Handicapping the race: iPhone markets and rivals

UPDATE - There is now a more thorough complete number-crunching of what Apple needs to sell per region, and per quarter, plus significantly more complete analysis of the market potential for Apple at this blog from June: Crunching the Numbers for iPhone.

So Tomi, you are the global guru on phones and 3G, advising the global handset makers, biggest mobile operators (wireless carriers), network vendors, content providers, telecoms suppliers, writing bestselling books and lecturing at Oxford on competition in mobile. Give us your handicapping of the iPhone's chances.

Fair enough. I am not the world expert on stand-alone music players, but hey, I can't escape my reputation in mobile phones. And now the freshly renamed Apple Inc is stepping into "my" backyard. Its a fair request. Here is my view of what Apple are up against.

COMPARING THE PHONE

The iPhone is a fabulous slim, sleek and sexy device. Loaded with most of what you'd expect of a high end smartphone today, with most obviously an enormous bright high-resolution screen of 3.5 inches in size (for comparison my new Nokia N-93 that I was so happy about last week, has a screen of only 2.5" in size.)

The resolution of the screen is also impressive at 320 x 480. That is twice that of its typical music-playing rival smartphones from SonyEricsson, Motorola, Nokia, LG and Samsung. When combining video viewing, internet browsing and Apple's smart touch-screen (they call it Multitouch), this screen size and resolution are both justified, and clearly differentiating from much of the competition. Of course with 1500 mobile phone models currently sold in the world, Apple is not cornering the top end of the market. For example Nokia's 9300i Communicator has an even wider screen of 640 x 200.

The iPhone has the newest and best iPod features built in, so it is a true iPod phone, not like the sad Motorola Rokr was. No matter how much the industry has loved SonyEricsson's Walkmans as "iPod killers" - we can safely trust  that this iPhone will be the best of the bunch for music.

And the rest of the phone features are pretty impressive too for a high-end smartphone, with quad-band GSM, meaning it works in every GSM network, meaning the most wide network coverage in the world, covering almost 80% of the phones in the world. It also has high speed cellular data, on the EDGE standard (what is often called 2.8G, just short of 3G) and WiFi and Bluetooth.

Sadly not being true 3G (WCDMA in the GSM evolution path), this phone won't work in Japan and South Korea. And EDGE does lack speed in comparison with 3G especially on downloading music, videos etc. EDGE is not deployed by all GSM networks, and more have deployed 3G, so in some markets and countries this phone will be seriously handicapped for speed having to resort to 2.5G ie GPRS. The rival high-end musicplaying smartphones are just about all 3G phones. This is a serious flaw for the market outside of America, but not really a major flaw for the American market itself.

Unfortunately adding 3G to the phone involves a complete additional radio unit, increasing weight, complexity, reducing battery life etc. So this is not an easy upgrade to the next iPhone. Adding 3G is a very complex and costly step, and it also requires "double" the amount of testing at all network operators before it is accepted into the supported handset portfolios of any operator. This may be part of the reason why Apple launches in America first (being the laggard market in mobile telecoms and in 3G) and Europe next, with Asia last (as South Korea and Japan are the industry leaders especially for handsets, mobile internet and music on mobile, as well as 3G)

The camera is perhaps the most disappointing feature at only 2 megapixels. That may be borderline ok for January 2007 - but many new cameraphones are now in the 3 to 5 megapixel range, and by June 2007 when this is to hit the market, 2 megapixels may well be very "last year". But it is also something Apple might be able to upgrade rather quickly to at least 3 megapixels.

Size? Very slim at 11.6mm - about the same thickness as the Motorola Slvr, in fact height 115mm is almost identical as well, but the iPhone is 20% wider than the Slvr at 61mm.

Weight? Here the iPhone is quite heavy for its size, at 135g - significantly heavier than the obvious rivals from Moto (Razr V3x) and SonyEricsson (Walkman 950i) and LG (Choco KG800), almost exactly same weight as the "heavyish" Nokia N-80

Storage. This is an interesting one. 4GB or 8GB may sound like much, also when comparing with existing phones. Until you notice that this is not removable media. 4GB for a musicphone/videophone without a slot for a memory chip is quite a drawback (and it is possible the iPhone will have a memory card slot, but they haven't mentioned it). Just about all of the competition offer memory slots, which today go up to 4GB in capacity and we'll have 8GB chips by the time the iPhone ships, and more soon thereafter. For one, the end-user does not have to pay for excess storage in the device when buying it; and for another, the end user can buy low-cost memory chips to upgrade the phone's storage; and use the chips to swap pictures, clips and songs - and take them onto the next phone(s). Not to mention the 10% of all people who have two phones - who may well want to bring the fave music collection onto one phone during the week at work, and onto another phone for the weekend partying etc. Music, pictures and videos stored onto the Apple cannot be removed or swapped (without copying such as using Bluetooth or WiFi)

Battery life seems good enough, 5 hours talk time, 16 hours music time (no word on standby time)

I mentioned the SMS text messaging as the only true killer application in mobile, in my open letter to Apple. I won't speculate here about how good the phone without the keypad but using its Multitouch screen will be. Lets assume SMS text messaging (and IM instant messaging and mobile blogging etc) will be on par with the competition. Like I've said, if not, then this iPhone will definitely disappoint in all markets, and fail in the most advanced mobile markets like Italy, Israel, South Korea, Japan, and Scandinavia.

MARKET SIZE

So its a 500-600 dollar device, a so-called Smartphone. You've maybe read here at the Communities Dominate blogsite that the worldwide mobile phone market is almost a billion devices annually. How many are smartphones? Good question. Smartphones are growing strong. In 2006 they were 8% of all phones sold, and Gartner says in 2007 they will form 12% of all phones. I trust Gartner's forecast will be close enough on target, certainly the proportion of smartphones will grow, as people will upgrade phone abilities when they upgrade phone accounts. And the replacement cycle for phones is already down to 18 months globally.

12%. Even if mobile phone sales grow only marginally in 2007, this means a target market for Apple of 120 million smartphones. And Steve Jobs talked (in his interview on CNBC right after the announcement at Macworld) about capturing 10 million of those, in its first year.  10 million is 1 percent of all phones, that is "reasonable" but 10 million is 8% of the worldwide smartphone market - that is quite a tall order in its first year, and even more so with only two phone models.

More significantly, Apple starts with America. Yes, this is the logical market to start with as Apple's strength is its music side with the iPod, and the USA is iPod's best market (in no other country does the iPod even have 60% market share, not even in Canada - these are by Apple official figures, and most countries are in the teens or below); but even more importantly, as America is last of the industrialized world to get into musicphones. Europe have had them - both as devices and supported by the mobile operators (carriers) for two years now, and they were of course launched in South Korea and Japan over three years ago. Makes sense to start with the "low-hanging fruit" for Apple, where the competition is the weakest and the established phone makers (and carriers) have the least established success.

But. Then we are looking at quite a small market. Out of the 2.7 billion mobile phone subscriptions in the world, only 200 million (7.5%) are in the USA. If we assume that smartphone shipments will roughly correspond with this proportion, then 7.5% of all smartphones would be sold in the USA. What was that number? 120 million. And 7.5% of that is... 9 million handsets. Ouch. Now the target of 10 million in the first year is becoming quite challenging.

