What Now for the iPhone?

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

The launch of Apples 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 Apples 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 industrys subsidized pricing model. But
has it done enough to attract this wider band of subscribers other than
its acolytes?
On the face of it, Apples decisions to sell the twice as fast iPhone
3G for half the price of last years 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
However, the appeal of the iPhone 3G is such that Apples 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 years 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 Samsungs Omnia, Sony Ericssons Xperia and
LGs Dare, not forgetting Nokias 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 3Gs lack of support for Java and Flash may prove
As with any mobile handset, Apples 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 Informas latest report, Mobile Broadband
Devices: Opportunities for mobile handsets, MIDs, UMPCs and notebooks,
click here.