Analyst Angle: iPhone Impact

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Compete’s Miro Kazakoff, Jupiter Research’s Julie Ask and iGR’s Iain Gillott.
I’m pretty sure that Congress just officially declared June “iPhone Anticipation Month,” necessitating daily coverage in every newspaper, trade paper and blog. I actually haven’t written about the iPhone since my First Impressions report after I first played with one in January, so it is high time I did my civic duty and offer a pre-launch assessment and discuss the customer base, competition and industry outlook.
Customer Segmentation
Six months of hype has certainly raised expectations, and if there are bugs or battery issues, all bets are off (if you think the PS3 backlash is bad, just imagine what faulty iPhones-which require a two year commitment-could be like). Regardless of how insanely cool the iPhone’s user interface is, some consumers will always gravitate towards phones with real buttons on them. Still, barring obvious quality problems, the iPhone should sell millions of units in the first six to nine months. I would consider anything above 1 million units of a $500 handset a smash hit, and it looks like Apple will sell considerably more-possibly many times that. So who’s buying? There are three separate groups of potential iPhone customers:
1. The Apple Faithful. The Mac remains between 3% and 4% PC market share overall (Apple claims 12% of U.S. notebook sales), but Apple has also sold 100 million iPods, mostly to Windows users. Even discounting iPod replacement sales, Apple fans are no small fringe group of zealots. Given the success of iTunes TV show and movie downloads, there should be a reasonable market for the iPhone just as the first widescreen iPod.
2. People who want the latest “it” thing. The interesting thing is that the analysis here almost always ignores how large a market segment this has become. Cost is no object to this group. Nokia has sold well over 1 million 8800’s at ASPs north of $800. LG reports initial sales of the Prada phone are doing well. But perhaps the most critical indicator of how many units a hot phone can sell is the original Motorola Razr V3. Before Motorola devalued its fashion icon, it sold 5 million of Razrs over the first nine months of availability under nearly identical terms as the iPhone: a $500 price point and exclusive availability at Cingular.
3. Some mainstream consumers-especially baby boomers-will buy the iPhone as well. There are a lot of people who just hate, hate, hate their phones. They’re looking for simplicity, but won’t purchase a product that makes them feel stupid. The iPhone walks you through a lot of basic phone tasks (making calls, browsing through contacts, etc.) in a clear manner with relatively large on-screen buttons and a certain flair (graphics are crisp and transitions are richly animated). Vodafone’s Simply and Palm’s Treo 680 do this, at least to a certain extent, but the Simply is a dumbed-down product, and the Treo looks complicated and just isn’t all that fun to use. If the iPhone’s UI holds up under extensive use-I got to use it for all of 15 minutes and haven’t received a production unit yet-then this segment could be huge.
There may be disagreement on the size of the first two groups, but not whether they’ll queue up to buy. If Apple sells just to them, it will have a solid hit on its hand. The third group, mainstream consumers, is quite controversial. This is where having actually used an iPhone-if only for a short while-colors my analysis.
Sitting in Jobs’ keynote back in January, I was rather shocked at the $500-$600 price point, which is well outside the $0-$50 even sophisticated phones like Samsung’s Sync garner. (The Sync is an HSDPA-capable, 2-megapixel clamshell cameraphone with a QVGA screen and touch-sensitive music control keys). But then I used an iPhone, and the sticker shock wore off, replaced by a different kind of shock-that Apple had actually managed to build a product that lives up to the hype.
The iPhone’s user interface is gorgeous, addictive, and includes several innovations that are just “right.” Scrolling down web pages or through lists is done with a flick of a finger-the screen speeds up and slows down as if it’s on a large wheel affected by gravity and friction. The iPhone switches from vertical to landscape orientation automatically (there are supposedly some Analog Devices chips inside, but it may as well be magic). The instantaneous response of the interface on the iPhone-at least on the hand-built sample I used-was a joy; that responsiveness is not matched by the similarly all-touchscreen LG Prada phone or HTC’s Touch. The screen’s real estate is used to walk the user through tasks, but in a non-patronizing way; I saw no Wizards (or talking paperclips, for that matter). Visual voicemail is a welcome improvement, even if messages are not truly unified. Apple’s traditional attention to detail such as detailed graphical shading and screen transitions stands out on the iPhone because this level of polish has been sorely lacking in the market.
In the U.S., the lack of 3G will be missed, but EDGE is probably fast enough for a 1.0 product, assuming Apple convinces AT&T to price unlimited data within consumer pricing norms ($5-$20) rather than at corporate rates ($40-$80). Making crazy-expensive data plans mandatory has been a major factor in the relatively slow sales of Motorola’s Q over at Verizon Wireless, another product that was also supposed to broaden the smartphone market to regular consumers.