If we assume that by June of 2008 Apple's iPhone global sales are split evenly into three, with one third out of America, one third out of Europe and one third out of Asia, and we need 10 million, and we have 12 months of sales in America, 8 months in Europe and 6 months in Asia, it means Apple has to achieve 4.7 million iPhones sold in the USA, 3 million in Europe and 2.3 million in Asia. The European and Asian market shares are somewhat reasonable as these are much larger markets than the USA. But in the USA, this means taking over half of the total smartphone market. Questionable. And that is before we look at the radio standards.

Here is where Apple really suffers. GSM is not the majority of mobile phone uses in America. A little over half of Americans are on an incompatible standard called CDMA. Verizon, Sprint and Alltel are on CDMA. So these customers cannot use an iPhone unless they switch carriers to Cingular. And Cingular is not the only GSM operator, but if I understood CNBC correctly, Cingular has an exclusive on the iPhone. Cingular serves only about 27% of the American phone owners. Now the economics of this strategy really hurt the goal of 10 million units in the first year - and my analysis this means 4.7 million iPhones in America.

If we assign American smartphone users evenly across the operators, and therefore Cingular would have the same proportion of smartphone users as their overall marketshare (not a fair assumption, as for example Nextel and Verizon are very strong in the corporate customer segments where the majority of smartphones are sold), then out of the 9 million smartphones sold in America next year, Cingular has only 2.4 million. OUCH !!!

To reach its target, Apple would have to convince every Cingular smartphone user (probably many very loyal to their Motorolas, Nokias, SonyEricssons etc) to switch to the iPhone. This means all Blackberry users in its network with corporate e-mail clients therefore as well; and then capture AS MANY new customers by stealing them from the rival networks. Cannot be done. Is totally beyond all reason. If the GSM standard based smartphone market in America is about 4.3 million, Apple cannot capture all of that. Not in one year, not even with a miracle phone. And the iPhone is far from a miracle phone.

MUSICPHONES

But all is not lost for Apple in America. While the analysts talk about the smartphone market, I would rather look at the musicphone market. That is much larger. It includes many cheaper musicphones, but for many considering a mid-range musicphone, when the iPhone becomes available, it will well be a worthwhile alternative, even if on the high end of what that customer would be willing to pay.

How big? Gartner tells us they sold 309 million musicphones in 2006 (vs about 40-42 million iPods. Can you guess the theme of my upcoming iPod vs musicphone review next week when Apple releases official numbers for the Christmas quarter of iPod sales?). Musicphone sales rocketed in 2006, more than doubling. It is fair to assume, even at very conservative rates, that musicphone sales will reach 400 million units in 2007. This of course includes most of the 120 million smartphones mentioned above.

Now we are talking about a valid market opportunity for Apple. 10 million means only 2.5%, and that is quite do-able.

So back to America. If we again assume that the 7.5% of all musicphones are sold in America, it gives us a market of 30 million. If under half are on GSM, we're at 14 million, and out of those, if Apple wants 4.7 million - that means 33.5%. A tall order, but it can be done. Out of Cingular's own customers it can be done and not all need to be converted. With a bit of clever marketing - Cingular will want to use this as its competitive advantage in capturing churning customers - it can be a very potent tool to steal customers from the rival networks. Certainly knowing Apple, we will get a massive, exciting and creative launch campaign. Everybody will hear of the iPhone in America in June.

REST OF WORLD

Here it gets more tricky. First, Europe (and Asia) is not one market with a couple of operators (carriers). They are a hodgepodge of markets with about a hundred significant operators. Each will require testing and verification (network specs vary, even on a global standard like GSM). Each will have local rules on subsidies.

If the country allows subsidies like the UK, the phone will be sold to given segments at zero dollars and at that price level obviously will fly off the shelf. If the country doesn't allow subsidies like Italy, it will require very aggressive marketing to succeed, against very well entrenched manufacturers and fickle customers who are very well aware of what they want out of their phone. Much like the world car ideas of the past - whether the VW Beetle or the Ford Escort - this only works in an unsophisticated market (Ford Model T), and in reality in any mature market, the tastes vary so much that segmentation is needed. Someone buys a Kia, while another buys a Jaguar and the third buys a BMW while the fourth buys a Hummer. In Europe where Apple fights on the full price (markets without subsidies), two models is certainly not enough to gain anything like 2.5% of the musicphone market.

But if the country has subsidies, that is no guarantee that Apple will succeed. Then the market is TOTALLY in the hands of the mobile operator (carrier). It is relatively easy for Apple to convince one carrier in America to carry its sexy new world innovation product, the iPhone, especially if that carrier can be the world launch customer. But if you have to go to every tinpot little European country, and haggle with every little one million customer operator about a substantial subsidy for the iPhone - without an exclusive deal - then it is a huge headache indeed.

This means real, long-term customer-service and relationship management with the carriers. Yes, one hundred of them in Europe, another 100 of them in Asia. Does Apple have an army of account managers to manage all of these? Do they have the distribution systems in place with DHL to ship the phones as these customers will then demand to fit their given launches, replacements, upgrade plans etc. Where can I have my Orange logo. Where can I have my Vodafone Live button, etc etc etc.

Europe will be a HUGE mess for Apple, any which way you slice it. Some of the operators will rush to want to launch the iPhone. Others will feel they hurt because their rival got the phone, and will not be eager to push it. In some markets it may work out fine, that one of the giants is the eager one, but in more markets it is probably the hungry smaller players, who are always looking for the chance to make headway against the incumbents. Then you get the promises of smaller players and easy disappointments with their bigger rivals.

In Europe by the fourth quarter, for a high-end smartphone which specializes on data downloads (songs, video and internet content) - the lack of 3G will be a very serious flaw. Already now in Italy, Austria, Portugal, the UK etc some 10% of all customers have migrated to 3G; that will be about 20% by year-end. This phone will be almost obsolete in Europe by then. But also, since Apple has a clear delay between the American launch and the European launch, they may be planning a 3G variant for Europe. That would be most prudent. It does considerably raise the cost and complexity of the device, though. But European smartphone buyers are quite accommodating with high-end phones if they fall in love with them and are willing to pay a lot for a good multipurpose device. But at least all of Europe is GSM.

Asia is another story again. Like Europe, Asia is not one market but a total hodgepodge again of a couple of dozen countries and a hunded operators (carriers). People in China buy 6 million phones every month, in India they buy seven. While Indonesia is a poor country, one of its bestselling phones is the Nokia Communicator, a 1000 dollar smartphone, the most expensive in the Nokia line. The wealthy like to show off that they are wealthy, and a phone is the way to do it in Asia. In South Korea the replacement cycle is down to 6 months so you can always show off the latest phone.

In Asia there are a couple of large markets that will be closed to the iPhone. China's second operator China Unicom is one of the world's largest CDMA operators. India's Reliance and Tata are also CDMA operators. South Korea and Japan have no GSM at all. There are CDMA operators in about half of the Asia-Pacific countries including Indonesia, Taiwan, Australia, New Zealand, and Thailand. Still, the vast majority of Asian subscribers are on GSM networks.

But in Asia the fashion-side of the phone handset market is even more pronounced than in Europe. Thus the variety is even more critical (two models of identical appearance and differing only in storage ability, means one model for fashion-purposes). The phone can very easily find a strong appeal in being cool and desirable. But these customers are totally spoiled for choice already, and most have developed their own preferences. Here the camera resolution of only 2 megapixels is a huge drawback. Remember that Samsung has already released a 10 megapixel cameraphone, the B600 last October, which of course first went on sale in South Korea.

