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THE SKEPTIC: Apple’s iPhone Strategy Lacks Bite January 10, 2007

Posted by notapundit in Economic News.

By Daniel Thomas

LONDON (Dow Jones)–Apple CEO Steve Jobs wowed attendees at San-Francisco’s MacWorld conference by saying the iPhone – a converged music player and internet device – will revolutionize the telecommunications industry.

If the reaction of shares in rival handset makers in North America and Europe are any indication, Jobs may be right. Shares in Nokia were down 2.2% Wednesday, while those of Blackberry handset-maker Research In Motion have fallen almost 8%.

But Apple’s much-anticipated foray into mobile telephony mightn’t necessarily change the market to the U.S. company’s advantage. Mobile telephony is a more complex and mature market than the one for portable music players dominated by Apple’s iPod.

Apple’s reasons for entering the handset market are clear. It’s facing stiff competition to the iPod from other consumer goods manufacturers, punting “me-too” products at more favorable prices. Phone manufacturers are designing their own handsets with MP3 music players and cameras, so Apple faces a challenge in trying to attract new consumers to buy iPods.

Apple’s first obstacle with the iPhone is pricing.

With the 4GB version retailing at $499, or GBP257, the iPhone is likely to struggle to attract the masses. In the U.S. market 80% of handsets sell for $99 or less and in large parts of Europe telecoms operators give them away “for free” in a bid to lock customers into long-term contracts.

If Apple cuts iPhone prices to compete, it would risk cannibalizing iPod sales.

But key competitors, such as Samsung, Motorola, Nokia and Sony Ericsson, are rolling out cheaper music phones.

Apple also faces tough decisions when it comes to partnering with mobile operators. In the U.S., it plans to sell iPhones through operator Cingular and its own Apple stores. But even taking into consideration Apple’s loyal fans and brand name, generating big sales of a single device backed by only one operator may be overambitious.

Teaming up with a mobile operator to provide its own Apple-branded mobile virtual network operator is one approach for a worldwide rollout, though there aren’t many MVNO success stories.

If Apple wants to sign up operators outside the U.S., it faces revenue-sharing issues given its proprietary iTunes online music and video store. Mobile operators, trying to limit customer churn and shrinking profits, are championing their own portals to bolster income.

Apple hit gold with the iPod partly because of its clever, no-nonsense design. Apple has sought to emulate that with the iPhone’s touch screen, a technology that has proven more clunky than keypads in the past.

However advanced the iPhone’s touchpad is, the technology may yet be undone by customers’ sticky fingers particularly when the iPhone is billed as an all-round telephony, E-mail, internet and video device.

The iPhone may well shake up the status-quo in the mobile phone market, but it’s main achievement might be to force market leaders Nokia and Motorola, already under pressure from nearest rivals Samsung and Sony Ericsson, to overhaul their handset designs. We could see Apple’s rivals come back bigger and better.


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