Crunching numbers for iPhone: benchmarks, regional and quarterly, to reach 10 Million

The hype around the iPhone is enormous. Its on CNN and CNBC every day, and happily for Apple's PR department, the news broadcasts keep playing clips of iPhone's new flashy ads meaning Apple gets plenty of free publicity for its pending launch. Its pretty much what we expected knowing Apple's flair for showmanship.

But the hype has also brought about an enormous amount of miscellaneous pundits, mostly without much mobile telecoms knowhow or background, who make wildly varying predictions.

We are not an Apple blog. We are not a mobile telecoms blog. We are an engagement marketing blog around our book Communities Dominate Brands. But one recurring theme in our book and the blog is digital convergence, and the iPhone certainly embodies convergence - of media, internet and telephony - in that one device. Not the first phone to do that by any means, but yes, its a converged device. And another recurring theme at our blog and book is the inevitable direction of where social networking and digital communities are headed (as is the IT industry, internet, and media) and that is mobile, as the mobile becomes 7th of the mass media. So yes, as the iPhone is a step by a former computer company now entering mobile, this is a trend we track at this site, like other major players moving to mobile whether they be Google or Microsoft or Yahoo or Dell etc.

The iPhone is seen by many industry experts within the mobile telecoms industry as being a landmark moment (we called it the two Eras of Bi and Ai time, Before iPhone and After iPhone).

We cannot compare the iPhone against its current rivals as the phone is not out yet. And that is certainly the job of those blogsites and websites which dedicate themselves for honest handset evaluation and comparison. It would be foolish for us to even try to do that properly.

But in my current job I advise global mobile operators, the biggest handset manufacturers, the largest mobile telecoms infrastructure providers and various middlemen in the mobile industry, on their strategy. My previous job was heading Nokia's 3G Business Consultancy, and mobile telecoms business modelling is a core competence of mine. My first three books were all bestsellers specifically in the next generation mobile strategy, business, marketing and services areas. I lecture at several of Oxford University's courses about next generation mobile. And ever since the iPhone was announced, I've taken at least one question on the relevance of the iPhone at every one of my public and private sessions.

So I want to put the iPhone matter "to rest" for us at this blog, for now.

So I planned a longer, "definitive" mobile telecoms industry "insider" view of what are the opportunities and threats, for Apple and the various industry players, and what to look for as metrics from Apple, when estimating whether the iPhone will deliver on its promise to reach 10 million iPhones shipped by end of year 2008. It is written a week prior to the iPhone launch, to try to inject some reality to the wild predictions galore.

I will go through with you, the three major markets (North America, Europe, Asia); talk about iPhone sale volumes and targets and triggers; talk about mobile operators (carriers) and the rival handset makers; talk about handset subsidies; contracts; SIM cards; handset replacement cycles; return rates etc. What factors will directly impact the iPhone's success. Along the way I will also digress with a couple of myths etc, but will do my utmost to keep this long posting on topic. But yes, it will be long. The mobile telecoms network is the world's largest interconnected system; it is built to the most demanding tolerances of any industry, far exceeding those of automobiles, airplanes, computers or even the proverbial rocket science; and a smarphone is the most complex piece of electronics on sale today. There are some very serious issues to cover, if you want to do a fair job of evaluating this market opportunity.

So get a cup of coffee, sit back, relax. This is a longer piece even by my verbose standards.

iPHONE CONTRASTED TO PEERS

The iPhone is considered a smartphone. Some mobile pundits quibble about that designation, but for the mass market the semantics are irrelevant, its a high-end very expensive feature-rich phone. A cameraphone, a musicphone, a video-consumption phone, an internet browsing phone, with WiFi. On a very sleek and sexy package.

And what Apple is honestly bringing as new to the table, is its impressive user interface, with its multitouch screen technology, proximity and orientation sensors etc and a user-menu format which seems both intuitive and revolutionary, based on the ads I've seen, having not used a prototype. If current phone users seem overwhelmed by the technical gadgetry of modern top-end phones with ever more buttons and difficult navigation of their menu structures, the iPhone promises a simple, elegant and "intuitive" interface.
Of course, I must stress, this is only within the marketing PR materials like Apple's advertisements, where it all seems to work like magic. That doesn't mean that the UI is perfect nor indeed even ideal for all uses. Very many mobile industry experts have severe doubts about its abilities in SMS text messaging for example, where utmost speed and privacy are valued, and every unnecessary step in finding the SMS feature and entering a message is a source of potential aggravation for those of Generation C (Community Generation) who are already fully addicted to SMS

On first view the listing of options and technologies on the iPhone present a very impressive listing, in particular for those who haven't used expensive smartphones before - and by expensive I mean really the top end of Nokia N-Series or top of SonyEricsson Walkman and Cybershot phones, not the low end of the smartphone market like a Blackberry or LG Chocolate or Moto Razr.

But the iPhone as it ships now in June, is actually a seriously flawed device, for this time. Not fatally flawed, but seriously flawed. If the phone is a 200 dollar phone (subsidised price in the USA) or about a 400 dollar / 300 Euro / 200 UKP unsubsidised (SIM-free) phone in Europe or Asia, then the feature set is quite adequate. But at the very top end of the line, there are serious gaps in the specs.

For comparison, imagine buying the top end of Mercedes Benz or BMW today. You expect air conditioning, anti-lock breaks, traction control, electic windows etc to be standard. If a luxury product suddenly doesn't have those, it seems to be obsolete or worse, mis-engineered.

The iPhone? Camera. Resolution of 2 megapixels. This is meek. Not quite weak, but certainly meek in this price range. But no flash? Granted few cameraphone flashes are any good anyway, but no flash at all? That suddenly seems like a BMW without traction control. Video? Yes it has video clip replay ability. So Apple can mention "video" in its promotions. But when you are in the store, and find out it can't actually RECORD video - what good is the cameraphone on the iPhone if it can only take still pictures but cannot capture video? In this price range we're now already suggesting a Mercedes without anti-lock breaks, going back several generations.

No 3G. This is a very serious drawback. Not in America, obviously, where 3G is not as advanced and in demand. But the first iPhone is definitely an obsolescent phone even for America, and definitely without 3G it would be an obsolete phone for advanced parts of Asia and Europe. This is like a top-end luxury car without even electric windows and air conditioning. Really really out of date.

There are many other deficits with the iPhone. The battery is not replacable by the user (to keep the phone as slim as possible). Many of the experienced smartphone buyers will know how quickly you can drain a smartphone battery with music, camera, video, surfing etc use so they want a second battery. But the iPhone won't let you have it.

And so forth. I want to be clear. I like the iPhone, I think it is a most welcome breath of fresh air for handset design. It will have a fiercely loyal and passionate user base mostly from past Apple/Mac/iPod/Newton etc users, but also will win new passionate first-time Apple owners and I am certain in many ways the first release of the iPhone will be revolutionary.

But understand, for all its hype and passionate proponents, this first release iPhone is not a perfect

phone, certainly not at its price point. And I'm not faulting Apple. They had to invent the iPhone in secret, without consulting with the mobile operators, using only their own internal understandings. They had to project the iPhone specification 18 months ago when the design was started, so trying to guess what is the right screen size, camera resolution, radio technology, processor speed, memory capacity, battery endurance, etc in December 2005 for a June 2007 phone is a daunting task. A smartphone is by far the most complex design work that Apple has ever attempted (and rumours have it that their first attempt was doomed a failure, which is why the iPhone is so much delayed compared with the first gossip when the first design was attempted).

And Apple has to get it rather close to perfect at its first attempt. Apple cannot sustain a Newton-like failure out of the iPhone now, not now when Apple Computer changed its name to Apple Inc and Steve Jobs staked the future of Apple to the success of the iPhone. Bear in mind, that an industry giant throwing massive amounts of design money and innovation at a new smartphone concept does not guarantee it will be a market success, consider Nokia's 7600 (that funky looking 3G phone in the shape of a tear-drop, internally known as the Flounder, which failed utterly in the market because the keypad was set around the screen, and it made sending SMS text messages a headache for all who were accustomed to the traditional keypad layout) or Motorola's ill-fated Rokr, the first iteration of merging an iPod with a cellphone. This is a huge gamble for Apple.

So yes, I recognize the 3.5 inch screen is glorious, the slick, sexy, slim case is beautiful, the Apple buzz and hype and customer loyalty, bordering on fanaticism are all strengths. But the iPhone, as a smartphone, is severely flawed.

And its competitors are far ahead. Consider Nokia's N-95, a smartphone in the same price class. It is hideously bulky yes, compared to the iPhone. But the N-95 has a five megapixel camera, with flash and Carl Zeiss optics. Shoots not only video, but DVD quality video. Has not only EDGE cellular and WiFi connectivity like the iPhone, the N-95 adds full 3G cellular and the even faster 3.5G, HSDPA, and most of all, the N-95 adds GPS satellite positioning.

Again, please don't misunderstand me. I don't mean to suggest that the N-95 is an "inherently better" smartphone, but only that once a shopper for a very expensive phone starts to compare features, some of the iPhone's deficiencies become glaring. And then it really comes down to - do you prefer style over substance. Is the ultrathin - but very wide - style better for you than the clunky bulky thick style etc. Do you prefer the larger screen 3.5 inch vs 2.5 inch or the higher res camera 2 megapixel vs 5 megapixel etc.

Its like comparing a Hummer to a Maybach to a Ferrari. Each is a very expensive car, but optimised for a given type of area and usage.

We do need to keep this in mind when we consider customers and operator needs (and future editions of the iPhone). If the customer is a first-time buyer of a high-end smartphone, the customer won't much notice or care of the iPhone's deficiencies. But if the iPhone buyer today already has a high-end smartphone, say like the Nokia N-80, then the gaps in its specifications loom very large.

But before I move on, before we get the hatemail from the Apple fanatics - I am NOT against the iPhone, it is a landmark device and will re-vitalize and revolutionize the industry.

And before we get the hatemail from the Apple-haters who suddenly feel compelled to blame us for being "fan-boys" of Apple - please note that I am not blinded by Apple, I know fully well this is not a "perfect" smartphone.