If there was one smartphone market segment in Asia, the iPhone would have a chance in it. But smartphones in Asia break into very well established groupings from the business phone (eg Communicator), the musicphone (Walkman), the cameraphone (Samsung), the digital TV phone (eg LG), the videocam phone (Nokia N-93) etc etc etc. Each of these has of course an MP3 player, camera, video player and internet access, so for the feature set of the iPhone, there are very many variants better at one angle, matching on others. Remember the Ford Escort world car. One model is totally not enough for Asia.

3G will not be a big factor in many countries where 3G has not launched (like China, India). But in Japan and South Korea (both are countries where more than half of all subscribers have already migrated to 3G), it is a death-nail to the proposition. If a phone is not 3G in Japan or South Korea, it is a "cheap phone" for young kids or grandparents or the poor people. Nobody in their right mind would buy one

But Apple has until 2008 to fit 3G into the iPhone, so for South Korea and Japan, this can be fixed by then. Besides, neither country has any GSM, so true 3G (not EDGE) ie WCDMA, is absolutely a must to get into these markets (or a CDMA variant of the phone)

In Asia there will be the same issues with the mobile operators (carriers) as in Europe. Some markets allow subsidies, others don't. Each market has multiple operators, each of the operators will need testing and verification with the network, and then often prolonged and difficult negotiations to get the operators to market and sell the phones (in markets with subsidies) or get into the local distribution systems in markets that don't allow subsidies.

THIS MARKET MOVES FAST

So yes, Apple can capture 4.7 million customers in America, as long as it targets the wider musicphone market, not only the smartphone market. In Europe it can gain its 3 million sales, but it will be costly requiring new sales and marketing efforts, at scales Apple is not used to (and perhaps not staffed to). Europe will need at least a 3G variant. For Asia it can gain its 2.3 million units, but for Asia Apple will have to expand the portofolio with several true variants of the phone, variants which are also visually different (including clamshell).

So then there is the problem of market response. The development of a completely new phone takes about 18 months, but if you can fit it into an ongoing "platform" and modify an existing product, new devices on a given family can be introduced in 9 months. Before Apple launches in Europe, at least a couple of the majors will have released an iPhone clone. Remember there are 1500 phone models out there, by over 20 manufacturers. The iPhone clone will not have Apple's intuitive interface or the iPod functionality. But it will have a better camera, 3G and a memory card slot. And if by any of the top five (Nokia, Motorola, Samsung, SonyEricsson, LG) - it will have an established brand and loyal customers who prefer the way that phone works. None of us like learning the user interface of a new brand of phone.

I could very well see an iPhone variant of say the Motorola Slvr or a thin LG Chocolate to match much of the iPhone (including a touch screen and no keypad) very "easily" with only a slightly smaller screen. One could well be out by June, and both by the fourth quarter of this year. But these iPhone clones would actually be more complete smartphones by current expectations and standards eg 3-5 megapixel camera, 3G and 3.5G (HSDPA, yes, we are now into 3.5G already), and the memory card slot. Toss in a clamshell variant (think Razr) and suddenly you have outdone Apple's big innovative product.

I've said before, this is a cut-throat market. Very big players with deep pockets and masses of custom customer-research JUST on how phones are used - like Nokia, Motorola, Ericsson - make massive mistakes from time to time, not catching market nuances and trends. This while they release several new phone models every month.

APPLE IS VERY POWERFUL

But Apple has a couple of things going for it, that are truly the envy of the telecoms industry. Apple has fiercely loyal customers who often become evangelists for the brand. Mac users tend to be iPod users, and iPod users tend to become Mac users. I am sure the iPod user base will predominantly expect to upgrade their next cellphone to an iPhone. This will help especially in America.

And Apple is brilliant at marketing. BRILLIANT. I can say when I was still working for Nokia's marketing, we envied Apple. This at the time when all in telecoms envied Nokia as the smartest company in marketing among those in the telecoms industry. Apple is years ahead of the telecoms handset makers and this game is ever more one won on marketing, not technology. Apple comes in with enormous potential.

And most of all, I am convinced that as we move from a voice phone to a multipurpose pocket device built around the phone, the user interface needs to "grow up" past what was the simple numeric keypad idea that is a hundred years old, from the dawn of telephones. We DO need innovation in the user interface. Whether the "magic bullet" is this Multitouch screen now on the iPhone or some other ideas, here Apple reigns supreme.

Remember Windows was Microsoft's Macintosh envy. All of our use of hypertext, screen icons, clicking with our mouse, and print matching what is on the screen - were pioneered by Apple (with the Mac). And the same with all of their major launches. Certainly all love the user interface on the iPod, and the standard line in any review of any MP3 player is that its user interface is not as good as the iPod. This is Apple's core competence. And as we add new functionalities to our phones - from messaging and web browsing and cameras, calendars, MP3 players of today; to TVs, credit cards, keys, barcode scanners etc of the future; the user interface will be ever more vital. Apple totally rules in this area. Even if the first iteration of the iPhone were not perfect (and it may well be) - trust Apple to push this envelope harder and further than we've ever seen by the Nokias and Symbians and Blackberries of the world so far.

But Apple is not infallible. Sometimes its first step is not enough - remember the Lisa, the predecessor of the Macintosh PC? A great computer at the time, and revolutionary in some ways, but did not take the market by storm. Only the Mac did. Same for the Newton, a great and innovative early PDA but its timing was off and other PDA makers took over what Apple pioneered.

SMOKE AND MIRRORS

Apple is also blessed in being based in America, with the IT industry press loving them. While some "deep experts" in the telecoms industry understand the real imporance of SMS text messaging, Apple is not troubled with that. Most IT -oriented technology writers in America - the best-read tech press and business periodicals - will fall for the glitz of the big screen and the American fascination with touch-screens (must be all that Star Trek Next Generation). The rest of the world is addicted to SMS text messaging and appreciate keypads for secret and urgent messages.

Apple can do a lot with its brand, PR machine and reputation. If Apple promises this is the next leap in cellphones, they have the benefit of the doubt, for a long time, from their own backyard, the IT and business press in America. As America lags in the mobile phone market and innovation, American analysts are really not competent to accurately measure how innovative the iPhone is. Obviously Nokia, Samsung, SonyEricsson etc don't bother releasing their top phones first into the American market, and American carriers are still years behind those in Europe and Asia.

So Apple also has a strange "boost" out of being in a market that doesn't really understand their product. Expect the most glowing reviews and opinions from the American press; and the most critical reviews and opinions from the Northern Asian and Northern European press. This regardless of how good or bad the iPhone ends up being when it ships (and obviously I am now assuming it ships on time, ha-ha, wouldn't be the first time a revolutionary product slips in its launch, also with Apple's history ha-ha)

CAN THEY DO IT

I would say 10 million iPhones - with prices in the 499 and 599 dollar range, and with only a GSM model and launching with only Cingular in America first - this is a tall order, but it can be done. I would suggest history will find that this is a much bigger drain on Apple's marketing and sales support resources than they can have imagined, but the writing is honestly on the wall. The reign of the iPod came to an end last year, and this is in reality a "defensive move" by Apple to remain relevant in the MP3 player market. They have to do it. In reality they should have done it a year ago.

With the launch and aim of 10 million sales comes a certain corporate-wide commitment by Apple to make it happen

I would say they will do it. But it will come at a serious cost to profitability. Note that this expands Apple's portfolio and helps a PC maker move into the mobile internet - the future, so this is also a clever move by Macintosh, to gain a foothold into the mobile computer market of the next decade.

