all pending litigation between the parties with a final resolution to become effective upon closing of the acquisition.

As a result, Sprint will no longer be required to divest its iDEN network in certain iPCS territories and will terminate its previously announced divestiture process pending closing of the transaction.

iPCS’s services are sold under the Sprint brand name and in Sprint-branded stores. Because of the nearly seamless marketing and sales relationship between Sprint and iPCS, customers should not experience any change in their service as a result of this transaction.

“Acquiring iPCS brings added value to Sprint by expanding our direct customer base, growing our direct coverage area and simplifying our business operations,” said Dan Hesse, CEO of Sprint Nextel. “Customers in iPCS territory will see a seamless transition and continue to enjoy a superb customer experience.”

“We are very pleased to have reached this agreement with Sprint Nextel. Given the increasingly competitive landscape, we believe this is an opportune time to provide our shareholders with a liquidity event at a very attractive price. iPCS shareholders will receive a significant and immediate premium for their shares and our customers will continue to receive the same excellent service from the same dedicated people who provide that service today,” said Timothy M. Yager, president and CEO of iPCS. “We look forward to working with the Sprint Nextel team to ensure a smooth completion of the transaction and transition in the coming months.”

Last fall, a small but vocal group of Twitterers managed to shame Johnson & Johnson (JNJ) into apologizing for one of its Motrin ads.

This weekend’s replay: a howl of outrage, amplified and directed via Twitter at Amazon (AMZN), which may or may not have instituted a boneheaded policy  regarding “adult” books on its site. Or “adult” books aimed at gay and lesbian readers. Or something.

What happened? It’s not clear. But search for “#amazonfail” on Twitter and you’ll find that many Twitterers believe that Amazon has stripped the sales rankings from all manner of books that deal with gay and lesbian, and/or “adult” topics, making them less likely to appear on the site. In essence, the Twittersphere charges Amazon with trying to hide material it finds distasteful or that it thinks some customers will find distasteful.

Example: Amazon’s listing for Annie Proulx’s “Brokeback Mountain” doesn’t have a sales rank. But the author’s newest book does have one.

From what I can tell, the meme started up on Saturday, but didn’t start building steam until Sunday afternoon, when I noticed mild-mannered types like New Yorker writer Susan Orlean railing about Amazon on Twitter.

And it’s still going. As I type this, after 10 p.m. Eastern on Sunday night, the “amazonfail” keyword is generating a dozen hits on Twitter’s search page every couple of seconds.

Amazon hasn’t helped its case by remaining more or less mute throughout the weekend. But, by Sunday evening, the retailer had issued the same line to me and several other reporters: “We recently discovered a glitch to our Amazon sales rank feature that is in the process of being fixed. We’re working to correct the problem as quickly as possible.”

Not a terribly illuminating response, and I’ve asked for more information. But no matter what really happened, Amazon now has a real problem on its hands: A vocal group of people believe the retailer has discriminated in some way against gays and lesbians.

When Johnson & Johnson got caught in the Twitterstorm last fall, it had a relatively easy way out: A profuse apology to people it had offended. But Motrin has a very specific customer base and Amazon has a much broader one, and anything it says or does regarding gays, lesbians and “adult” material of any stripe is bound to upset some people.

But the company should do the right thing and clear the air anyway.

UPDATE: Here’s an apology from Amazon, which doesn’t really explain what happened, but says the problem didn’t just affect books aimed at gays and lesbians.

If Apple is indeed preparing to offer the iPhone 3G in China in partnership with China Unicom, its sales prospects are looking pretty damn good. Bank of America analyst Scott Craig believes the company could claim as much as a fifth of the smartphone market in China when it launches the device there–and in relatively short order. “Our Asia supply chain checks seem to indicate that Apple believes it can achieve an initial penetration rate, least on a sell-in basis, similar to the iPhone launch in the U.S. (about 20 percent),” Craig wrote in a recent research note. “In fact, given our channel checks in Asia, Apple likely believes it can easily meet (and likely exceed) this and/or believes in other scenarios that result in much higher unit sales levels.”

Craig estimates that Apple (AAPL) can sell 1.5 million iPhones in China in calendar 2009, assuming a midyear release and a price-point of $500-$600. He sees the company selling a further 4.6 million in calendar 2010, and 5.8 million in calendar 2011. That’s a hell of a lot of iPhones. But given the strong gray market interest in China already and the fact that China Unicom’s customer base at 150 million is roughly twice the size of AT&T Wireless, it doesn’t seem like all that much of a stretch.

If Apple is indeed preparing to offer the iPhone 3G in China in partnership with China Unicom, its sales prospects are looking pretty damn good. Bank of America analyst Scott Craig believes the company could claim as much as a fifth of the smartphone market in China when it launches the device there–and in relatively short order. “Our Asia supply chain checks seem to indicate that Apple believes it can achieve an initial penetration rate, least on a sell-in basis, similar to the iPhone launch in the U.S. (about 20 percent),” Craig wrote in a recent research note. “In fact, given our channel checks in Asia, Apple likely believes it can easily meet (and likely exceed) this and/or believes in other scenarios that result in much higher unit sales levels.”

Craig estimates that Apple (AAPL) can sell 1.5 million iPhones in China in calendar 2009, assuming a midyear release and a price-point of $500-$600. He sees the company selling a further 4.6 million in calendar 2010, and 5.8 million in calendar 2011. That’s a hell of a lot of iPhones. But given the strong gray market interest in China already and the fact that China Unicom’s customer base at 150 million is roughly twice the size of AT&T Wireless, it doesn’t seem like all that much of a stretch.