And finally, please also don't misunderstand me, while I am an ex-Nokia executive, I don't mean to suggest the N-95 is somehow the superior phone (in fact, I far prefer the six months older N-93 over the N-95, because to me, the camera performance of the N-93 is far superior, and while the N-93 has "only" 3 megapixels of resolution, the N-93 has 3x optical zoom and yes Carl Zeiss optics - and for serious photography enthusiasts, optical zoom is the way to go. I wouldn't trade my N-93 for an N-95 under any circumstances)

So the iPhone is an exciting new smartphone yes, but on its feature set, does it move the goal-posts? Not at all. It actually mildy disappoints. But what it does do, is move the goal-posts in the User Interface game. I'd argue Apple moves them so much as to invent a new game altogether for the User Interface.

But on that, there is no reason whatsoever to speculate, as we cannot honestly know today how useful, intuitive, better, etc the new multitouch screen is (and the various user-experience factors out of the Apple OS-X operating system and related applications)

So again to be clear - I don't think the outwardly appearance and technical specs of the iPhone are that noteworthy. But I am totally convinced that the Apple iPhone user experience is the revolution for the industry. That all phones will be measured in two Eras of time, the Era Bi (Before iPhone) and the Era Ai (After iPhone). Its that big a change. Exactly like the personal computer industry pre 1984 when the Macintosh was released. Exactly like the music pre 2001 when the iPod was released. For this revolution to occur in the mobile telecoms industry, it is totally irrelevant whether Apple sells its stated 10 million handsets, or only 1 million or even 100 million. The fact that Apple is about to unveil its radical user interface, that will utterly change the mobile handset competition forever. It is a paradigm shift in the very true sense of that oft-abused phrase.

BUILDING BASE CASE MODEL

LETS LOOK AT THE MARKETS AND BUILD A MODEL

My background is econometric modelling which I headed for Nokia as part of my job as Global Head of 3G Business Consultancy up to 2001. As I like to say in any issue involving econometrics, a model is only as good as the assumptions. And it is only a model. It cannot possibly capture every element that might have an influence. But the difference between a good model and a bad model, is that a good model captures all of the truly relevant factors, and attempts to measure their relative impact; while a bad model either ignores relevant impacts or provides significance to irrelevant factors.

In other words, please understand my assumptions, and that this is only a model, by which I will attempt to analyse the market. It is by definition a simplification. And as any forecast, it cannot tell the future accurately, but can only provide guidance in understanding likely scenarios for the future.

I stand by my models. You can go back in history, see my contributions to mobile telecoms forecasts and projections, which are well documented for example in my second book, m-Profits (2002) which is still the only comprehensive business book on how the 650 billion dollar mobile telecoms industry makes its money today.

TOMI'S ASSUMPTIONS

First, that the big difference is wealth of the country. A poor country will not have enough wealthy mobile-phone addicted cellphone users to generate significant sales of the iPhone. Yes, there will be the occasional tech millionaire etc, but the biggest differentiator is the wealth of the nation. The vast majority of the iPhones will be sold in the industrialized world, North America, Europe, Industrialized Asia and Oceania. It will not really matter to our model to consider any sales in Africa, Latin America or poor parts of Asia. Yes, this is a simplificiation, but remember what I said about Econometrics. Apple won't reach its 10 million target by succeeding in Botswana.

Further adjustments.

I count Industrialized Asia to be Japan and the Tiger economies (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand). I will be add into Asia-Pacific New Zealand and Australia knowing full well that the Australian market is not as advanced as Japan or Hong Kong or Singapore but as their 23 million subscribers in Australia-New Zealand are exactly only a tenth of the industrialized Asia, so this is a small statistical error I'll carry to keep the model reasonably simple. Please note that the advanced parts of China such as Shanghai are definitely on par with Taiwan, Hong Kong, South Korea etc, but we cannot count 400 million Chinese mobile phone users into this pattern. Equally there are poor parts of Malaysia, Thailand, South Korea etc, which will help balance this China phenomenon.

I will be assuming that Eastern Europe behaves exactly like Western Europe. You might be alarmed, thinking, surely Poland, Lithuania, Slovakia, Ukraine etc can't be lumped with UK, Italy, Germany etc - but for the iPhone's target market - the wealthy - actually the wealthy in Eastern Europe do exhibit very similar spending patterns and disposable income as the wealthy in Western Europe. For a mass-market phone this could be a dangerous over-estimate, but for a phone in the luxury item bracket, I think we can safely lump Moscow millionaires with London millionaires - remember that Nokia opened its first flagship showcase store in Moscow, not London, Hong Kong or New York.

And for Canada? O' Canada. I'll just statistically aggregate the Canadian cellphone subscribers into American numbers (sorry Canadians) but again, its one tenth of North America, and I certainly hope Apple has not forgotten the Canadian market with its launch plan, so likely the North American experiences will be similar in Canada and USA if not on an identical time scale.

Now we get a rather fascinating model. Out of the 6.5 billion people on the planet, we have a subscription in this industrialized world for 1.3 billion people (more than its true human population in that region). This is because there are multiple phone subscriptions owned by one in four mobile phone owners. And we can see, that out of the 2.7 billion cellphone subscriptions worldwide at the end of 2006, almost half, 1.3 B are within the industrialized world.

SECOND SUBS

So I make this assumption - any buyer of an iPhone will only have one iPhone, and any second or third phones will be by other makers. This is not true for example for Nokia owners, when often those with two phones who own a new Nokia, tend to have two Nokias (to have utility of the same recharger, the car kits, the various accessories etc). But this is very strongly the pattern with Blackberries, that most Blackberry owners who have two phones, the second phone is distinctly a non-Blackberry device, a Nokia, Motorola, LG, etc.

So I'm assuming that anyone who does buy an iPhone, for the vast majority of cases, will not use two iPhones. The one in four out of those customers with two phones who has an iPhone, will "always" have a non-Apple second phone (which could be a Blackberry for example, as the work phone given by the employer). And please, don't misunderstand me, yes, more people than not, will only have one phone, and being a converged device, the iPhone may cause some who today carry two phones, to consolidate and only carry the iPhone.

My point is, it will be extremely rare (outside of those working for Apple ha-ha) for someone to carry two iPhones.

Now we have to adjust the target market to phone owners, not subscriptions. When I remove multiple SIM cards by the industry rule-of-thumb (ie every alternate subscription after 60% penetration is a second SIM, and every third subscription after 100% penetration is a third SIM) we arrive at end-of-year 2006 cellphone owner numbers as follows:

North America 208 million unique owners

Europe 641 million unique owners

Asia-Pacific 190 million unique owners

With a total of 1.04 Billion as our target market, Apple needs to achieve a 1% market share in this user base in 18 months to reach 10 million units sold

To keep things simple, I am ignoring growth. Note that most of the growth in the world of mobile is now in the developing world (and ever cheaper phones there). And in the industrialized world most sales is replacements, and most of the new sales are as second and third subscriptions. So in reality, there is not much honest absolute growth in this target, not in the expensive phone segment. Certainly anyone who can afford a 500 dollar subsidised (900 dollar unsubsidised) phone today in the industrialized world does have at least a cellphone already, probably a basic smartphone already.

For our model we don't need to include a growth factor.

I am simplifying. First, I am actively ignoring regional differences. I know fully well, that Americans get the oldest, crappiest, phones today. Europeans get much better phones, but the best phones are in South Korea and Japan. So the penetration rates for smartphones, and the customer awareness, and willingness to pay this much for a phone, are factors that are very different.

I will be discussing those, but lets first get a simple model for our targets to set the base level, a base case if you will.

Lets assume, that within the wealthy parts of American, European and APAC regions, the purchase patterns are broadbly similar.

Also we need to remember that Apple will launch in the fourth quarter of 2007 for Europe, and in the first quarter of 2008 for Asia. I'm assigning November 1 as the European launch date (have no insights, this is totally a guess, and why, so that they can hit good Christmas period sales); and the Asian launch to be first day of March.

So the iPhone will have 18 months of sales in North America, 14 months in Europe and 10 months in Asia, until end of year 2008.

I could assign the same target percentage of 1% in each of the three regions, North America, Europe and Asia-Pacific, but that is not realistic. Now we have to make some adjustments to the model.

AMERICA WILL OUTPERFORM, ASIA UNDERPERFORM

Why. Because in America, iPhone can tap into a vast, loyal fan base of Apple/Mac users and iPod/iTunes users. (As a percentage of users against the total population, Mac PCs and iPods have highest penetration in North America). Also in America, the iPhone faces the least domestic competition from top models by Nokia, Samsung, SonyEricsson. Further that the North American market is very undeveloped, where a Blackberry is seen as an advanced smartphone (it is also Blackberry's best market by far). The strongest domestic competitor, Motorola, is weak in smartphones. All of these factors say, that of the three regional markets, Apple should outperform in America, compared with Europe and Asia, irrespective of how good the iPhone is (or is not) and irrespective of when the phone is launched.

In Europe, the iPhone faces very sophisticated customers who have had more advanced smartphones and more advanced networks (3G and 3.5G). The Mac and iPod user bases are smaller. And Europe is the "home field" for Nokia the biggest handset maker and biggest smartphone maker, and also partly the home of SonyEricsson.

In Asia, the iPhone has the worst chances. There the markets have far superior smartphones in use already and several of the Tiger economies have the most advanced 3G and 3.5G networks. The PC penetration is far lower than in Europe, so Macs are rather rare. And Asia is the home field for Samsung and LG, and half of SonyEricsson.

So I'm going to assign a "boosted" rating for iPhone performance in North America, a "neutral" rating for iPhone in Europe, and an "underperforming" rating for the iPhone in Asia. What that ratio is, is of course anyone's guess. I will arbitrarily assign 30% as the booster ratio. Your guess is honestly as good as mine. But remember, I am modelling to achieve 10 million sales. So if I say the iPhone will do better in America than Asia, for every million I add to America, I have to remove the same million out of Asia. This is not a forecast (yet) this is building my model.

Lets assume 30% better performance per capita in North America than in Europe (in December 2008), and a further 30% worse performance in Asia than in Europe. So after they are fully launched in all three markets, compared to Asia, North America sells almost twice as well, per capita.