Good move by Apple. A lot of worries by major handset makers. An exciting time for the industry. But I want to see a family of iPhones before the end of the year. One (with 2 storage options) is not enough beyond America.

UPDATE - there are two other relevant postings about the iPhone. First, I wrote an Open Letter to Apple urging them to consider SMS Text Messaging abilities. It is the only killer application for mobile (not wireless e-mail such as Blackberry). Read my posting here

http://communities-dominate.blogs.com/brands/2007/01/open_letter_to_.html

I also report on a surprising development, Engadget discovered that one of the LG Chocolate phone's variants - in fact an industrial design award winner, preceeds the iPhone with almost identical form factor, touch screen and all. Read my posting and follow the link to see the pictures side-by-side at:

http://communities-dominate.blogs.com/brands/2007/01/creepy_iphone_i.html

Finally - many of our visitors seem to come from the IT side of technology, who maybe do not know the mobile telecoms industry very intimately. For those visitors, you might be quite surprised in the immense scale of the 750 billlion dollar mobile telecoms industry worldwide, with 2.7 billion cellphone subscriptions worldwide, with contrasts to the other major technologies and industries of our lives, such as automobiles, credit cards, TV, computers and the internet. Read the posting at:

http://communities-dominate.blogs.com/brands/2007/01/putting_27_bill.html

RELATED - At our blogsite we've tracked the rapid shift of consumer tastes away from stand-alone MP3 players like the iPod onto the converged device of the musicphone. Now that Apple has released its final numbers for the Christmas Quarter of 2006, we can calculate the final market share of iPod vs musicphones, with iPod now down to 12.9% and musicphones outselling iPods at a ratio of almost 7 to 1 in 2006 (and the gap is moving further in favour of musicphones). The article is long and full of facts and sources, but may be of interest to those thinking of the iPhone. It is here: Requiem for a Heavyweight: Reign of the iPod is Over

Comments

[alex]

Hi Tomi,

very well balanced and detailed analysis.

However, I don't believe that a viable iPhone clone can emerge within 6 months.
First, if the "multi-touch" user interface is as sophisticated as it was demoed, it will take time to technically analyse and copy the implementation. Half-baked copies will fail, since it is already hard to believe that the real thing can really meet user's needs outside the US.
Second, Apple claims patent protection. Let's wait though, what the large handeset manufacturers have in their patent portfolios to hold against. Also that will take months or years to settle out.
Third, the established vendors will hardly overnight conclude that Apple's UI is better and thus should be copied. Rather they will stick to the current "UI beliefs" of the phone industry until the market proves the outsider Apple right.
You listed yourself the concerns, such as potentially bad usability for SMS. The industry will go on wondering about that for the next few months.

So rather I'd expect that we'll see iPhone clones only after Apple has had spectacular success (like outperforming that 1% global market share).

Alex

[A.C.]

Interesting take on the potential pitfalls and successes that might await the Apple iPhone in the years ahead, but I suspect the emphasis on 2.8G vs 3G and the bandwidth limitations are - at least in the US market - irrelevant. Likewise, the lack of a removable media slot (if in fact it does not have one) is also unimportant given how most users will use the device.

iPhone users will not download video or music over the cellular network. They will sync the devices to the iTunes and photo libraries on their computers (after all it's this seamless integration which has helped the iPod become so entrenched and while Apple doesn't make a lot of money from music and video sales, there presumably is no money to be had if users download ringtones and games and YouTube videos straight from the Internet or via the carrier).

All of their major non-PC products (iPod, AppleTV, iPhone) are extensions of the media and communications capabilities of the centralized computer. Video and music and contacts and calendars will sync to it via desktop cradles or bluetooth/wifi/wimax (eventually) and NOT over the cell network.

[A.C.]

I also agree with Alex above that this paragraph:

-------
I could very well see an iPhone variant of say the Motorola Slvr or a thin LG Chocolate to match much of the iPhone (including a touch screen and no keypad) very "easily" with only a slightly smaller screen. One could well be out by June, and both by the fourth quarter of this year. But these iPhone clones would actually be more complete smartphones by current expectations and standards eg 3-5 megapixel camera, 3G and 3.5G (HSDPA, yes, we are now into 3.5G already), and the memory card slot. Toss in a clamshell variant (think Razr) and suddenly you have outdone Apple's big innovative product.
--------

is *extremely* far-fetched.

3-5 megapixel cameras by June? "easily" match much of the feature set of the iPhone?

Much like the iPod before it, the iPhone has few if any features that haven't already been implemented in competitors products years earlier...but just like the iPod the iPhone's number one feature appears to be integration and ease-of-use.

Do any of the competitors have the OS and Internet/Web browser expertise of Apple? I can't see anyone coming close to the ease-of-use and apparent elegance of the interface any time soon...

Last idle thought: while I suspect Apple is mainly trying to get ahead of the consumer smartphone adoption curve, I am curious how they have implemented their IMAP email features and if they'll try to get ANY penetration into businesses (which is the current target market for most $600 phones in the US). If so, they'll need to have some server side component analogous to Blackberry Enterprise Server or Goodlink Mobile Messaging which would allow IT managers to enforce corporate IT policies.

[David McElroy]

It amazes me that so much of the space in this analysis is spent on the outward specs. It sounds pretty much like the geeky comparisons of the first-generation iPod to existing MP3 players when the iPod was first announced. Such comparisons miss the point of what Apple is doing, in my opinion. Regardless what specs the existing MP3 players had (bigger hard drives and other things that mattered to the so-called experts), the iPod got the user experience right. Apple took something that was fairly complex before and made it simple to use. Apple is taking an even more bewilderingly frustrating device (the feature-ladden phone) and making it simple to use. This simplicity and (apparently) great user experience will be what allows Apple to win with the iPhone, NOT whether it has a 2 megapixel or 3 megapixel camera. (Quick. Ask a normal person near you what his phone's camera resolution is. There's a high probability that he won't know.)

I suspect that Apple will be wildly successful with this thing. I think it will sell to people who aren't even considering today's so-called smartphones. I'm an example of someone who thinks the current smartphones are junk that I don't want, so I stick with a Razr, which uses an interface which is insultingly bad. I've never paid more than about $200 for any phone, but I'll willingly pay $600 for this thing. (And I spent much of Tuesday talking with others who likewise have never had smartphones, but plan to buy one of them.)

I suspect that people who analyze this phone as just another entry into the smartphone market are going to be very surprised. This is not a product that I knew I wanted, but now that I've seen it, I really want it badly. I suspect there are going to be a lot of people like me in that regard. Of course, I've been wrong before, so we'll just have to wait and see the sales numbers.

[jaded]

Good post, the only note of contention: Overall lots of mac users are iPod users, but the camp of iPod users is heavily skewed towards PC users. Apple has a huge market of maybe 500M installed iPod users that could migrate to iPhones. That is pretty good (I can already count 3 iPod users out of 3 friends that aim to incorporate iPhones on their short list for their next cell phone upgrade.)

[E.J.]

A.C. is dead on. Talking features represents about 10% of what the iPhone will bring to the market.

Finally, a simple, friendly, usable phone.

[acdeveloper]

The fact is is that with a background of shaking up greedy over priced and restrictive industries (i.e., recording and now movie TV) Steve has chosen to roll over and play their game. Does it make sense to you to sign a 2 year contract for a service that you do not know will function for you and have to pay them to leave their bad service? If so I have some bottom land in FL that I would like to sell you.

