Originating Author: Bert Latamore
As Friday's release of the Apple iPhone approaches, the technical media are in countdown mode. The general tenor of articles is that the iPhone will revolutionize the smart phone market just as the iPod did with MP3 players. Looking beyond the hype, however, the smart phone market today is very different from the MP3 market back before the iPod. While the iPod was in many ways a pioneering device in what then was a very immature market both in terms of the technology available and market size, the iPhone is entering an established market where several players ranging from tiny Palm Inc. to innovative giant Hewlett-Packard are already well established, with lines of technically sophisticated devices. Furthermore this is a market where device design and sales are largely controlled by the service providers rather than the device manufacturers. Just to cite one example, the main reason that very few smart phones offer built-in WiFi connectivity is that the service providers see WiFi as the competition that cuts into their revenues by providing cheap downloads and voice over IP (VoIP) services.
Furthermore, when the iPod was introduced, most potential users were unaware that MP3 players existed, and those who did found them difficult to use. Apple's two brilliant strokes were first to create a fully integrated, plug-and-play MP3 solution and second to market that to a mass audience. Timing its introduction for the holiday market helped as well. It became that year's gift gadget.
In contrast the smart phone market has been active for a decade. While it is only a fraction of the overall cellular market, most people are aware that smart phones exist, and “Blackberry” and “Treo” are approaching the status of household terms. And while MP3 players are almost entirely consumer items, a large percentage of the smart phones (including Blackberres) in use are provided to users by their employers.
So how will the iPhone fare in this highly competitive market? Given how little is known about the device in these final days before its release, it is easy to project all our hopes — or all our fears — on it and see it either as a revolutionary product that will change the face of the market, or as a sure-fire flop. However, that has never stopped speculation.
First, the iPod was hugely successful because it built a huge initial sales spike, mostly by selling to customers who had never owned an MP3 player before. In contrast, virtually everybody today, down to elementary school children, already have cell phones and cellular contracts. And phone sales, particularly for high-end phones such as the iPhone, are closely tied to contract renewals. This means that regardless of the hype, the immediate potential audience for the iPhone is confined to people who:
- Are either existing AT&T subscribers or are nearing the end of their present contracts and are willing to switch to AT&T, and
- Are willing to spend $500 up front on a high-end phone (about $2,000 total over the length of the two-year contract AT&T requires with the iPhone) despite the discounts all services offer on other phones, including competing smart phones.
Second, Apple is clearly focusing on its strengths in the consumer market with the iPhone. Its ads have not even mentioned email, although presumably the iPhone does support email, which is the most-used single application on smart phones other than voice. This and IM/SMS are important traffic generators for the cellular carriers, and no carrier would allow a high-end phone that did not support both.
Clearly the ads are directed primarily at attracting new users to smart phones rather than at convincing existing smart phone users to upgrade. It has two major qualities in its favor there: the excitement it has generated in the market with its huge advertising campaign, unprecedented for a cell phone manufacturer, and its “coolness” factor, driven in part by its excellent design.
However, the iPhone is also one of the most expensive phones on the market, and the services where it excels — video and audio downloading — are expensive as well. So while the iPhone may generate lines at AT&T stores Friday morning, many of the people in those lines may find the package beyond their budgets. And some of those who do sign up may find themselves with serious sticker shock when they get that first month's bill for the stuff they downloaded.
Also, the iPhone's main competition may prove to be Apple's own video iPods. Today the street price for a 70 Gbyte video iPod is $330, about $200 less than the iPhone. While its screen is smaller than the iPhone's, it is just as bright, and while it has no wireless connectivity, a major lack that I hope Apple will remedy in future devices, a user can carry a lot of music, pictures, and video on 70 Gbytes. And downloading via a high-speed Internet connection is both faster and less expensive than using cellular.
If that is true, Apple may find it is cannibalizing its own market with the iPhone, and furthermore, by of necessity allying with AT&T, opening its captive market to competition.
The bottom line here is that the iPhone will attract users and probably will be successful in turning a profit for Apple. But it is unlikely to generate the huge influx of new users to smart phones that the iPod did for MP3 players. The iPhone’s largest contribution to smart phone development is in popularizing the large, bright display and one-finger interface. With luck the other smart phone makers will pay attention and field a choice of designs, including some that maximum screen area rather than using half of that precious real estate for thumb boards.
Action item: Ultimately the iPhone’s success will depend on its ability to attract a market of new smart phone users. The iPhone's applicability as a corporate device — providing mobile access to email, corporate IM and enterprise applications — remains to be seen. However, Apple and AT&T would have to offer significant discounts to compete against Research in Motion and other established smart phone suppliers in the corporate market outside of companies where the Macintosh is standard.
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