REGIONAL LAUNCH GROWTH RATES

The iPhone will not grow sales like the iPod did, starting from zero and growing in very dramatic fashion. That is true of a new market for a new product, could be so when cellphones first were introduced, but not today when it is a replacement market in the industrialized world. This is a market of totally saturated cellphone ownership in this high-price market segment. It is strictly a game of replacement cycles.

Phones are replaced every 18 months worldwide (slower in America, faster in Asia). You are on a contract today, that expires in November. It doesn't matter that the iPhone was released on June 28, your AT&T contract won't give you the upgrade until November (or it will cost you more, so some fanatics will ignore this, but most who buy an iPhone, will do it with their natural replacement cycle purchases of their next phone)

So in America, the level of sales can be expected to be rather flat, month on month. Yes, there will be an initial spike, probably a big spike, but over time, it will be relatively flat. yes, there is always a Christmas period spike in cellphone sales, particularly as gifts, but factoring seasonality out, the sales will be rather flat in America.

Specifically compared to Europe and Asia, where it will be TOTALLY different. So different that for the purposes of our model, this is a very significant factor and must be considered.

Because in Europe and Asia, it is not one carrier like AT&T (formerly Cingular) in the USA. So in the USA the full marketing and sale effort is enabled from day 1, across its full dealer network. In Europe and Asia, each country has to be dealt with independently, separately.

If Apple launches on Nov 1 in Europe, then it will have several countries fully lined up with operators signed up, the phone tested and approved into those radio networks etc. But its also a 100% certainty, that on that launch date, not all European countries who will be selling the iPhone a year later, will be ready to launch on the first of November.

I modelled a moderately aggressive spread of the countries, on a four month pattern using an S-Curve, starting with 50% of subscribers in Europe and Asia, having access to the iPhone at Day 1 of their regional launches, and then spreading to 100% of intended countries covered by four months later.

Note it doesn't matter for this model, whether the iPhone is provided via all national operators in a given country, or through an exclusive deal like with AT&T in the USA. We are now modelling the pattern of adoption, with the market realities of the three regions.

But please recognise, in America, the sales pattern of the iPhone will be relatively flat over the first five or six months. And in Europe and Asia it will have a very pronounced growth pattern in the first months, as all countries are brought online to the Apple iPhone availability range.

Here Apple suffers from being a first-time player in the market. The existing big five manufacturers, Nokia, Motorola, Samsung, SonyEricsson and LG, have a distribution network into every industrialized country, so they can introduce new models very easily into all markets, almost simultaneously. Apple cannot sell the phone before it has been cleared for radio operation by the local mobile telecoms network operators/carriers. That will not be happening anywhere nearly as smoothly in every country, for a wide range of reasons. So expect the European and Asia-Pacific iPhone launch patterns to show very strong growth in numbers over the first months, then settle into a flat pattern.

SEASONALITY

Lastly I modelled the seasonality factor, for Christmas sales 2007 and 2008. I assume November sales is up 20% over the full year average, December sales up to double the average, then January sales to drop to half the average and February up to 75% of the average.

Again, its certain there will be a Christmas seasonal factor to the iPhone sales. Is it double the average of only 50% above the average or maybe three times the average, only time will tell. But to give us guidance and understanding in this model, that is what I used. Remember this model is intended to help understand the numbers when they start to come in from actual sales.

NOW WE HAVE A REFERENCE MODEL

The North American sales will need to achieve a typical monthly sales volume of 128,000 iPhones, with peaks at double that in Christmas of both years. They need to achieve cumulative sales of 2.6 million iPhones by December 2008. Then North America is on track.

Europe has to do a lot better. After ramp-up Europe has to sell 441,000 iPhones per month and double that at Christmas, and achieve 6.2 million iPhones sold by December 2008.

Asia-Pacific is easier, there the monthly volume needs to reach 130,000 units, double for the last December, and reach 1.2 million iPhones total sold by end of year 2008.

So far with Macs and iPods Apple has not given national break-downs of their sales numbers. But Apple tends to give quarterly sales volumes. So I've also aggregated this model into quarterly sales and cumulative sales:

For quarterly performance to look for, in Apple results.

The July-to-Sept 2007 quarter needs to achieve 383,000 iPhones sold.

The Christmas quarter 2007 needs to ship 1.3 million iPhones for a cumulative total of 1.7 M.

If Apple can say at the end of 2007, that it has shipped anything in the order of 1.4 M to 2 M iPhones, the company is well on track to reach 10 M sold by the end of 2008. If bigger numbers, that might be a time to pick up some Apple stocks, ha-ha, and if lower numbers, I'd be very worried at Apple Inc.

(For any analysts out there - please use the European launch date, and the earlier or later European sales figures to adjust that quarterly and cumulative number. Remember I assumed Nov 1 launch in Europe, available at half of European countries.)

Year 2008.

The January-March quarter of 2008 Apple needs to ship 1.4 M iPhones for accumulative shipments of 3.1M. Remember post-Christmas drop in sales, and Asian launch in half of the Asia-Pacific Industrialized countries by 1 March.

In the April-June quarter 08, another 1.9 M iPhones to sell, for cumulative 5.1 M.

In the July-Sept quarter 2008 (and Apple's fiscal year ends in September, so this is a very big moment to observe) the iPhone shipments need to be about 2.1 M per quarter and 7.2 M cumulative.

If those are on line, then yes, the Christmas quarter of 2008 can well be 2.9 M iPhones sold and achieve cumulative sales of 10 M total.

That is the model. I am not saying this will happen. I am saying, IF Apple wants to achieve 10 Million, it will need to be very close to those numbers regionally and quarterly. For example, DOUBLING the American sales, if Europe is at only half, will mean Apple falls short of its target by half a million. THAT is what I mean with this model. This is to my best understanding, the "easiest mix" of markets, and smoothest path of quarterly sales that Apple could have. It also serves as a good benchmark for anyone who wants to see is Apple on track to reach its goal

WHAT DO WE LEARN AT THIS STAGE?

Apple's 10 M target depends most on European acceptance of the iPhone. American domestic market totally cannot deliver the levels of sales alone.

So we have our volumes and regional sales targets.  Apple needs to take 1.3% of the North American cellphone user base installed phone market, 1% of the European one, and 0.7% of the Asian market, to achieve its 10 million sales goal.

Can they do it? Now its crunch time. Lets start with America

ANALYSIS OF THE AMERICAN MARKET

NORTH AMERICAN GOAL 2.6 M UNITS

The American analysis is the "piece of cake" part. AT&T has an exclusive contract for the USA, am assuming Apple will negotiate a similar deal with a Canadian carrier. And Canada is more the nuances, the meat of the customers: 90% of them, have to come from the USA

Its also rather clear. AT&T (Cingular) has the exclusive contract for USA for the iPhone. AT&T has about 55 M subscribers, and runs on the GSM standard. The main rival on the GSM standard is T-Mobile with only half the number of subscribers, so this is also the best GSM option for Apple in the USA clearly.

But of those 55 million AT&T subscribers, 2.6 Million (4.7%) need to be migrated to the iPhone. Part of the iPhone strategy for AT&T will be to capture customers from other networks, most importantly from the CDMA operators Verizon and Sprint-Nextel. But equally, those two carriers will be doing their own customer-acquisition campaigns, so while AT&T may win some for the iPhone, they will also lose some other random customers back to Verizon and Sprint-Nextel.

It is important to understand now then the cost factors. Smartphones were about 8% of all phones sold last year, and expected to be 12% of all cellphones sold globally this year. If we just assign that percentage evenly across all countries and then accross the operators in America, we get an installed base of about 6.6 million smartphone owners on AT&T right now (or technically actually that amount at the end of the year, but lets work with that number now).

Note that out of all current cellphone owners on AT&T who have a Blackberry, an LG Chocolate, a Nokia N-70, N-80, a Motorola Razr etc, the carrier has to convert 39% to the iPhone.

This is a tall order. Because currently well less than 10% of all smartphones in America fall into the extremely high price category of the iPhone.

And worse, a disproportionately large amount of all smartphones in America are Blackberries and other corporate tool phones (Treos, Nokia E-Series etc). Companies will not be subsidising their employees with brand new Apple electronic toys, masquerading as business phones. The Apple e-mail client won't be secure like that of Blackberry etc. Most business customers will not be approving company purchases of the iPhone as a business phone (excepting for as an executive toy for some senior management, who will then carry a separate Blackberry anyway)

PRICE DROPS LIKE I-POD?

What of price drops, like the iPod? Good idea, there is Moore's Law obviously, which gives us more processing power on silicon, and applies to things such as memory and CPU and much of the electronics inside a modern smartphone, so all other things being equal, a similar electronic gadget should shrink in size.

But there are two countervailing issues. First, the Apple iPhone is becoming obsolescent, even for the American market, this year. By end of year when the European version launches, it has to get an upgrade in specs. And for the Asian market, it will need more upgrades and costly changes.

I'm not saying its impossible for Apple to release a smaller cheaper iPhone, but I am saying, Apple will be spending a lot of its precious R&D just to get the absolutely vital European and Asian models released.

And then its a global product. There is then the issue of fixing the imperfections in the original design.

I am 100% certain, that no matter how wonderful the iPhone may be at launch, there will be many specific details, which Apple will need to fix, small things that will make a big difference. This is typical of any early product and its later versions. The first improvements are very significant.

And Apple is struggling in this area, because it has no customer insights into its current phone - yet. So Apple knows it will have to do urgent fixes, but has no idea which areas are the ones, that customers - globally - will be demanding.

Remember the economics, succeeding in America will not save Apple. European success is the key. What do European customers think of the iPhone? That is the biggest focus for Apple R&D.

Yes, we may get a cheaper simpler iPhone, perhaps. But my money is that the second (European launch), third (Asian launch) and fourth iPhone (first major upgrade of the whole line) will be significantly more capable phones than the first. By more capable, I mean camera resolutions up to at least 3, probably 5 megapixel, adding at least 3G, maybe even 3.5G. Adding the flash. And ability to record videos. And building a removable battery casing. And adding the removable memory chip slot. Things like that. Eventually also GPS maybe next year.

All of these add to size, weight, cost, CPU and battery demands.