He could have sold unlocked phones you could have picked and chose the service without a contract could have voted with your feet if it did not work.

Paying for minutes before you use them is another scam, regardless of allowing roll over it is just a bad deal.

We have been sold out by the State and the Feds setting up a uncompetative incompatible cell system and now by Apple with a nice product with a noose attached to it. Further going back to the morbound AT&T is an oxymoron to begin with. Try their phone system and I challenge you to get a human to talk to about your problem.

Pay too much for a phone when there is a contract attached (don't see any real rebate or discount here) is nuts.

Look for some hack to this phone to unlock it before you buy!!!

[Alan Smith]

Great demo via Mac World. I want one because it will serve as a great true video iPod, phone, and reading e-mail. Access to the web, and text messaging are additions. Who really expects great photos from cameras? I have a Canon EOS Rebel for that. 2.8 vs 3G, GSM vs. Edge? The American market is uneducated for that now and it does not matter. I am sure that by launch dates in Europe and Asia, that the so called flaws will be corrected. Apple sold something in the range of 15-20 million ipods over the Holiday season. 10 million of these in one year is probably a low estimate. It will probably sell 20 million in year one. I have not wanted a Treo or Blacberry. Too difficult to use. But this looks elegant and fun to use. Can't wait to have one.

[Martin Geddes]

Maybe the right answer for Apple was to swallow pride and sell out. Either Nokia or Sony/SE. Now imagine if every Mac was a Nokia and every Nokia was a Mac... The Windows ecosystem is vulnerable from below, not the side or above.

They're betting the farm on this one. I predict Apple will be taken to the edge of the abyss working out this market, but they'll make it eventually a long way down the line.

Potentially missing is the suite of operator gear that enables a bunch of new services. That's why a Nokia or SE merger is needed. There's not enough "what's in it for me?" for operators -- apart from a horrendously expensive device to subsidise which will make for lots of low-margin video network usage and high support costs ("where do I put my thumbs?").

It's a technological tour-de-force, but I'm afraid it's the Newton of the 2000s, now with added electromagnetic radiation.

[Dimitar Vesselinov]

The rest of the world welcomes the Apple iPhone
"So why the keen interest from outside the US in this costly gadget most of the world won’t have access to for quite some time? Partial credit certainly belongs to what’s come to be known as the 'Apple Effect', the company’s legendary ability to create pre-release hype around their products, and also to the fact that geeks, no matter where they live, just can’t help it. But perhaps the more compelling reason is the critical role played by mobile technology in the information landscapes of many countries, notably in the developing world."
http://www.globalvoicesonline.org/2007/01/10/the-rest-of-the-world-welcomes-the-apple-iphone/

[Cameron Doherty]

2.8 vs 3G? Why do we care when the iPhone has 802.11x?

[Tomi T Ahonen]

Hi Alex, A.C., David, jaded, E.J., acdeveloper, Alan, Martin, Dimitar, and Cameron

Thank you very much for the comments. I will respond to each individually

Alex - on a clone within 6-9 months. I agree TOTALLY with you, it is impossible to copy the Apple experience, the iPhone user experience, the OS and integration. So to consider a Macintosh analogy, to create Windows as the clone of the operating system. I totally agree with you.

But most mass market end users, they see a glitzy slim touch-screen music-playing cameraphone that costs 500 dollars and has 4 GB of storage with a 3.5 inch screen. They don't understand user interfaces. Its a touch-screen device. For that, it is relatively easy for LG to use the Chocolate platform, install a large screen (3 inch for example, as this device is not as wide as the iPhone) and create its own touch-screen interface.

Of course it is not going to be an iPhone, its a clone of the "hardware" not the "software". But that kind of device can be produced in 6-9 months on an existing platform. Thats how our industry works. A whole new phone takes 18 months from ground on up.

So by clone I meant only the hardware side. Certainly I totally agree with you, that we cannot start to reverse engineer the iPhone operating system until it is out, and then it will probably take a good deal of time to make sure all patents etc are avoided etc. But like there was a Windows running after each new release of the Mac OS, so too, if the iPhone is successful, of course some of the manufacturers will copy ideas from it, and am sure some will try to reverse-engineer a true clone. Expect these to come from Asia rather than Europe or America, ha-ha

A.C. - good points. I agree the 2.8G/3G (ie EDGE vs WCDMA) argument is not relevant to America. I did say that. It becomes important in Europe, is absolutely essential for Japan and Korea. The three very big problems are in adding 3G is time (very complex to handle the hand-over successfully), weight (another complete radio unit) and money. It makes the phone considerably bulkier and costly to add 3G. That is why almost all of the iPhone "rivals" that I mentioned are much bulkier in total volume.

But you are right, not a relevant point for America. The removable media slot (and I hope it has one) is a different story. Just about every model of the current crop of smartphones has this feature. If the iPhone doesn't, it will stick out like a sore thumb on a device used as a media consumption and creation device (rather than a communication device where it could be an optional extra).

This need is massively increased with multiple phone ownership. As I've reported here at our blogsite, in Europe already 25% of all phone owners have two (or more) subscriptions, most of those mean two phones as well. With the replacement cycle at 18 months, it means a new phone every 9 months. Now you have two new smartphones, you want to easily control the media files you have, your pictures, videos, music etc. Its cumbersome to transfer back and forth via Bluetooth - and keep deleting some files to have enough space. I have 2 GB now and trust me, with a cameraphone (high resolution video capture) that space is gobbled up in no time at all. Then you're constantly shuffling space to find which file can I safely delete.

With two phones - and both smartphones with heavy users obviously - the removable media is absolutely a must. Won't happen in America? Think again. The CTIA reported that 12% of American phone owners have two phones already, so this phenomenon is just about starting to happen there too. Removable media is a big matter. But it may well be - or become - a feature for the iPhone before June.

Then you said, "iPhone users will not download video or music over the cellular network" and suggested they transfer between Macs and PCs and the iPhone like they do with the iPod now. Fine, that is true for America. It is totally not true for Europe and Asia, where PC penetration is less, where iTunes is marginal, and where already music sold DIRECTLY to phones is cheaper than buying off iTunes. In Korea MP3 files to phones cost typically 50 cents, in Sweden you can buy OTA download MP3 songs to your phone for 8 cents per song. Why on earth would you go through the trouble of transferring songs via a PC when its cheaper to get it straight to your phone? In Britain they are launching a service which allows free downloads in return for some advertising consumption on the phone.

So the PC transfer-model is valid for America, not for the rest of the world.

A.C. - finally on the "all content goes without money to carrier to the iPod/iPhone" - this will just about kill the product for just about every carrier (mobile operator) in the world. Just like Nokia's N-Gage, which allowed people to buy N-Gage games offline, from gaming stores, rather than through the carrier's network. If that is the model, you can be sure most carriers in the world will not buy into this. They won't subsidise the phone and won't carry it in their stores. Then all bets are off, the rest of the world WILL NOT BUY 5 Million iPhones in the first year. Apple's success will be limited to America. Note that in England, I received my Nokia N-93 phone - list price 900 dollars "SIM-free" for zero dollars because of my monthly spending, as I renewed my contract for the next year. No matter what superphone is introduced by what superbrand, if one is similar in features and costs 500 dollars, and another is similar in features and costs zero dollars, this becomes a no-brainer. This is exactly why the Nokia N-Gage died. Because carriers would not support it.

