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iPhone on the cheap: Apple seizes the day to pursue content revenue

APPLE INC. IS THE NAME and, now, sheer volume is the game.
Before the “wow” factor for his much-hyped handset fades or is eclipsed by competitors, Apple CEO Steve Jobs has abandoned his initial business model for plunging into wireless and has gone with a time-tested formula: cheap phones as a conduit to recurring service and content revenue from the largest possible numbers of subscribers.
“Cheap,” of course, is a relative term for $200 and $300 iPhones (with 8 GB and 16 GB of memory, respectively) that replace the $400 and $500 iPhones now pulled from the market. But analysts said that the iPhone’s new pricing allows it to compete not just against high-tier smartphones but also against mid-tier and high-end feature phones.
The biggest lesson is that what works in the United States doesn’t necessarily play well overseas. But Mr. Apple is learning quickly how to disrupt (set new rules) and then adapt (play by existing rules) to a new industry. The content play has been an obvious goal from the start for mobile contenders, both incumbent and newcomer.
Gone is the notion, however, that the iPhone would restore a sense of value to high-end phones, as is the notion that major network operators overseas would kick back iPhone-related data revenue to the American
consumer electronics juggernaut in exchange for exclusive access to the subscriber-generating device.
With a swiftly growing global retail channel, Apple is poised to get cheap iPhones into as many hands as possible while the device’s buzz lasts and competitors play catch-up. And that broadening base of iPhone users may well deliver the sweeter, recurring revenue to be made in content and applications, in the view of several analysts.
“Apple isn’t doing this for hardware revenue,” said analyst Tero Kuittinen at Global Crown Capital. “They’re after the mobile content market.”
After all, the much-vaunted iPhone “2.0” merely provides HSDPA speeds, GPS and productivity features already marketed by its competitors, in addition to its signature touchscreen user interface.

Going for the masses
To garner a healthy slice of mobile services and content revenue – the same future being pursued by Nokia Corp., Google Inc. and other contenders – Apple must seed the planet with as many iPhones as possible. (And not just with the international proliferation of unlocked devices that Apple did little to discourage.) That’s where pricing comes in, though it remains unclear to what degree dozens of overseas operators will subsidize the device.
“Apple is working furiously to gain as much market share while it has an advantage, before rivals catch up,” said Neil Mawston, analyst at Strategy Analytics. “I think Apple is doing the right thing to get a foothold before the competition responds. Outside the U.S., the price was a sticking point. Apple seems to have learned from that and the result has been lower prices all around. I guess Apple’s goal is to be a global, mass-market player.”
“Particularly in developed markets, (a subsidized) price will drive uptake,” Mawston added. “But in less-developed countries, where subsidies are less common, the device’s high price may be a hurdle to adoption – it may well remain a niche device in less-developed markets.”
O2 in the United Kingdom, for instance, will offer the device for “free” with an $88 monthly rate plan, Mawston pointed out. But 70% to 80% of subsidies worldwide occur in just a handful of countries, the analyst said, including the U.S., U.K., France, Germany, Japan, Spain and South Korea. Everywhere else, Apple and other vendors struggle to get subsidies or the local market forbids them.
But subsidized pricing in developed markets – particularly at AT&T Mobility in the U.S., which has generated the bulk of worldwide sales so far – should effectively broaden the base of iPhone users and produce the volumes sought by Apple by the end of this year. Though Apple had set an internal and public goal of selling 10 million units in the 18 months between the iPhone’s initial launch in June 2007 and the end of this year, Wall Street’s new metric is 10 million units this year alone, said Kuittinen.
When the iPhone was priced at $400 or $500, Mawston said, Apple could only address 1% to 2% of all mobile-phone buyers. At the $200 and $300 price points, the company can address 20% to 30% of the market.
“The final piece of the puzzle is the distribution side,” Mawston said. “They’ve gone from one country in June 2007 to 22 countries in July 2008 and 70-plus by early 2009.”
Time was of the essence for Apple to expand its channels, Mawston said, especially as a bit of the bloom is off the rose. “They’ve got a strong brand and portfolio,” Mawston said, “though I must say, the ‘wow’ factor with this new design is not as great as it was with the original.”

Vendors on notice
In the near term, while the global content-and-services market is developed, a handset-to-handset battle continues. Analysts weighed the relative impacts of the new iPhone against the strengths and weaknesses of incumbent vendors such as Nokia, Samsung Electronics Co. Ltd., LG Electronics Co., Sony Ericsson Mobile Communications, Research In Motion Ltd. and HTC Corp.
While many analysts appear dubious that RIM’s formidable, productivity-oriented BlackBerry franchise is in imminent danger of being supplanted by the entertainment-oriented, QWERTY-less iPhone, Apple’s news last week was swiftly followed by cautionary remarks from financial analysts on Nokia’s high-end market position.
Both Mark McKechnie, analyst at American Technology Research, and Ittai Kidron, analyst at Oppenheimer, said last week that Nokia faced pressure from Apple and RIM at the high-end of its portfolio, while Chinese vendors pressured the Finnish company at the low-end.
“While Nokia is working on solutions to address these concerns longer term, we believe that in the near and intermediate time frame [average selling prices] and margins could see growing pressures,” Kidron wrote in a note to investors.
“Nokia will face increasing competition from new 3G smartphone introductions in the second half of 2008 and early 2009,” McKechnie wrote.
Matt Thornton, analyst at Avian Securities L.L.C., was upbeat after a Nokia management meeting in New York last week, however, and said that Nokia executives appeared confident in the company’s ability to roll out new products on time in the second half of this year. That includes a touchscreen effort viewed, in part, as a response to the iPhone.
Kuittinen said that Nokia indeed is under the microscope in large-display, touchscreen technology.
“This is Apple’s moment to undermine Nokia, which doesn’t have a big-display product yet,” Kuittinen said. “Much may depend on whether Nokia can lock in large-display component supplies. Apple, Samsung and LG may be mopping up the supply.”
“Apple has gotten its second-generation out before Nokia’s first generation, and it’s rare for Nokia to be behind like that,” Kuittinen added. “Network operators are pushing some version of large-display devices now that there’s clear evidence that large displays boost browsing traffic and application downloads. And consumer interest is shifting in that direction.”

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