What Now for the iPhone?

In the aftermath of last Friday’s launch of the iPhone 3G, Daid McQueen, Principal Analyst at Informa Telecoms & Media, looks at the prospects for the device

The launch of Apple’s eagerly awaited iPhone 3G attracted massive interest from consumers as it went on sale in operator and Apple stores in 22 countries on Friday. By end 2008 this will be expanded to over 70 countries, including Brazil and India.
Although called the iPhone 3G, it uses a technology called HSDPA which is at least twice as fast as WCDMA 3G devices which first went on sale five years ago. What it delivers is faster Internet access and faster downloading, delivering a true mobile broadband experience.
Global demand for advanced applications and high speed Internet access is now significant. The iPhone 3G clearly delivers on that point. But many markets have had 3G or faster devices for a number of years. The sophisticated subscribers in these markets are well attuned to what high-end smartphones and their myriad associated applications can offer. Only now is Apple’s iPhone 3G providing this level of technology, and a marked increase in available applications. But has it arrived too late?

Subsidized pricing
Already Apple has surrendered its attempts to change the game and had to adopt the mobile handset industry’s subsidized pricing model. But has it done enough to attract this wider band of subscribers other than its acolytes?
On the face of it, Apple’s decisions to sell the “twice as fast” iPhone 3G for “half the price” of last year’s model and to no longer offer exclusivity deals should help Apple to meet, if not surpass, its oft-stated target of 10 million iPhones by the end of the year. Despite predictions that this estimate may be undercooked, the company has been consistently maintaining this target each quarter.
Yes, Apple now has access to an enormous distribution channel selling through some of the largest mobile operators on the planet, excluding China for the time being. Based on all the announced operators, this will give the iPhone access to over 480 million subscribers by end-2008. However, only 4% of these currently subscribe to HSDPA plans. How many of this addressable market will succumb to the charms of Steve Jobs’ latest baby?

Total cost of ownership
Present current economic circumstances may also see many baulk at the thought of parting with around $1,000 (£500) a year for at least two years for the device plus mobile contract, as available from AT&T. The price for the device may have lowered, but it would appear that anyone signing up for a new iPhone 3G contract will actually be paying more over the life of the service contract than the original 2.5G model.
However, the appeal of the iPhone 3G is such that Apple’s main challenge may not be with demand or distribution, but in fact, with its capacity to supply. This may be the fundamental reason why, for the time being at least, Apple is sticking to its target of 10 million units for 2008. In its short life in the mobile phone industry, has the company built the scale, sourced the components and signed the contracts to produce 15 million phones or more in less than 12 months?
Whilst it is highly probable, and perhaps even desirable for Apple, that demand will outstrip supply, the company will want to secure a high-margin for its new device, whilst generating economies of scale. It may have additional suppliers lined up to deliver capacity in addition to its principal Taiwanese manufacturer Hon Hai. In addition, it is believed that Apple has invested in on its own CNC tooling machines, perhaps as a means to ensure stringent quality control.
With Christmas expected to come twice this year for Apple, sales should be buoyant to year end, with expectations from Informa Telecoms & Media that sales of its iPhone 3G will pass the 12 million mark in 2008. Added to the estimated 2.2 million 2.5G versions sold in 2008, this brings a cumulative total of 14.4 million for the year. The signs are good for 2009, particularly if Apple can secure deals to Chinese and Russian operators before the end of 2008, but Informa Telecoms & Media believes next year’s iPhone 3G sales will not exceed 20 million at best.