Trust me on this. Carriers hate any services that bypass their revenues. That model will TOTALLY NOT FLY. But, if Apple is willing to allow the carrier to make money in this model, then they can embrace it. So here I think you are wrong, but time will tell.

Then, A.C., on agreeing with Alex, and cloning the phone. As I told Alex, I meant only the superficial outside hardware, not the Apple user interface, "obviously" (and I was not clear about it, in honesty) - you both are totally right, one cannot clone this user interface before it has even been seen in the public, and not that fast. But a "dumb" touch-screen slim MP3 playing cameraphone can be released if the platform supports that form-factor today. That is what I meant, a partial clone, or a dumb clone if you will. Sorry I was not clear enough on this.

3 to 5 megapixel cameras? Why on earth not. We've had 3 megapixel cameras for a year already, several 5 megapixel models now, and Samsung has a 10 megapixel camera already released (in Korea obviously). Why on earth not. Thats not stretching the envelope. Maybe you don't have these in America?

Finally A.C. on the corporate side, very good observation. Its not just integrating with the email server like Blackberry, but its also SLOW WORK to then sell to corporate/enterprise customers who are very reluctant to support new technologies in an ever more complex IT support structure. Even more so if the gadget is seen as an executive toy, not a serious work tool. This is why so many of the business-oriented smartphones don't have a camera (or MP3 player) because corporate customers don't want to buy fleets of digital cameras or musicplayers (or portable video gaming consoles) for their employees. So even if the integration is happening, there needs to be a strong sales support staff to aid Cingular (and the subsequent European and Asian carrier) corporate sales forces in convincing enterprise customers to adopt this device (and platform) in their companies. Tough work, can tell from personal experience, each account, one by one, slow going....

David - VERY GOOD POINT, thank you!! I am falling into my own trap, ouch ouch ouch. So critical of my peers for being technology-oriented, and here I go, with so much of my argument being technology... You are so right, the theme of my analysis is too technology-focused.

Here is what I probably wanted to convey (I've had a night to sleep it over). The iPhone is potentially a radical leap, a whole next generation in the pocketable device experience. I've asked for that in various mobile phone user interface design conferences like the one I spoke at in Taiwan two months ago. If it is done right, and it doesn't fall into the obvious trap of being bad at the only killer app in this industry (SMS text messaging) - it can truly revolutionize the phone biz, like the Mac did for the PC biz. I wrote about that SMS part in my open letter to Apple, obviously, so nothing more about it here.

But this handicapping blog, was supposed to highlight some of the regional differences. I am sure the Apple consultants and senior management understand the American IT market very well, and even the cellular market (as it is today, lagging the world obviously) rather well. But I am afraid Apple doesn't understand the more advanced mobile markets in Europe, and totally misunderstand the futuristic markets such as South Korea and Japan, which even few of my peers understand well. (incidentially, I am discussing future handset development in two weeks in Tokyo at the biggest annual telecoms event of Japan, where I am a regular speaker)

So my purpose was to try to show where opportunities and threats lie. And also, reflecting on my long blog now, I did talk about carrier (mobile operator) needs as well, as some customer preferences. But you are right, this is not unlike the PC technical press in 1984 comparing the CPU speeds of the Mac to the IBM etc, focusing on the trivial missing out on the radical innovation which was the operating system and user experience.

Thanks for the comment. I feel a deep pang of pain in my heart, that I've become a technology pusher, rather than celebrating the innovation in user experience. Point very well taken.

jaded - very good point, thank you. I kind of knew, it, but had forgotten it, that more iPod users own PCs than Macs. Your number is wildly off, however. There is not an installed base of 500 million iPod users. Apple has only shipped 85 million iPods since 2001 and a significant proportion of the went to people who had earlier iPods, so the actual user abse is probably 60 million or so. But good point otherwise, thanks.

E.J. - yes, AC was dead on with features being only 10% of the story, the user interface is the majority of it. I should caution you both, though. Reinventing the phone user experience is not easy, and the clear standard today is the Nokia. We have a multi-function device (camera, messaging, phone, browser, music, TV, wristwatch, calendar, gaming, blogging, etc). Nokia has been pushing the envelope on POCKETABLE experiences on just about all of these for years while Apple perfected the iPod. Note Nokia's N-Gage before the Sony PSP, Nokia's Communicator as the first pocket internet device, the Lifeblog as the first blogging entry into mobile, and now for example very heavy investment into DVB-H digital TV broadcasts to mobile (eg the Helsinki Trial, the Oxford Trial etc).

I don't doubt Apple's ability to innovate. I think they will find Nokia's lead in multi-purpose pocketable device user interfaces to be totally different from how IBM's DOS operating system was with PC's when it was truly horrible to use a computer.

And to be clear, this is not only a Nokia vs Apple game, have you seen what Sony has been up to? They brought their Walkman brand to the phone. They already own Playstation. And they just bought Minolta-Konika to gain the knowhow into the camera biz.

I don't mean that Apple cannot reinvent this industry, only to point out, that they are entering unknown waters where the competitors are huge, customer-focused already, and well resourced. I would argue that even with the iPod launch, Sony was ignoring it, thinking the Walkman era was over, there was no growth in new portable music players left. So Apple had it to itself with Sony not putting up a fight.

But with phones, Nokia, Motorola, SonyEricsson, Samsung and LG all know perfectly well that their whole future depends on phones. Moreover, Microsoft knows and is working hard especially on the smartphone operating system side. And major global non-equpment providers, like Google, Yahoo, Disney, BBC, Electronic Arts etc all know the future of their respective industries is on mobile phones, so they are all maneouvering into this space. Its a crowded space, and very many huge companies are putting their best efforts into making this work best. Apple may have discovered a new and better way to do the mobile phone, but they may well find it isn't that easy...

Again, I am strongly hoping the iPhone will be a huge success and more than that, that it will deliver similar scale of radical innovation and a leap forward as the Mac was to the PC.

acdeveloper - Very good points. I totally agree with you that the current predominant mobile industry model, of bundling the handset and a contract, and preselling these minute and message bundles and handing out "free" phones, is inherently bad. I frequently argue against it in my books and the blog and my conference speakerships. There is some hope. In some countries there are no handset subsidies. The phones are sold separately, at full price, and the networks offer their contracts or pre-paid accounts separately. Then the costs are economically real, not artificial. A lot of real benefits come out of this. And it is no inhibitor to industry growth, Italy - with about 140% subscription penetration per capita (almost twice as many phones per capita as in America) - has no subsidies. Belgium has none, Indonesia has none, etc. But these are the minority. But gradually countries are noticing it makes for a more healthy market, so for example in South Korea and in Israel they have discontinued handset subsidies.

So I totally agree with you, and no, I don't need that plot of land in Florida, ha-ha...

Alan - thanks. I accept your guess is as good as mine. I still stand by my view, that 10 million is do-able, but tough going. I think your guess that 20 million can happen, is too high. I'd say absolute tops is 12 million, and I'd guess the actual number will be about 10.5-11 million because Apple can "manage" its actual sales somewhat with discounts, release dates, etc, and since the 10 million number is out there, if Apple is running at say 9 million rate by April 2008, they will just run extra discounts to make sure they hit the 10 million target.

As to your iPod sales 15-20 million this Christmas season, it will be much closer to 15 than 20. But we'll get the official numbers shortly, so no need to speculate.

Martin (nice to see you as always). Yes, I think the right move would have been in 2004-2005 when they had the discussions with the handset makers, to "sell out" and try to get onto two of the big five, or else one of the big five.