Of course, Apple will have to market the iPhone as a phone. The first three TV ads are straightforward walkthroughs of the many things you can do with the multi-purpose unit-making phone calls is almost forgotten.
Even if the phone functionality is properly highlighted, asking regular folks to spend ten times more on an Apple product than a feature-rich Samsung or Motorola (with real buttons!) is a stretch. This is where the iPod functionality comes in. Many consumers will purchase the iPhone for the user experience but rationalize the purchase based on the included gigabytes of storage. Once considered as an iPod, the price isn’t as galling. Plus, in this country at least, people will just put it on their credit cards anyway.
Competing with the iPhone
Any discussion of the iPhone’s competitive impact needs to be split up geographically. For reasons I cannot begin to fathom, Nokia and Sony Ericsson have left the high-end consumer segment of the U.S. market completely open for Apple. Other than productivity-oriented devices, there is basically nothing to buy above $200 at carrier retailers, where the vast majority of phones are sold. A receptive home market lets Apple figure out what works, and what doesn’t, before moving abroad.
The iPhone needs the incubation period because once it arrives in Europe and Asia, it will encounter serious, entrenched competition. Sony Ericsson’s W950 has offered European consumers a touchscreen smartphone with 4GB flash memory and music and web capabilities-plus UMTS-for nearly two years. LG and HTC have competing touchscreen devices for sale today, and consumers who prioritize imaging, video, GPS navigation, and 3G-along with music, web, and Wi-Fi-will be drawn to Nokia’s N95.
Still, even in Europe, Apple has the power of its brand and an unmatched ecosystem of accessories. Consumers expect Apple to create easy-to-use devices. The iPhone’s user interface appears to be consistent with that expectation-it is not an overlay over something else (like TouchFLO on HTC’s slick new Touch phone) and users will never have to pull out a stylus and precisely hit a spot four pixels wide (like on Sony Ericsson’s W950). Apple’s secret weapon is the 40-pin connector: there are iPod docks in living rooms, in cars, and (soon) in airplanes, and the iPhone taps into this ecosystem from day one. An UpStage-like battery wallet will al
most certainly be one of the best selling iPhone accessories, as it solves the much-lamented lack of a removable battery. Apple also carries over a key to the iPod’s success, iTunes, with its ready source of ripped and bought content along with a strong synchronization engine that consumers already know how to use.
Industry Outlook
As my mother in law reminded me last night, anything that brings the industry’s focus on making phones easier to use is a good thing. Not that I’d ever argue with my mother in law, but she’s definitely right on the money here. Nokia and Palm have also been vocal in welcoming Apple’s entry as “validating” their mobile computing initiatives. The truth is, anything that raises average selling prices would be good for Nokia and Sony Ericsson in the U.S., but neither company appears ready to capitalize on it. They missed the Razr, and they may be missing the iPhone, too. Long term, having Apple as a competitor in the multimedia space is quite dangerous; Apple is unlikely to make a dent in Nokia’s unit volumes, but high margin products like the Nokia’s Nseries offset lower margin phones sold in emerging markets.
iPhone clones simply can’t generate the same pull as the original, because Apple excels at creating end-to-end user experiences. Indeed, no one has quite replicated iTunes yet just for digital music alone. Still, if a clone experience is reasonably close, you could have the SanDisk effect: a lower price combined with excellent distribution equals a workable No. 2 position. For example, Verizon Wireless could heavily subsidize a clone and it would sell, though it won’t pull subscribers away from the iPhone. It is important to note that the overall experience needs to be close-not just the form factor. There has to be adequate on-board storage to replace a stand-alone iPod nano-at least 4 GB of storage. To keep costs down, no cellphone to date has shipped at a U.S. carrier with more than 1 GB of storage. Musicphones need a regular, 3.5mm headphone jack, not some proprietary doohickey. Finally, there has to be an emphasis on managing and synchronizing a wide variety of media from a PC, where consumers store and manage their content. Sprint Nextel and Verizon Wireless have been reluctant to embrace this scenario because they want a piece of the content revenues. It’s time to change.
Avi Greengart is the principal analyst of mobile devices at Current Analysis Inc. This Analyst Angle column is part of an Advisory Report containing additional industry analysis and recommendations for vendors and carriers; a companion report comparing the iPhone, LG Prada, and HTC Touch is also available. You can contact Avi directly at agreengart@currentanalysis.com. You can contact RCR Wireless News at rcrwebhelp@crain.com.