Competing products
The iPhone is not alone in the handset market. It has sparked a number of competing touchscreen products, and indeed been the catalyst for creating a new class of device called Mobile Internet Devices (MIDs). It will face stiff competition before the end of the year, with heavyweight me-too offerings soon appearing on the market from top handset vendors, including Samsung’s Omnia, Sony Ericsson’s Xperia and LG’s Dare, not forgetting Nokia’s ‘Tube’ and the N96.
Furthermore, openness is becoming a key feature in the mobile market. While the forthcoming Google Android and next version of Nokia S60 will be open, enabling users to access to a large number of innovative applications, the number of iPhone applications remains limited. Meanwhile the iPhone 3G’s lack of support for Java and Flash may prove problematic.
As with any mobile handset, Apple’s iPhone 3G will, in time, need to be updated. It remains to be seen whether the next iPhones will be further re-inventions of itself year-after-year, extending its product lifecycle, or whether Apple will segment its portfolio to move into lower-tier devices. iPhone nano anyone?

For more information on Informa’s latest report, Mobile Broadband Devices: Opportunities for mobile handsets, MIDs, UMPCs and notebooks’, click here.

Comments

[KenC]

You said, "Furthermore, openness is becoming a key feature in the mobile market. While the forthcoming Google Android and next version of Nokia S60 will be open, enabling users to access to a large number of innovative applications, the number of iPhone applications remains limited. Meanwhile the iPhone 3G’s lack of support for Java and Flash may prove problematic."

Could you explain how this so-called "openness" is a "key feature"?

What "innovative applications" is the iPhone going to miss?

How is lack of support for "Java and Flash" "problematic"? Can you tell me what users are going to miss if the iPhone doesn't have Java? Can you tell me what phones have Flash, and I mean Flash, not Flash Lite?

[pedro]

One heck of a journalist you are.... you sound just like the equipment that you describe a me-too offerings..., not a single idea that is not a rip off from what others have already written before you... is that the best you can come up with? are you that lazy? that all you can do is imitate others? go buy yourself an iphone and do some real journalism, on what is a unique product, you probably have not even explored that much.

[Bill Burkholder]

Jeruvia's right! That the iPhone is a true computer PLATFORM, and not just another hard-wired, firmware-programmed device, is HUGE! Yes, Windows Mobile was around first. But Windows Mobile is a toy, compared with OS X.

Apple delivered TEN MILLION iPhone applications over the weekend, while also selling a million iPhone 3G systems. Developers will be a huge part of the equation here.

It's not just a phone, or an email device, or the best web browsing experience you can put in your pocket. It's also GPS-enabled. It has a camera. It has a GREAT movie player. It has THE BEST iPod (MP3) audio player built in. It has an accelerometer for game play. And to top it all off, it can use all its tools together with an on-the-go software download!

This is not just another smart phone. It is the next generation of personal computer. It will re-define the landscape for computing and telecommunications, and it will most certainly evolve rapidly. Good as it is, it is far from complete, or perfect. I can hardly wait until next summer... My Verizon contract expires then, and I'll bet they have a new version of the iPhone out by that time.

Apple is the ONE computer company that truly "gets" the user experience. So far, what I've seen them do with the iPhone indicates they're the ONE mobile device company that "gets it" as well.

David,

You make a keen observation about the emergence of the "Me-Too" crowd as a countervailing force to Apple achieving the upper reaches of 20 million units in calendar year 2009. However, what you underestimate and quite understandably miss, is the power of Apple's new App Store and the phone's underlying OS X roots - to attract and nurture a developer community not seen in this product sector. This developer community is mobilized for the iPhone unlike any other to capitalize on the real "game" - software. And unlike its competitors, the iPhone is built on top of OS X - a real-life breathing operating system which delivers a superior development environment for this critical community.
You see, Apple has belatedly learned from Microsoft that developers are key to any platform's success. Oops, there's that new word - PLATFORM - that will emerge as a key differentiator for Apple's iPhone from its competitors. And that's why developers, as much as consumers will play a significant role in the iPhone's success. And it is why the new iPhone will reach new heights - 20 million is achievable. And, I argue it will not to be stifled by the "Me-Too" crowd who, like yourself, will mistake it for a DEVICE, instead of seeing it for what it truly is - a PLATFORM.

Jeruvia