A funny after-thought (with hindsight, this I TOTALLY did not see at the time) - if Apple knew in 2004 or so, that phones were a likely future (they've planned this iPhone apparently for 2.5 years), and therefore they must have analyzed the market back then. Even in 2004 the phone industry was huge compared to PCs (and MP3 players). They could have bought up Siemens's phone unit (that went to BenQ). With it, they would have gained a fully functional production line, about 5% market share of handsets worldwide (five times bigger than Apple's target today) and a TECHNOLOGICALLY excellent unit to deliver high-end smartphones??? Revamp the company, continue selling the Siemens-Apple phones for two years, develop the iPhone in secret, then release a SERIES of iPhones. They could have bought up Siemens phones for a pittance back then, and then turned it into a powerhouse.

Like I've said, the secrets to winning the global market share outside of America, means dealing with about two hundred separate mobile operators (carriers) each requiring their own sales effort and support. Siemens phones would have had that whole organization in place, and every mobile operator in the world knows Siemens phones, so these doors would also all have been open. Now Apple has to go knocking on every door...

But hey, this is hindsight. I honestly never saw it before now.

Ha-ha, Martin, very VERY funny, the Newton of 2000s, but now with electromagnetic radiation. LOL!!! You are so funny.

Dimitar - thanks, yes I liked it, especially yes the Apple effect. Us geeks love Apple...

Cameron - 802.11x vs 3G? Yes, you are probably in America? 3G is mopping the floor with WiFi in the rest of the world, so this is also an America vs rest of the world thing. In America 802.11 is enough to cover for not having 3G. But most of the rest of the world does not have free hotspots to speak of. If you have to pay a subscription to use WiFi at some hotspots, not others, but 3G covers everwhere you go - including abroad - the game very soon tips. I have heard of dozens of colleagues who have abandoned their WiFi subscription once they got onto 3G, and of nobody who abandoned 3G in favour of WiFi (and many who use both).

In the 3G vs WiFi "war" (outside of North America) the winner was 3G. We in the telecoms industry are now bracing for the WiMax (802.16) vs 3.5G (HSDPA) battle which is just now starting in the first dozen or so countries.

Thanks all for writing !

Tomi Ahonen :-)

[Aravind]

Thats a very good, logical article on iPhone, Tomi. Steve has worked his magic before on products he fathered, as long as it was under his control. Going by that guiding line, this product is a hit. Though there is absolutely no logic to that argument :)

[alex]

Tomi - I'm afraid that the apparent lack of memory cards matches well with iPhone syncing only via the PC.
Clearly Apple targets PC centric users.
Apple must know the implications of that to non-US sales from the iPod.

So I'd rather assume for 2008 a regional sales split between US and the rest of the world matching with the iPod - not 50:50, you have the numbers probably.
I.e they need more than 5M in the US.

10 M globally in 2008 =
10-15% of iPod installed base(assuming some growth of that in 2007)
That looks doable to me.

(BTW, my hunch is that Apple is trying to carve out a new market segment that does not match with the traditional smartphone or musicphone segments.)

Of course it is possible that Apple overcomes its US/PC bias and creates an appealing iPhone for the rest of the world, but looking at the history of the company and the lack of national diversity in their management team, I would doubt that.
This might even be their highest risk for failure, since - as you pointed out - the US is not the lead market for mobiles.

Further, huge M&A doesn't fit at all to Apple. I cannot imagine that Jobs would have micromanaged and pushed to their limits thousands of Siemens-telco-Germans against a wall of "buts" and "not possibles".

Alex

[ngiam st]

Even as a relative SMS non-addict (by Singapore standards), I got to agree with Tomi's point that if the SMS implementation is bad, that would kill it in the Asia market.

Most specifically, a flat touch-screen is not going to work for touch-SMS'ing. Unless Apple has something up their sleeves - some way to give tactile feedback so people can SMS without looking at the screen. Or maybe stroke-style character entry ? Apple does seem to be trying a bunch of things (two-finger dragging, variable-speed dragging) with touch-pad interfaces. Graffiti ?

[Tomi T Ahonen]

Hi Aravind, Alex and ngiam

Thanks for posting.

Aravind - yes, I am very strongly inclined to agree with you. Steve Jobs and Apple certainly have the track record to succeed in something like this, and my gut says this will succeed. Whether its 10 million or 12 or 7, I think its still success at an Apple strategic direction point of view. My pain is more in that they are so "late" with it. A year ago, this move (and Apple's best effort into the smartphone market back then, BEFORE the Walkman Phone, Chocolate, Razr V3 and Nokia's N-Series - that would have been the real revolution in phones, and in that market, an "iPod Shuffle + phone" concept with technology of that period, would have taken several dozen million phones in this same time period. Bear in mind we did sell 309 million musicphones last year. Apple missed its window on this. Now it is only a defensive move. Makes me sad. But yes, I'd certainly bet on Apple succeeding when they set their minds to it. Also like I said, Apple is brilliant at marketing, telecoms phone makers and operators (carriers) are miserably bad at marketing. We as an industry need this kick in our rears to learn real marketing...

Alex - good point about the iPhone being very much tailored for the USA market. But now that I have learned that the 500 dollar / 600 dollar price is AFTER the subsidy by Cingular, meaning this is one of the most expensive phones in the world - ie double that without the contract, or 1000 dollars street price SIM-free for the 4GB model and 1200 dollars for the 8GB model; now we are in very seriously expensive territory. For that price you'll get the Nokia N-95 with "all" that the iPhone has (except its UI of course and a somewhat smaller main screen) plus a 3 megapixel camera, a carl zeiss "professional quality" lens, optical zoom, 3G, hot-swappable memory slot, infra-red, television quality video recording... etc. Or you'll get a top range digital TV tuner in your smartphone - with built-in PVR (TiVo) in Korea at that price, PLUS the phone, 3 megapixel camera, web browsing, MP3 player and 3G. The iPhone is seriously underpowered in the 1000 dollar plus price range. I was handicapping it against phones near half its price..

But yes, to your point about it being "very" USA-focused, because eg the lack of memory card slot. I think you're right. They may have made it too much for American specs. Then we have two big problems. If the aim is to get 10 million mostly in America, say two thirds there - there aren't exact numbers of iPod sales splits, but two thirds in North America is a common assumption for current split. Considering the timing issues, that results in about 8 million sold in America and over 1 million in Europe, under 1 million in Asia. Fine, Europe and Asia became better to achieve. But America, near impossible..

Because of the price we are even more against price perceptions in America. They aren't used to this level of cost of a phone. And as we move higher on the price level, we move away from mainstream musicphones and purely into top smartphone territory.

Now we HAVE to get corporate customers. Then it becomes a perception issue. Why give my mid-managers free iPods (iPhones) rather than real work tools like Blackberry. Its not a new sale into corporates, it is removing the existing Blackberries and other business smartphones like those from SonyEricsson. Very rough going, from something that is so strongly associated with an entertainment device (iPod, video iPod).

I'd say 8 million sales in America for a device which after the subsidy costs 500 dollars in America, out of a smartphone market in America next year of about 9 million, even if we count some sales to existing iPod users, this is way too much to expect. In particular as we remember more than half of those 9 million are on CDMA networks, and it is a VERY big job to get a corporate/enterprise customer to switch from one network provider to another, when that also means a differing network technology. Certainly I'd say an impossible goal.