No, the "second edition" iPhone won't be a 300 dollar iPhone, it is almost certain, the next few iPhones will be more expensive ! than the first. That is the nature of the beast.

But these are not mutually exclusive. Apple may ALSO be working on a cheaper iPhone, say with a slightly more thick body so its not quite that slick and slim, etc. But they can't really "tone down" much of the feature set either. If they go down from the 3.5 inch screen, then it almost ceases to be an iPhone; the large impressive screen is certainly a distinguishing feature of the first iPhone. I would assume Apple keeps this as its standard (in particular because of the great investment in the user interface design, and the integration with the wireless carriers to their service development such as the visual voicemail feature etc)

And if we're looking at the "minimum form factor" being constrained by the 3.5 inch multitouch screen, it becomes almost irrelevant what camera resolution or CPU speeds to consider, you can't really go down-stream with those either. One savings could be abandoning WiFi for significant savings yes, so some things can be done to create a "plain vanilla" version of the iPhone, but not much.

WHERE ARE THE 2.6 MILLION

So 2.6 Million are a tall order for America. Not impossble, mind you, but yes, this takes a lot of effort by Apple. Its addressable market size is pretty well the 55 million of AT&T, and out of those, some 6.6 M have a smartphone, but only 660,000 would have spent anything near what the iPhone will cost. Now Apple wants to capture a market size four times that.

Now I need to get specific about customer loyalty. I've spoken about the iPhone to cellphone enthusiasts in several dozen cases in countries on four continents since January. There are those, very passionately looking forward to the iPhone, yes. But there are also very many who have doubts, or who have already expressed their opinion that they have a personal preference why they will not seriously even consider the iPhone as it currently is specified.

Take me as an example. Two years ago, this time, my top phone was the 6680, a 3G Nokia smartphone which had a one megapixel camera. ANY good smartphone, how ever clumsy, if it had a better camera, I would have wanted. The jump from 1 megapixel to 2 megapixel, is very noticeable. If the iPhone had been offered to me then, I would have seriously considered it.

Last year, this time, my top phone was the Nokia N-80, with its 3 megapixel camera. Now, totally ignoring its other features, 3G, flash, video recording, etc - this 3 megapixel camera would trump that of the iPhone's 2 megapixel. For me. Not suggesting in any way that I am a typical user, only that I am one smartphone user who has a preference. Yes, I occasionally listen to music on my phones, but music isn't that important to me. I do have several music videos stored on my phone and some comedy clips also for entertainment. But those are not the killer app for me. For me its the camera. Already last year, much as the N-80 is an imperfect Nokia 3G phone, I would never have replaced it with an iPhone.

Today, like I said, I totally love my N-93 with its Carl Zeiss optics, 3 megapixels, and that critical need: optical zoom. Plus it has DVD quality video recording - and video-out connectivity to watch on TV, etc. A brilliant phone for me, and slightly less expensive in today's market than the iPhone or the Nokia N-95 for that matter.

So this is the kind of market we now find the iPhone facing.

Some customers can't wait to get their hands onto it. I have many existing Mac user friends, who can't wait to get the first cellphone by Apple which will let them fully intergrate and synchronize using the intuitive Apple/Mac logic, rather than weird mobile phone engineering logic, etc.

But out of those 6.6 million AT&T smartphone customers, especially in the higher cost region, there is already a lot of loyalty. A SonyEricsson Cybershot cameraphone owner, or a SonyEricsson Walkman owner, or a Samsung, LG, Motorola and yes Nokia owner who already is strongly loyal to their phone(s). And all the business phones from the Blackberries etc. I've heard from many Blackberry users who say they wouldn't give up their BB for the iPhone. And each of these existing customers of smartphones have their cars with car-kits that support their current phone brands. Etc.

What will Apple have to do? First, it has to convince "ordinary" cellphone owners who may have an iPod or Mac, to now upgrade very seriously to the iPhone, and promote it more as a new pocket Mac or a "super iPod", and have the customer think not that they are replacing a 100 dollar phone with a 500 dollar phone, but rather that they are now getting their fave Mac/iPod experience onto their phone.

WIN IN CHURN

Secondly they have to "win" the churn wars for AT&T. The ratio of the type of customer won and lost in customer churn between AT&T and its rivals, has to become very lopsided in the top end of the market. That AT&T captures high-value smartphone customers from Verizon, Sprint-Nextel and T-Mobile, and in return (assuming churn roughly balances out) they should give up more of the low-end customers. AT&T would love this trade-off of course.

Here we have another new, emerging problem. Second subscriptions. In Europe already 28% of all cellphone owners have second subscriptions. In America its closer to 10% only. So in Europe its a lot easier to add a second subscription to a user, and go onto a new network, because the customers are very accustomed to this already, but in America its still harder to do (why would I want to carry two cellphones, I hear a lot still today from American mid level execs, while in Europe its no longer a point of contention)

And now back to the net-gain in churn game. AT&T (ie Cingular) is not the top choice among younger well-addicted cellphone users. T-Mobile tends to be their choice, and I understand that Sprint-Nextel is also very well placed in this marker as the carrier of choice (through its Boost brand for example)

Can it be done, I think so. It won't be easy. Apple will have to invest a lot, and so will AT&T. We should be getting some insights from AT&T announcements about their customer acquisition.

AND CANADA

And a quick Canadian comment - the only viable GSM player is Rogers. So if Apple launches this year, its with Rogers. Or else if it waits for its CDMA model, it might launch with the "Asian model" (which all but has to include a CDMA version)

So pay attention also to an Apple Canada announcement about the iPhone. If they announce Rogers this year, its better, but if not, then Apple needs to announce one of the three (Telus and Bell Mobility being the other two majors in Canada) early in 2008. The sooner Canada is added to the North American mix, the better.

But the American 2.6 million will depend on how AT&T does.

RIVALS IN AMERICA

I'll also briefly mention on four rivals. First the Blackberry. Many analysts have suggested the iPhone will hit Blackberry. It won't. Blackberry is the most insulated of all smartphone makers against the iPhone, simply because the Blackberry is part of a corporate wireless email system. The iPhone won't have a direct rival for that, and corporate buyers will happily approve more Blackberry devices, but will shy away from buying iPhones to employees. No, the Blackberry is not hit by the iPhone.

The maker most in danger is Motorola. Its top end models and especially the Razr and related slim phones will directly feel the iPhone. SonyEricsson's Walkman branded musicphones are likely to see a lot of comparison-shopping with the iPhone, so SE may also suffer out of this, but SE has had a fantastic ride with the Walkman Phone and its coat-tails, so perhaps it is about time for this pendulum to swing back. SE has also very aggressively rolled its musicphone line down the mid range phones so it would only feel the iPhone at the top-end of its Walkman models.

The two I see most benefitting are first LG, with the Prada phone and other simpler iPhone clones. Remember that for the 55 million who can have an iPhone on AT&T, there are 145 million US cellphone users on the other networks who can't get it. For them the LG will seem like a good substitute. Not quite the iPhone, but also a slim, sexy, large-screen 3.5" touch-screen smartphone.

And the other is Nokia's top-end N-Series phones, the N-95 in particular. Nokia dominates the other five inhabited continents, being the top-sold phone on all of them. But in North America Nokia lingers in third place behind Motorola and LG. In the rest of the world, Nokia holds the top slot for the most expensive phones (excepting South Korea and Japan, where true superphones exist) but in America, they release "stripped down" simpler variants because the market is still so immature.

Now with the hype around the iPhone, Nokia's N-Series and E-Series have a great chance to show what else you could get for a 500 or 600 dollar subsidised phone. I think Nokia will gain an almost silent benefit, big boost to their top-phone line performances in North America, helping customers adjust their acceptable price ranges closer to the top ends where Nokia generally rules in the rest of the world.

CHANCES IN THE EUROPEAN MARKET

IN EUROPE IT GETS TOUGHER

Ok. Lets return to the iPhone and Apple. And cross the Atlantic to Europe. We need to find 6.3 Million iPhone sales in Europe. Yes, there is a market of 641 million mobile phone owners, who currently have 830 million phones, so its a big market yes, but it has a lot of issues.

First the good news. All of Europe is GSM. Europeans are wealthy, the mass market has used cellphones much longer than Americans, and the penetration rate in Europe is already well past the total per-capita population, yes all babies and great grandparents included. 28% of Europeans have two or more subscriptions, most of those also have two phones. The advanced smartphones were launched first in Europe (Nokia's iconic Communicator ten years ago). As mobile phone owners tend to upgrade when they renew, Europeans have had a lot of cycles of new phones per user, to move from basic phones to feature phones to smartphones. So where 12% of the global phone population of new phones sold this year are smartphones, in Europe its at least 50% above that, so we're looking at some 115 million Europeans with a smartphone already today.

But remember, in every European market there tend to be 3 or 4, even 5 mobile operators in any one country, so as Apple's strategy says exclusive deal with one operator, we need to divide that target with 3 or 4. If we divide it by 3.5, we get 40 million as the addressable market. 6.3 million iPhone target means 15.7%. Again, we're now looking at a tall order. In only 14 months, Apple needs to enter the top end of the smartphone market, and elbow itself to one in every 6 phones sold, at the high end of the price range for smartphones. Not as rough a winning battle as in the USA, but still a very tough job to achieve.

Now, that was the good news. Now for the bad news. You might want to get a refill of your coffee...

LETS START WITH 3G

3G. Last year in Europe, 15% of all phones in use were 3G phones. And sorry, I have to stop here for a moment. I mean "real" 3G, not the Qualcomm-fuelled propaganda counting their earlier CDMA2000 1x RTT technology as if it was also 3G (most mobile experts in the world count 1x RTT as a 2.8G technology akin to EDGE, not a true 3G technology). If you count that lesser technology as 3G, then also American 3G penetration is near 15% today. I don't accept that. I've been involved with the international telecoms standardization work since 1996 and I live by their tight standards. There is a CDMA2000 variant which is fully recognized as 3G, and that is called EV-DO. I am a purist in 3G, and I count only the full 3G technologies, not the "pretend-3G" technologies. By this more precise measure, the American 3G penetration rate is only 4% today.  Bear that in mind, that according to this "tight" definition of 3G, Europe has almost four times as many 3G phones per capita, and well over ten times as many in real terms, than in North America.

