“Serenity now!” yelled the character George Costanza in one episode of the 1990s sitcom, “Seinfeld.”
Costanza’s anguished cry underscored the unbridgeable gap between his desperate need for serenity and the angst that gripped his soul.
A roughly analogous gap may yawn between the public serenity of incumbent handset vendors and network operators and their private musings over how to react to Apple Inc.’s and AT&T’s iPhone launch. That everyone needs to react, and swiftly-while projecting serenity-is accepted by most.
With most market impacts from the iPhone yet to be determined-with the noted exception that it appeared to sell unprecedented quantities on “opening weekend”-analysts’ sense of how the competition could or should respond is as varied as the possible, competitive responses they envision.
A handful of analysts said that, in the long run, vendors needed to follow their own instincts in simplifying their products’ hardware and software and better articulate their value proposition to consumers. Short term, vendors can tout products with features emphasized by the iPhone, or, conversely, features omitted from the iPhone. Most vendors have innovations in the pipeline for the critical fourth quarter. Carriers, including AT&T, will have to emphasize the diversity of their handset offerings; some have already begun touting their 3G network speeds to strike at the iPhone’s use of AT&T’s EDGE network.
A fight for your life
Rumors have convinced many analysts that Apple is nimbly moving to deliver the next iteration of iPhone, as well as the next member of the product’s expected “family.”
In the past week, the rumor mill has gotten fresh grist: J.P. Morgan analyst Kevin Chang cited an Apple patent application for a device that might enable a Nano iPod to make cellular voice calls, while his colleague Bill Shope emphasized the inevitability of a 3G version of the iPhone.
Rob Enderle, principal at Enderle Group, believes that Apple will simultaneously release the next iPhone and a voice-enabled iPod simultaneously, probably this fall. That provides little time for incumbents to craft a marketing response to the iPhone, let alone a new product. Though the incumbents’ relentless march of innovation should produce competitive options, according to Enderle and others, that may not be enough.
“The industry’s right response-with a killer vendor out there-is to stop the infighting and resolve standards and interoperability disputes,” Enderle said. “You’re in a fight for your life. This is Apple’s version of Pearl Harbor. Now it’s up to the industry.”
Enderle said the iPhone could well bring attention to the feature phone category, but that individual vendors will have to offer products that reflect the iPhone’s key advantage: simplicity and fun.
“The question in my mind is: how many handset vendors will ‘grok’ what Apple has done in simplifying the mobile experience?” Enderle asked, rhetorically.
Who to watch
Neonode, the tiny Swedish company with the ultra-simple, touchscreen-based device, may have “gotten it” before Apple, but the company is too small-unless purchased by a larger vendor-to threaten the status quo, in Enderle’s view.
“HTC seems to ‘get it’ with their ‘Touch’ device,” he said. “HTC has been surprising me and they could turn out to be a spoiler.”
Neither Nokia or Motorola have gotten the message of simplification, according to Enderle.
“Whatever platform you use, you’re going to have to do a lot of work to make the user interface easier to use,” said Enderle. “If you can create a better overall experience at a more attractive price, you can steal the market back from Apple. I’d like to see something from Nokia and Motorola, but I don’t think they can respond that quickly. I’ll be watching Samsung, Sony Ericsson, LG and HTC.”
No need to over-react
Still, Apple’s approach to the mobile device market has limitations.
“Apple has Achilles’ heels,” Enderle added. “It doesn’t partner well. Inevitably, Apple partnerships go south.”
If AT&T decides that Apple has too much power, it may promote contenders for mind share, creating an opening for incumbent vendors, the analyst said. In the global picture, Apple has to scale linearly, region-by-region, while incumbent vendors with existing, worldwide channels can move much faster.
“No one wants to over-react, and rightly so,” said Mike Gartenberg, analyst at Jupiter Research. “No one is expecting Apple to take over the market. But a critical part of the story is that Apple will develop a family of products. And it will move more swiftly than it did in creating the iPod family. So vendors must evangelize their own compelling story and products. And they’ll need to be prepared for Apple’s follow-on products.”
“Apple has raised the bar,” Gartenberg said. “But will a rising tide lift all boats? Will consumers go for premium products or those with similar functions (from incumbents) but without the iPhone’s cachet?”
As for the vendor-carrier dynamic, Gartenberg said he found it “downright shocking” that Apple has succeeded in using the nation’s largest carrier as a sales channel for its own hardware-and services bundle-especially since Nokia has not made headway with carriers despite similar efforts.
Mark Donovan, analyst at M:Metrics, said that Apple’s splashdown in the mobile industry provides an opportunity for incumbents to step up their game.
“Competitors can try doing the same old, same old, or they can draft in the iPhone’s whirlwind, which is moving the discussion-and advertising dollars-from voice to data,” Donovan said. “Vendors should bring out their own innovative devices. It’s a fool’s errand to go apples to apples over the iPhone. It would be more effective to change the conversation and demonstrate value in the context of what people want to do with technology. You must address how technology makes life better and more fun. The iPhone is a pretty delightful experience.”
In the short run, the replacement cycle coming in the United States will drive opportunities for vendors and carriers to make a renewed pitch for their products, according to Donovan. Longer-term, the “digital generation” now coming of age will be comfortable spending on high-tier, converged devices-if incumbents seize the day.
According to Bill Morelli, analyst at IMS Research, competitors and analysts are awaiting hard data on the average consumer response to the iPhone, once the must-have crowd clears out.
“The $500-$600 price tag is a pretty significant speed bump for most folks,” Morelli said.
Add to that price tag the features that Apple left out and other vendors pack into their handsets, plus the surprise mail-in battery replacement cost and average consumers may balk, the analyst said.
“The real question is: how long can Apple and AT&T maintain the premium pricing on the iPhone?” Morelli said. “That question will be answered almost purely on the basis of how strong sales are.”
“I expect to see a number of new handset models being announced in the coming month or so,” Morelli added. “But that will have as much to do with timing for the pre-Christmas rush as anything else. You’ll see greater emphasis on multimedia, touchscreens and consumer-oriented smartphones. The right handset could see a nice bounce from the ‘iPhone effect’-folks who like the features, but don’t want to switch carriers or spend that much money.”
John Jackson, analyst at Yankee Group, noted that the U.S. International Trade Commission’s ban on the importation of new CDMA-based handsets containing patent-infringing chips from Qualcomm Inc. continued to loom over incumbent handset vendors and carriers in that space.
Unless that ban is lifted-Qualcomm is seeking a presidential veto, has filed to overturn the decision in federal appeals court and is exploring a settlement with Broadcom Corp., owner of the infringed patent in the case-Verizon Wireless and Sprint Nextel Corp. and their incumbent vendors will see their new handsets delayed to market in the critical fourth quarter, thus ceding Apple and AT&T
more time to rack up mind share and market share, Jackson said.
Verizon relies heavily upon LG, Samsung and Motorola, while Sprint Nextel depends on Sanyo and Samsung, among others.