Now on the 10% of the installed base of iPods. Thats a fascinating viewpoint. I'm estimating that of the 85 million sold, about 60-65 million are discrete users, the rest 20-25 are second and third iPods to existing users (I have no data to support this). Lets also assume two thirds of those users are in America. That gives us about 40-43 million users in America.

Someone said at some Apple discussion board that the announcement of the iPhone kills the iPod market, which is why it was announced only after the Christmas period. Makes sense. Apple will be discounting iPods heavily to keep it afloat. But that pretty well eliminates the new buyers during 2007 of an iPod from wanting immediately to dish out 500 dollars or more after June for another (iPhone).

So we have a market potential in America of about 40-43 million. To get our 10 million out of that we'd have to convert 1 out of 4. Some of them love the iPod but could not justify spending more than 100 dollars or so for a Shuffle. These won't buy iPhones. Some have their "perfect" music solution already and won't bother. Some will want the iPhone for sure, many at Apple-related boards are "drooling" for this phone, so certainly there will be many lining up at the stores to be the first to have them.

But remember, odds are, that 55% of the current iPod ownership in America happen to be on carriers who use the CDMA network. They will be difficult to convert, not impossible, but difficult. In America the replacement rate lags that of the world average (Korea, Hong Kong, Taiwan and Japan lead) so if we say 2 years, that means that perhaps 20 million of the 40-43 million are on GSM. We can safely assume all will own a phone, as by now almost all will with American penetration at 75%. Out of those 20 million, half upgrade during the year. So its that magical 10 million number, we'd have to get EVERY iPod user on GSM to upgrade contracts in the first year to switch to the iPhone when they upgrade. Not feasible, certainly.

But its a good part of their plan. You could say that before the phone is out, today, for most iPod owners who can afford 500 dollars after subsidy for a phone (and qualify for a 2 year contract, obviously) - their new phone of preference is now the iPhone. Whether their network, employer (wife/husband) etc agree with this kind of expenditure is then another thing.

The one other thing to keep in mind is that Apple is quite good at pushing the price perception point up. The Macs were always more expensive than PCs of the same generation. The iPod initially was incredibly expensive, yet people flocked to buy it. Apple does have that ability to get buyers inspite of high prices, not unlike say a Mercedes or BMW etc.

And on Siemens, you're probably right. If Daimler-Chrysler was bad, German meet American automobile engineers; this would have been America/Germany PLUS computers/telecoms. An enormous headache indeed..

ngiam - good point, thanks. Yes, I am hoping hoping hoping that either they really understood SMS, and it is done "right" (one-handed, without looking at the phone), or else they now get the message (my Open Letter has been widely quoted in Apple circles, ha-ha, with positive comments, so I am confident the message got through). I am rather confident, if Apple put their mind to it, and decide to optimise the messaging on the phone for SMS (rather than for e-mail or voicemail) - then it will REALLY be a killer phone. And like you say, if not, then the iPhone will seriously underperform in Asia and Europe.

Thanks for writing

Tomi :-)

[alex]

According to the German mobile magazine "Connect", Apple stated their awareness that the feature set of the iPhone needs to be adapted for Europe, and possibly also the hardware.
http://www.connect.de/handy/testberichte/apple_iphone.148193.htm
So iPhone fans can hope for 3G and optimal SMS.

[Dalibor Kunic]

I am not denying iPhone is to some extent game changer in mobile telecom space, but I'll say they went to solve wrong problem.
True, many mobile phone UI's are clunky and not the straight experience. But could we think a bit about SMS ?

Just look how SMS texting is done ( thumbing ). Who would only expect this to be such a huge success but it did. It is horrible user experience from today's iPhonish perspective, but look average user who never used PC or Mac can write SMS ( global ) .

Where's problem then ?
Get me decent phone ( not too expensive for the average user ) which can call, go online fast and straight ( iPhone good at it ) and get me some of those funny pics and noises ( integrate it easly with iTunes catalogue ).
I pressume, It can be done only in partnership with mobile carrier. So, who's the partner here ? Cigular and on exclusive terms. No, that's not smart.
Present situation doesn't explain enough of their distribution strategy exept intention to use marketing muscle as usual ( it's sexy, they will want it ).

Why not go on cheap and take it with Virgin Mobiles, Helios and Amp d' Mobiles and get a scale that can breakeven in two years time ?

Second, I'm hugely curiouse about prototyping/testing of iPhone. How they done it and for how long ? I know it has to be done with very limited resources at hand ( confidental agreements and small teams) . So, what type of people were doing it, do they had fully understood mobile space or they were people with IT background and default heavy internet philosophy cause it's obvious they knew how to make fully capable internet phone ( but is not following W3C guidlines in terms of mobile content rendered for mobile phone ).

[Tomi T Ahonen]

Hi alex and Dalibor

Thanks for writing.

alex - good point. It makes a lot of sense. Apple has time, 4-6 months to finalize their European variant of the iPhone (with better camera, probably with 3G as well). Then another 3-6 months to finalize their Asian phone(s) - where 3G is vital, CDMA variant quite likely as well, and obviously the camera and removable media will be upgraded. Thanks for mentioning the article in Connect, it validates this presumption.

Dalibor - very good points. I think there is that archetypical Apple "arrogance" of avoiding the consensus and established paradigm (including standards) and going it alone; breaking the mold if you will. Look at the Mac and iPod/iTunes. It has its upsides (new market space potential) but its downsides (cannot truly break mass market with proprietary systems).

The best part from my view, is that this entry - honestly many inside the phone industry have "feared" this would happen for five to six years - will jump-start the thinking of the phone as the seventh mass media. There are controls on the radio, which are inadequate to control TV. Similarly when the mobile phone emerged as a voice device (and gained SMS text messaging) its controls - user interface - could adjust with the alphanumeric keypad - in 1996 there were six incompatible alphanumeric keypad formats by the way, so the industry went onto standardize this as SMS was starting to take off, and today all phones have the same alphanumeric keypad with ABC at number 2 etc.

But this phone-centric (voice-centric) form factor is woefully inadequate to handle the phone as the most versatile mass media ever (the seventh, where TV is the fifth and the internet is the sixth). The phone as the 7th mass media is also the youngest and least understood. At 7 years of age, this media is still a young child and will grow a lot before it is anything like the established media like TV (and obviously with twice the users of TV, three times the users of PC based internet, the 7th mass media on the phone is also by far the biggest media with the widest reach). Apple is entering at a great time for our industry, to help it grow.

And while it looks great and sexy, the iPhone obviously will not push the envelope on a large-screen or even touch-screen innovation (witness LG's preceding phone of very similar configuration). No, Apple's contribution will be from its core competence - user interface - and hopefully will propel the industry far into the future, like the Mac did to the PC, Newton to PDAs and iPod to portable music players. And Apple will also drag the lagging marketing skills of the mobile telecoms industry (can anyone say stone age) to modern times.

Thanks for writing

Tomi Ahonen :-)

[radiomoscow]

mobile phones have a memory card slot to make money ie; they have 1 extra feature for marketing and they can sell u a 50c card for $50 or wateva they charge

when u walk into your home/office and your phone syncs to your pc automatically
you remove several steps

just like the ipod, data management is done from the computer not from endless button pressing on your phone
you guys need to change the way you think...do u have to defrag your TV or install speaker drivers on your car radio
why do you feel mobiles and computers need to be complicated to use?

as far as cloning the iPhone...haha …did u notice this is not a touchscreen like any other
clone steve jobs its much easier and less patent protection