(Sorry about the technology lecture, but if the point was why Europe needs a 3G phone, we need to be clear what 3G I am talking about. And for a GSM phone, 3G is WCDMA (also known as UMTS) and the next faster variant is the 3.5G technology, or HSDPA, which is already launched in numerous countries).

And the story gets worse for Apple. Just about every smartphone sold in Europe is a 3G phone. And the iPhone is not a 3G phone. And most of the appeal of the iPhone - music, video, internet surfing - are features which specifically benefit from 3G.

Couple that thought with multiple subscriptions. Almost all of our target users will have two phones and two subscriptions. They have the older phone, last year's SonyEricsson or Samsung or Nokia, which is already a 3G smartphone, and now get a new iPhone. Suddenly all performance, of downloading a song or surfing the web, etc, will be inferior compared to the older phone! Note that all Western European countries, and most of their rival operators within those countries have already launched 3G networks and services, and are now rolling out 3.5G. Most of Eastern European countries have already launched 3G as well. 3G is a make-or-break issues for the iPhone in Europe already this year.

EUROPEAN iPHONE VARIANT

Why isn't Apple launching simultaneously in Europe as it does in America? Because of this factor, for sure. It also means - if you read the tea leaves - that a 3G phone is in the works, and the European launch will feature the 3G iPhone. And that 3G iPhone will be dual-mode GSM and WCDMA (UMTS). It means it is bulkier and drains more on the battery. That is the nature of the beast when you add 3G to a 2G phone. Can't be helped.

If its 3G - then it HAS to record video. A full half of France Telecom/Orange's 3G data traffic (excluding voice calls and SMS text messaging) is video, mostly users uploading and downloading user-generated video similar to YouTube in the online world.

And the 2 megapixel camera with no flash? It can well be time to upgrade that. But more so, there is also the issue of video calling. No serious mobile telecoms expert has promoted video calling as a major cash cow or killer application for the 3G world for many years now. But equally, ALL mobile operators in their 3G service portfolios, push video calls. Some more aggressively than others.

When Nokia launched its 3G phones, the first three models did not support video calls. The operators hated that. Nokia soon learned its lessons and rectified it with the 6680, today its 3G phones do support video calls. What does it take? The current iPhone has the camera pointing into the wrong direction for video calling. Either the iPhone needs two cameras (with a simpler, VGA camera pointing "inwards" towards the caller when he/she is looking at the screen) or else a tilt/swivel mechanism for the primary camera, that it can be pointed at the caller in video calling mode.

Please understand - it is IRRELEVANT if YOU believe or don't believe in video calling. The European (and Asian) 3G mobile OPERATORS want to promote video calling (even whether they believe in it or not), as one of their 3G services. Any 3G phone which does not support video calling, will be not liked by the operators. They will not promote 3G phones that don't do videocalling - because video calling needs to fix the chicken-and-egg situation, enough people need that capability in their pocket, before it can even take off. None of the 3G operators want to support a new device to enter 3G which postpones the adoption of video calling. Our opinion here is truly irrelevant, it is the clearly published public opinions of all major 3G operators that they want to promote video calling as a long-term data traffic generator. And video call does mean either a second camera, or re-positioning and providing costly tilt/swivel feature for the one camera.

So we need all these changes to the more advanced 3G European smartphone. All of this adds complexity, electronics, more software, more draw on the processor, battery. Adds weight and cost.

The European 3G iPhone will definitely be more expensive than the simpler 2G iPhone. Apple is likely to release both for Europe, but understand, the 3G phone will be at least 100 dollars more expensive than the 2G phones - plus heavier and more bulky.

So Apple's iPhone at a SIM-free price in the 800-900 dollar range for the smaller 4GB hard drive unit, is now a 900 - 1000 or even more for the 3G version (and 4GB storage). Add another 100 dollars for the 8GB versions to the above. That pushes it ever more into the price stratosphere against the top models like Nokia N-95 and the Nokia E-90 Communicator etc. These are very compelling packages it is going against.

But lets not fall into despair. Apple is the past master of getting its customers to happily pay more for an equivalent specified piece of technology. The Mac was always more expensive than IBM compatible computers, and the iPod was the most expensive stand-alone MP3 player going. Price won't stop the iPhone. But bear in mind, the European 3G variant - will by definition be bigger, heavier, and more costly than the simpler 2G version, not cheaper and lighter..

And my gut says, the vast majority of Apple's European iPhone sales, no matter what level they reach in this period - will be the 3G model inspite of its greater cost.

THEN THE OPERATORS

The second issue in Europe is that Apple cannot talk to one operator and find 25% of the total European market, like it can in North America just talking to AT&T/Cingular. In Europe there were 144 mobile operators by end of 2006 according to my latest count. There may be one or two more as a recent licence in particular in Eastern Europe. But yes, 144 independent mobile operators/carriers just in Europe.

This is like hearding cats

There are alliances and operator groups, some more coherent than others. The German-led T-Mobile group tends to be rather "Germanically" rigidly organized; the Vodafone-led group from Britain is very autonomous even with owned national subsidiaries, and includes a large amount of affiliated companies who support given Vodafone initiatives but are under no control from Newbury. No operator has a full footprint into Europe, not even close.

You would be forgiven to think that operators are consolidating and expanding - say like Telefonica Group of Spain who bought UK based O2 Group. Yet other operators are abandoning markets and selling assets there, like Orange pulling out of Denmark and Vodafone abandoning Sweden. Among the consolidation and horse-dealing, some operators seem to change stripes and you can't be sure who you are dealing with; in Finland the Swedish incumbent Telia offered mobile services as a local operator, then its parent Telia merged with Finnish incumbent Sonera, and today TeliaSonera's service in Finland is what was Sonera, not Telia in Finland - and the entity which was Telia became a rival operator in Finland. Seem confusing? It is. Now multiply this across 44 countries. Its nearly like there was a set of 3 or 4 independent cellphone carriers in almost every American State.

Of course this is not in any way an insurmountable problem. McDonald's sells in all of those countries, as does Levi's Jeans and Coca Cola and Ford.

But for Apple, it means 44 separate sales efforts, separate national regulatory requirements (who is the telecoms regulator in Macedonia?), separate legal and contractual matters (want to be sued in a court in Vilnius?), etc. Each operator will need to do rigorous handset testing. Yes, each of them. This typically takes months. And it is even more demanding for 3G handsets which need to cover the complex matter of "handover" without causing excessive load to the network due to the 3G network's design allowing for "cell breathing".

No doubt Apple is well on its way to talk to most of the 140 or so operators. Some it does not need to prioritize (Andorra has one operator with 65,000 subscribers; the second operator in Cyprus has only 63,000 and the two operators on Guernsey have a combined subscriber base of 55,000 so these can probably be safely ignored, with my best apologies to their inhabitants.)

But the fragmentation of Europe is a very pressing sales challenge. Only in Russia are there operators similar to AT&T in size (MTS and Vimpelcom both in the 44-45 million subscriber range). And if Apple's strategy is an exclusive national deal, it can only accept one of those two.

Then its a long way down. There are only four European operators with more than 20 million subscribers. And now the Groupings start to work against Apple. If Apple wants an exclusive deal in each European country, of course the operator Groups will play a major part in this. Orange is the largest operator in France, but the fourth out of five in size in Britain. Telefonica is biggest in Spain and Britain, but third in size in Germany. And so forth.

MIXED BAG IN SUBSIDIES

Then we have the handset subsidy issue. In America cellphones are heavily subsidised. So the true cost of the 4 GB iPhone is somewhere in the 800 to 900 dollar range, and the 500 dollar price is based on a two-year contract commitment, with a phone locked to AT&T.

In some European countries like Britain there are subsidies at least as steep as in America (even more, as even the top-most phones in Britain like the Nokia N-95 are subsidised to "zero cost" in contracts typically running 18 months). Many industry experts deplore the practise of subsidies as it distorts mobile telecoms competition and promotes churn and creates disloyal customers, who tend to run after the latest phone models. This is a blessing and a curse for Apple's iPhone, I will explain in a moment.

In other European countries like Italy and Belgium there are no subsidies. So the local customer has to pay full price of the phone. Yes, paying about 900 dollars for the 4 GB version of the 2G iPhone, and probably well over 1,000 dollars for the 3G iPhone, perhaps as much as 1,200 dollars for the 8GB storage version of the 3G iPhone. Our American readers might be quite shocked to consider a cellphone costing 1,200 dollars. But expensive phones sell quite well in such countries. Its just that the nature of the market is different. Obviously in those countries the customers are not locked into long contracts and charged artificially high prices of calls or monthly fees.

In Finland which didn't have subsidies, last year they introduced handset subsidies for 3G devices. If Apple releases a 2G and 3G phone, Finland would be in the weird situation where the obsolescent 2G iPhone would cost 900 dollars and the modern 3G iPhone would be free (on a two year contract, obviously)

And many countries are trying to abandon subsidies altoghether such as they've recently done in South Korea and Israel. So this adds a major headache splitting Europe (and Asia) into differing types of marketing situations.

Why a blessing and curse? If you are a European and in the market for a smartphone, you are most likely young and employed and can easily afford it. You are fully addicted to mobile phones. But you have at least two subscriptions and your effective replacement rate for a new phone is 9 months (half of the average replacement rate of 18 months).

This kind of customer spends well over twice the average European spend on the monthly phone bill, and can easily get an iPhone price level phone on a contract commitment, and has had several smartphones already on similar deals. The price is not an issue here, the person cannot imagine living without a cellphone, and knows its cheaper to be on contract than on prepay. So this customer "gets an iPhone for free" kind of automatically, at the anniversary of the next upgrade. (Provided, of course, that the operator is the one carrying the iPhone in that country)

But then, suddenly as price is no object, and the customer already has an "old" smartphone at least of the ability of the Nokia N-80 . So the customer tends to be very sophisticated about the phone. This customer sees rapidly the faults in the iPhone.

Secondly, there are phones even more expensive than the iPhone. And while Nokia, SonyEricsson and Samsung have pushed the high end of smartphones gradually, they are now able to go well above the iPhone with even more feature-laden phones. Remember the big handset makers introduce several models every month. And they have had a lot of time to plan their counter-moves to Apple.

This is a bit like if you were estimating the market size for Jaguar, an expensive car for sure, and then once you've launched, you notice that there is an even more expensive "baby Aston Martin", which appears to eat the top end of your market. Or what Mercedes Benz did by launching the Maybach at the top end of the model range. The iPhone will help sell more of the outrageously expensive phones

The rapid replacement cycles also mean that the iPhone in Europe will have a much shorter "table life". When it is the newest phone for its user, it will be the phone carried everywhere and shown, placed on the table, the desk, etc, in view. But 9 months later the heavy user European customer will have his/her next superphone, which is likely to be again more appealing to the user. It will be more expensive and more feature-laden than the iPhone. It cannot be a newer iPhone, because this second phone is with a rival mobile operator/carrier (remember only one operator will carry the iPhone in any country), so it is "guaranteed" to be a non-iPhone smartphone. And the iPhone mobile operator has at least another 9 months to go until its contract expires and its time to get a new phone for renewing the contract.

This short "table life" may create a feeling that the iPhones were the rage for a short while - all the hip cool smart people were sprouting iPhones and they were on all desks and tables, and then just as suddenly they start to disappear. to be replaced by whatever Nokia N-series or SonyEricsson etc superphones of mid 2008. Note the user won't stop using the iPhone, only that it has become the second, lesser phone.

The main point is, that for the high-end phone buyer market, those who already use smartphones in Europe, in markets with handset subsidies, the "high price" of the iPhone will not be much of an obstacle at all. But there are many equally expensive rivals, and soon far superior phones from the other makers (remember, I am not judging the user interface itself, cannot know about how compelling that is, until it is in the market, but even that will be reverse-engineered and cloned, much like Windows is Microsoft's clone of the Macintosh operating system - and yes, of course, Windows never came close to being as good as the Mac of any generation, I know that..)

WHEN NO SUBSIDIES

But there are plenty of European (and Asian) countries with no subsidies. Now the iPhone will be in a severe uphill struggle. It is true that in Italy for example they have achieved some of the world's highest penetrations of mobile subscriptions with no subsidies. But, that partly also helps explain why Italy is a world leader in prepaid accounts (which were launched first in Italy and Portugal). So in Italy the issue of owning a handset, and signing up for a telecoms carrier, are completely divorced. You pick one handset, you then stick in your SIM card from your carrier and use the handset in whichever network you have selected. If tomorrow you feel like using another network, you use another SIM card and the phone will work just as fine on that network.

It means that every phone will cost full price. Full, non-subsidised price. And the smartphone user who last year bought a top-end SonyEricsson or Samsung or Nokia, has a good recent phone (of same or better technical performance as the iPhone). How much is the style now the "killer application" to replace an existing phone with one of similar performance, not better performance, but one which is cool and sexy. In some countries of high fashion, say Italy, this can still work. But in other countries of more "rational" purchasing behaviour, say Finland, it becomes a very difficult decision to spend 1000 dollars to get the slim phone which won't really bring anything new.

But in countries of no subsidy, there is no operator-loyalty to a given phone model. Now the iPhone has a very serious other issue - its integration with the mobile operator/carrier systems such as the voicemail. Operators do not want a handset manufacturer to "meddle" within their internal systems. It can perhaps be accepted in some cases when the operator feels it gets an exclusive deal. But if an iPhone is sold SIM-free, no subsidy, then the operator has no incentive at all, to allow Apple to interfere with their systems.

This in turn, diminishes the unique beneifits of the iPhone.

SMS TEXT MESSAGING IS BIGGEST KEY TO EUROPE

What most American analysts do not understand is SMS text messaging. They think that the Blackberry is extremely addictive (and yes, it is addictive) but don't know that SMS text messaging is severely MORE addictive. IM Instant Messaging and wireless e-Mail will not end the unique benefits of SMS texting. SMS is as addictive as cigarette smoking. In absolutely every country the exact same pattern has been observed, starting with the youth, then young employed adults in personal contacts, then eventually all business use SMS, then the whole population including retired people etc. SMS text messaging is a juggernaut that is unstoppable. American SMS usage is second-to-last in the industrialized world (Canada is last). But the exact same pattern is happening in America as in Europe four years ago, and Scandinavia seven years ago.

At the end of last year, 42% of all Americans were active users of SMS text messaging. American cellphone owners average about 15 SMS text messages per month or 0.5 SMS per day per cellphone subscription. Or measured against the total American population of 300 million, that translates into 0.3 SMS text messages per person per day. Verizon reports that at the last quarter, they were at 28 SMS per subscriber per month, almost 1 per day per cellphone owner on their network.

In Europe we had 1 SMS per subscriber across the whole continent back in 2004. Today Western European SMS use is more than 2 per person per day (seven times more than in America). Britain averages 6 text messages per person per day; South Korea 10, Singapore 12 per person per day. In the Philippines total cellphone penetration is typical for a developing country, but across those who own a cellphone, they average 15 SMS text messages sent per cellphone subscriber per day.

SMS is used at work, a 2003 survey by the MDA (Mobile Data Association) of British companies, found that at 80% of British companies, SMS was used for company communications - work, business communication. A 2004 survey by the MDA found that the vast majority of British executives selected SMS texting as their most valuable communication asset - ahead of email, voicemail and voice calls. It then comes as no surprise that last year in the UK the total population expressed a preference of using SMS texting rather than voice calls on the cellphone.

With all this, my point is, that in the advanced markets for mobile telecoms, SMS texting is the killer application. From all that has been said and shown about the iPhone, yes the iPhone will be able to do SMS, and for habitual users or new users, certainly a full keyboard on the multitouch screen can be a great boon.

But for heavy users of SMS texting - 10% of British students average over 100 text messages per day; 30% of South Korean students average 100 text messages per day - if you are a heavy user of SMS, then it becomes a near-autonomous communication method, a semi-telepathic method of "speed of thought" contact with best friends and colleagues.

Then it is absolutely vital, that messages can be sent, by using the phone with one hand, and typing messages blind (not looking at the screen). As far as I can tell, the iPhone will require users to operate it mostly with two hands, and looking down at the touch screen!

For any American user, you've seen enough of the Blackberry users. Imagine separating the Blackberry from its user. Imagine the withdrawal symptoms, hostility, nervousness, stress, lack of sleep etc. Now please accept my thought - that SMS is MORE addictive than Blackberry. Then consider users who didn't discover Blackberry addiction last year, but have been addicted to SMS texting for five years. (Young employed adults today are the smartphone target especially for the iPhone in Europe - they are all addicted to SMS, have been for years)

It is possible that the iPhone is good enough at SMS (one-handed and blind). But comments at various discussion panels about SMS on a touch-screen has been unanimous that it is a lesser experience.

If you are not addicted to SMS, this seems like a silly point. But keep that image of the Blackberry user forced to go without. Now magnify the effect - SMS is more addictive than Blackberry AND text messaging has built the addiction over many years longer than the Blackberry has existed. Then worse of all - remember the user has two phones. If the iPhone is lacking in SMS, it will very rapidly be relegated to second phone status. When you go club-hopping, which phone do you carry? Of course the one that does SMS text messaging (as its so noisy in night clubs, SMS is vastly more useful than voice calls). If Europeans start having this discussion "Where is your new iPhone?" and "I left it at home cause its texting is so bad" - this will be the death-nail for the iPhone in Europe.

And it will result in severe backlash by European users. Otherwise fine, but bad at SMS. This is what has haunted Motorola in Europe for years and what killed several innovative phones such as the Nokia 3650 which was supposed to be Nokia's first mass-market cameraphone (which had alpha-numeric keys arranged in a circle, and all who were active SMS text messaging users already accustomed to the classic alpha-numeric 3x4 keypad totally hated it for poor SMS use, returning the phone in droves) or the Nokia 7600 tear-drop shaped phone that I mentioned, which was supposed to be Nokia's first mass-market 3G phone (where keys were on both sides of the screen) - where the return rates were totally driven by severely disappointed users of SMS text messaging. Both were intense sales flops. Both were rapidly removed from the market.

If SMS is a poor performance on a top-level phone, Apple will suffer severely in Europe (and also in Asia). It won't have any chance of reaching its European goals and because of Europe's relevance to total iPhone sales, therefore it won't reach 10 million sales. SMS is the make-or-break element.

Obviously the easiest fix is a slider keypad with a normal alpha-numeric (or even full alphabetic) keypad. But this would go against the philosophy of the radical new user-interface. My bet is there will be an keypad iPhone, but not until late in 2008 when this has been proven to Apple to be the biggest problem.

Obviously it is quite possible that the iPhone can actually do SMS as well or even better than current Nokias and SonyEricssons, and if so, then this won't be an issue. But the gossip on the iPhone is, that SMS is a disappointment. We'll have to see.

THEN THE RETURNS

But what is the worst part of the European region of the iPhone game are the returns. Of course any purchase in any country has some buyer-protection laws. With even the best gadget or device from the best of brands, there are some returns. But where Americans are very unfamiliar with top-end phones, and therefore will love many of the iPhone's features, Europeans have seen many things better than the iPhone and the return rates will be inherently more than in America.

Some of the disappointment factors will be obvious testing the phone in the store. And the customer will select another phone, that is normal in buying and will not have an impact to replacement rates. But many specific points will not become obvious until the customer has taken the iPhone home, and tried to use it. Suddenly all the problems flood in.

NO MEMORY CARD

he very serious flaw in the current iPhone (which Apple may well fix by the European model) is a lack of a removable memory chip. That is not a fatal flaw in a basic or feature phone. But with a smartphone, for users who are accustomed to smartphones and who get a new phone every year, when you've already stored 500 megabytes of your fave pictures, videos, songs etc on your current SonyEricsson or LG or Nokia, and you now pull the new iPhone out of the box, and want to insert the memory chip - and then find it has no slot - this will be very annoying.

Here European customer sophistication will hurt Apple. American customers mostly will not care. Europeans will be dumbfounded, remember the heavy users of smartphones replace phones every 9 months, taking their fave pictures and videos and music with them, from phone to phone. And they can remember several years back in their phone history, that this was a staple in the abilities of smartphones. Now Apple brings a phone that can't support memory chips?

This one feature will immediately promote returns. But it is not obvious when looking at the specs of the phone. These kinds of "faults" will be dramatically observed when starting to use the phone. And its not only the memory chip in storing own memories, pictures, messages, videos and msuic, it is also in sharing with friends, and yes, in customizing a phone for the week and for the weekend, etc.

NO REMOVABLE BATTERY

Another problem with astute smartphone users, is that with more features on the phone - and high resolution cameras, videos, larger screens, etc - the phone battery runs down faster. So many smartphone owners buy two batteries, for heavy usage days. What, the iPhone can't replace the battery?

Where Americans mostly won't care too much about these kinds of "cosmetic" things - yes, the iPhone can do SMS texting, but not single-handed and blind; it already has a 4 GB or 8 GB hard drive, who needs memory, etc. the European customer will find these as serious flaws.

It means the return rates in Europe will be much larger than in America, probably twice the rate, maybe more.

And high return rates mean two things - bad word-of-mouth meaning harder to sell to new customers, and short "shelf life" for the phone in the stores, as the salesreps notice they get too many returns, and start to steer customers away from the iPhone.

An industry rule of thumb says that more than half of customers walking into a store with a phone preference, will walk out with a different phone model than what they wanted. The salesguy will decide. And too many returns is too much hassle satisfying an unhappy customer - generating no further sales commission for the sales guy, but often taking even longer to process than a new sale - so if the return rates become big, the sales chain will start to avoid the product.

Then the only way to push the phone is to increase sales commissions for the iPhone, this would hurt Apple profitability.

A very important factor to keep an eye out on, is how European official iPhone authorized mobile operators and independent stores like Carphone Warehouse, report return rates for the iPhone. If they remain roughly within industry averages, no problem, but if the return rates climb above those, then the iPhone is very seriously in trouble.

Remember, Apple needs Europe to perform, to get to the 10 Million target.

APPLE ARROGANCE BACKLASH

A separate item of gossip I've heard, is that many operators feel Apple is very arrogant in its approach to European mobile operators/carriers (which amuses me, a pot calling the kettle black ha-ha; usually it is the European mobile operators who are accused of being arrogant). I haven't had direct verification of this, but have heard of it from several directions, that apparently the European mobile operators are very unhappy with Apple's intentions to "meddle" with their service plans and internal systems. If Apple was able to get Cingular/AT&T to agree to let them develop separate systems that are exclusive to the iPhone, and actually control some internal systems and data, such as the visual voicemail, I am very sure most European mobile operators will slam the door on any such ideas.

This will probably mystify Apple's sales efforts. There can easily be several major European markets where initially the Apple sales effort is shut down altogether by all of the local operators.

I would think this is a short-term adjustment thing, a learning process that Apple has to go through anyway, in learning to deal with the 144 European mobile operators, and the 44 or so selected operators who will be supporting the iPhone in the 44 countries.

For that, I did set up my model to include a growth pattern for new operators to be added to the European (and Asian) portfolio. We have factored this into Apple's performance in the Reference Case already.

However, it will be cause of considerable worry, where not all European countries will initially be supporting the iPhone when it launches in Europe. My main thought on this, is that this is resolved with good sales effort, it may cost some more (hitting the profitability) but Apple is a typical powerful American sales and marketing organization, and will only deal with that as a delaying factor, not an obstacle.

So we need to get to 6.3 million iPhones sold in Europe. That is only 1% of all 641 million European cellphone owners. This is the market where smartphones have existed the longest, where mobile phone customers are very willing to pay high prices for phones. I don't see it as in any way impossible. But it will be very hard work. And Apple will by mid 2008 be averaging 441,000 iPhones per month or 1.3 million iPhones per quarter. If they hit those levels in Europe, Apple is well on target.

WHAT COUNTRIES TO WATCH

The countries to watch would be among the large European countries who are close to the European average in their domestic mobile market. Italy is too advanced, Germany and France too much behind. Britain is borderline too advanced but can be used; Spain is the best market to observe Western Europe and Poland Eastern Europe. These three countries also have no powerful national manufacturers who might tilt the balance (eg Finland with Nokia, Sweden with (Sony)Ericsson and France with Alcatel etc)

WHO ELSE BENEFITS

I think in Europe Nokia and SonyEricsson won't particularly gain or lose out of the iPhone. But for those mobile operators/carriers who won't have the iPhone, suddenly this opens the door to the small Asian smartphone makers like HTC and ZTE etc who can bring in rival Asian "iPhone Clone" type of phones to give a local variant for a given operator, as their iPhone rival. I think this will help drive operator-specified phones to Europe (which are more common in Asia) and also open the door to small second/third tier smartphone makers.

FINALLY THE ASIAN MARKET

ASIA IS MOST CHALLENGING

Asia won't get an iPhone until the first quarter of 2008 - which to me suggests March not January. Why would Apple wait so long, because more than half of Asia-Pacific is on GSM

RADIO TECHNOLOGY, MAYBE CDMA VARIANT

Out of our target of 190 million cellphone owners in the industrialized Asia-Pacific area (with 236 million cellphones), 130 million are in South Korea and Japan. In South Korea and Japan there is no GSM at all. And four out of six 3G networks in these countries are the "non-GSM" version, or CDMA2000 EV-DO.

In Japan it is possible to offer an "European" 3G version on WCDMA (UMTS) and there are two operators with that network technology, but in South Korea, the current three network operators only have CDMA networks in use, requiring the alternate 3G technology, CDMA2000 EV-DO to use 3G there. It should be noted that two Korean operators are rolling out WCDMA 3G networks as well, but initially these will only cover major cities. A serious drawback.

What this means, is that for Apple to even be sold it has to at least have the European 3G variant. But then the GSM technology is useless for domestic use in Korea or Japan. It would make sense, that Apple also release a CDMA variant of the iPhone. If so, this is the time to do it.

Another possibility is to release a Japan and Korea -exclusive model, which has no GSM, but only 3G. (either WCDMA ie UMTS or CDMA2000 EV-DO) Then the phone could be made smaller, lighter and and less consuming of its battery. This could be a clever strategy as the Japan/Korea iPhone would also be cheaper than the European bulkier combined 2G-and-3G model.

For the rest of our industrialized Asia-Pacific, a GSM-and-3G model is absolutely necessary by Spring 2008.

UPGRADE IN SPECS

Secondly, the Spring 2008 "Asia" model will need serious upgrades to its specs. By then 5 megapixel is pretty much the norm for high-end smartphones (in South Korea Samsung introduced a 10 megapixel cameraphone last year), DVD-quality videorecording as well. The removable memory chip ability is absolutely needed here. In-built flash, removable battery, etc.

Where the European model is likely to upgrade part of my "wish list", but at least 3G and 3 megapixel camera and flash; and selected other upgrades, by Spring 2008 I'd say all of those items have to be part of the "Asia spec" iPhone. Lets see for example how well GPS starts to spread. It may be a sudden added need for the Asia spec iPhone. Another hot item is a built-in digital TV tuner (mostly DMB or DVB-H depending on the country)

Note adding any of these features drains the CPU, loads the memory, adds size, weight, drains battery, adds cost.

MANY SAME FACTORS AS EUROPE

In Asia-Pacific, as we only focus on the industrialized parts of Asia, in these nine countries, there are 35 mobile operators/carriers. And obviously 9 need to be selected/approved, and there the necessary testing etc done. These issues are similar to Europe.

There also are similar factors about second subscriptions, about handset subsidies, about churn, loyalty, operator independence, regional alliances, SMS, etc.

REPLACEMENT CYCLES

What is exceptional in Asia starts with the phone being very much a fashion item. Initially this is good for the iPhone - it can well be an iconic phone. But here, the Asians are very particular about what is cool, hot, new. If they get the iPhone a year after the Americans, it can well gain a "stigma" of being the "last year's phone" - especially as the coolest phones in Asia tend to come out of Finland and South Korea, not America. Apple will need to invest a lot in sustaining the desirablility of the iPhone in Asia, while not releasing it there.

Asians are very fickle with what they like, fashions and trends come and go. What is the ultimate must-have gadget can be forgotten soon. In South Korea for example among young adults the replacement cycle is 6 months. Remember that the outwardly near-identical to the iPhone is the LG Prada phone, which was a South Korean industrial design winner - LAST YEAR, before the iPhone was even announced. 3.5 inch screen, touch screen smartphone, was the cool winning design a year ago. People walk around with phones that look very similar to the iPhone today - of course they are not as clever in the user interface, but if fashion drives the industry, then looks are more important, and if that iPhone looks like the old LG from 2006, it suddenly is very much last year's phone. No matter how much its loved by the Apple fanatics also here in Asia.

PRICE CONSCIOUS

But another more severe problem is price. Asians tend to be much more price-conscious, "value" buyers. They price-shop, they haggle and bargain, they research all options, and really demand top performance. It is very clear from published early opinions about the specs of the iPhone, that where Americans tend to love it, Europeans tend to be mildly interested, Asians mostly dismiss the phone as weak, inferior, not worth the money.

Again, this is their impressions of the current model - and we can be sure there will be a revised (upgraded) iPhone for Asia.

But the Asian phone market is more vibrant, has more players (tons of Taiwanese, Chinese, Japanese etc manufacturers) and the product cycles are shorter still. Here Apple will have a great challenge to match expected Asian preferences for Spring 2008, when designing that phone and manufacturing it now.

CLONE WARS

In Asia Apple will face tons of low-cost clones. Not quite calling themselves iPhones, but certainly promising all, and even delivering most, of what the iPhone will be specified as. For example this week CNN has shown an interview of the CEO of HTC, who has shown their top end smartphone, which has a touch-screen user-interface, which on TV seemed "identical" to what Apple's user interface looks in Apple ads.

We won't know how similar they are, until they are tested side-by-side. But HTC says this is their own design, from two years ago, and certainly on the screen it looked totally the same as that on the iPhone. For the average buyer who wants a touch-screen smartphone operated without a stylus, sliding the finger on the screen etc, this seems like a clear easy substitute (at a fraction of the price of the iPhone)

Because Asian manufacturers are accustomed to shorter production runs (whereas European manufacturers tend to favour economies of scale) and of rapidly changing local tastes, it is relatively easy for them to copy Apple design clues, and make similar, iPhone clones. Here the price-sensitivity kicks in. Some will go for the real thing (Apple brand etc) but others will select the rival.

This is unique to the Asian market, where many more clones will flood the market, than in Europe or America.

As I mentioned in the America section, in Asia there also are the fewest existing Mac users and iPod users to tap into, in getting cross-promotional and Apple loyalty effects.

But Apple is iconic. The airports sell iPods and Mac powerbooks and the brand has a strong following. There will definitely be those who want to show off having the iPhone. And in our model we had Asian per-capita penetration of the iPhone to be nearly half of that of the iPhone in North America (per capita), so partly we've factored in these regional issues.

In Asia Apple needs 1.2 million units sold in ten months to December 2008 and then Asia will perform to target.

COUNTRIES TO WATCH IN ASIA

The Asian market success depends on Japan and South Korea embracing the iPhone. If it isn't getting something near the target of 0.7% of the market in those two countries, they account for more than half of the total market size in Asia-Pacific and will determine whether iPhone can reach its targets for Asia. Keep a close eye on Japanese and South Korean reviews of the Asian iPhone model to gauge its chances in those markets.

FIRST BIG REVISION

Finally, my gut says Apple will have an "iPhone II" in the summer of 2008. It sounds about right, that there is an American model summer 2007, an European (upgraded) model for Christmas 2007, an Asian model (further upgrade) for Spring 2008, and then a first totally new model for summer 2008, to keep the line refreshed. I'd say that with the rapid innovation cycles of the industry, a new model is needed, at least for the Autumn/Christmas season 2008.

CAN THEY DO IT

That is the model and regional issues. I think I've covered just about all major issues which I think will impact the market success of the iPhone.

We need 2.6 million out of America, 6.2 million out of Europe and 1.2 million out of Asia. Then the total penetration of the iPhone among cellphone users (not subscriptions) in the industrialized world will be 1.3% in North America, 1% in Europe and 0.7% in Asia.

I think yes, Apple can do this. In my mind it requires definitely a new phone for Europe (a 3G phone) and a further upgraded phone for Asia with a CDMA variant.

I think also that Apple's profitability will be severely hit as it fights to get to these targets (as the European and Asian mobile operators and the various reseller channels will be more cumbersome to win over than Apple did with AT&T). The Cellphone business is cut-throat with margins in handsets much lower than those in the PC world.

My gut says Apple has to release a slider/folder/clamshell/candybar phone with a keypad to get SMS texting users onboard, but am willing to give Apple the benefit of the doubt. If anyone can break the keypad "lock" as the SMS text messaging metaphor, then Apple is that company to be able to crack that nut.

But I would not be surprised to see a keypad iPhone by next year.

And the real superphone? Apple is now in the learning phase of mobile telecoms. It has clearly stated it is here for good, totally fully committed, this is the future of Apple.

Apple will be listening more carefully and completely to all customer feedback, directly and via the mobile operators, than any handset manufacturer out there today. Apple will improve the iPhone based on this feedback. And no-one will pursue customer satisfaction as well as Apple when it notices its first iPhone was not quite perfect, after all.

The phone to fear, the ultimate superphone of its age, the one striking fear into the HQ's of Nokia, Motorola, Samsung, SonyEricsson and LG, is the first re-designed iPhone, after feedback from users in Europe and Asia. That truly re-designed "iPhone II", that may be released in the summer or autumn of 2008 at the earliest, that is the must-have smartphone. I can't wait to use that iPhone. This first iPhone is more like the Lisa for Apple PCs, an important step along the way, but the next iPhone is like the Macitosh, a true masterpiece.

FINAL FUDGING

Apple does have considerable ability to adjust the actual performance, going into the second half of 2008. At that stage, if Apple notice they are clearly below the target, Apple could slash iPhone prices, fore-going profits of the iPhone range, to reach the intended 10 M goal. Equally, if Apple notices it is ahead of the target, it can resist lowering prices even marginally, and drive extra profits out of the Christmas sales period of 2008.

THATS IT

So there, thanks for hanging out with me to the end, sorry that this was so long, but honestly, I felt I'm not covering the full topic if I don't mention each of those matters.

For those who want to see how the iPhone will influence industries outside of telecoms, ie media, advertising etc, please see my blog about Entering the iPhone Era

For those who want to see more about the mobile telecoms industry in general, its size, etc, please see Putting 2.7 Billion into Context

If you are interested in the media dimensions of smartphones, you may enjoy my article on Mobile as the 7th Mass Media Channel

And for those who liked parts of this blog, but feel they can't see the part about SMS text messaging being that important, please read my open letter to Apple about the importance of SMS which I wrote the night the iPhone was announced in January: Open letter to Apple

Comments

[Jeff at www.thenewsroom.com]

This iphone video, from Mossberg, is pretty about alternatives...http://thenewsroom.com/details/428470?c_id=wom-bc-js

[Tomi T Ahonen]

Hi Cewdrywc and Jeff

Thank you for the comments

Cewdrwywc, thank you for the kind comments and yes, the addiction to SMS keeps growing. I remember seeing the first time an offer for free 1000 text messages (which was offered over a 6 month period in Finland back in about 1999 or so) and I thought to myself I'd never get through 1000 texts in six months, but then upon thinking of it I thought, actually, some of my younger relatives certainly could do that.

Today my monthly phone bill on an active texting month is definitely over that ha-ha..

In Switzerland one of the operators had a funny marketing gimmick, they said that everybody deserves to be a millionaire once in their lives, and gave all their customers a million text messages but this expired within a month. In reality they just turned the billing off for their texting for the month.

What they observed afterwards, was that the residual usage level by their customers had jumped a lot during that month, and they were making much more money out of paid SMS texts after that month. But also their customers were incredibly thrilled by this promotion, becoming "SMS millionaires"

Jeff - thanks, we've gotta go take a look what Mossberg says

Thanks for writing

Tomi Ahonen :-)

[Javier Marti]

Once again, an excellent article.
Thank you very much for sharing your experience with us.
Many intuitions about the Iphone were re-inforced through your interesting words.

Regards

Javier Marti
http://trendirama.com

[David Cushman]

wow Tomi, burning the midnight oil.
I didn't realise there was no video camera function.
For me that's like your BMW coming without wheels!

[Manish]

Tomi, good thorough analysis, as usual. One point, though - you say, and I quote, "The phone to fear, the ultimate superphone of its age, the one striking fear into the HQ's of Nokia, Motorola, Samsung, SonyEricsson and LG, is the first re-designed iPhone, after feedback from users in Europe and Asia. That truly re-designed "iPhone II", that may be released in the summer or autumn of 2008 at the earliest, that is the must-have smartphone."

But you had yourself noted earlier that the design cycle is 18 months. So, for iPhone II release in summer 2008, shouldn't they have started the design early this year? When do they have the time to listen to feedback (forget Europe and Asia - even from the US users) and form that as a base for next version?

I would expect iPhone II (not the re-tuned Europe or Asia version) by around 2H08, and that too mainly with US feedback in mind. And I would expect that one to be, once again, behind the European and Asian expectations.

As you can tell, I'm not really an apple fan-boy :-) But realistically, I am judging them based on facts (as you have painstakingly and repeatedly outlined in this forum)

[Tomi T Ahonen]

Hi Javier, David and Manish

Nice of you guys to visit us, thanks for the comments.

Javier - thanks. We'll also need to see what the real iPhone and its experience brings with.

David - yes, that is the gossip rather strongly around the Mac/iPod/Apple boards. But as I say, I don't have one to play with, don't know until the phone is really released.

I would think that adding the video recording software is a relatively modest addition to a digital camera(phone). So this should be a deficiency rather easily fixed in the near future.

Manish - ha-ha, you've been reading my blog :-)

Seriously, very good point about 18 month development cycle. It would typically be "staggered" so that the original June 2007 iPhone was started in Dec 2005; the Nov 2007 European iPhone design started in May 2006, and the March 2008 Asian iPhone design started in October 2006, and so forth.

The early design goes to the form factor and major size, weight, etc elements. Then the design can be rather much tweaked until perhaps 9 months to launch, when the design would be frozen and then completed.

So if we look at say an August 2008 "iPhone 2" release, the design for that would have been started only February 2007 - after the iPhone was announced and the first global reactions collected etc. Notice that Apple would be setting the "baseline" of what was current competition - at that time, say the LG Prada, the Nokia N-95, etc. and then project 18 months into the future from that baseline.

With this kind of process, Apple would rather rapidly "get in synch" with the mainstream. When they designed the original iPhone from December 2005, few cameraphones had built-in flashes for example..

Now, if we continue with the assumption that its an August launch, Apple would have until about the first of December to collect feedback from its American users, and the first month of European use, before locking the final design concept for the iPhone 2.

Its do-able. I would also say, that Apple will be much more inclined to "push the envelope" in where they put emphasis.

But yes, you're very right, a totally new "from a clean slate" phone - say if the current plan calls for a flat large screen keyboard-less phone, and suddenly Apple says - no, the iPhone 2 has to have a keyboard, make it a slider or clamshell - then we're looking at a total re-design, from the beginning.

I have vibes and reading between the lines, that this already occurred once with the first iPhone project, and this current iPhone is actually Apple's second attempt at a smartphone. But I don't have any solid evidence of it. Just reading the tea-leaves and with my ear to the ground so to speak..

Thanks for writing

Tomi Ahonen :-)

[alex]

Hi Tomi,

what a refreshing pleasure to read a business analysis about the iPhone with substance.
I agree with most of the assumptions and statements.
However, I see more potential for "game changing", which you acknowledged in the introduction for the user interface, also for the business.
You have in many places assumed that the iPhone market segment is a subset of the existing smartphone user segment.
What if the iPhone appeals largely to mobile users without smartphones?
For people outside the relatively small smartphone segment, the iPhone could bring value that has prevented those people from even considering a smartphone in the past.
You wrote one paragraph to that direction
("First, it has to convince "ordinary" cellphone owners who may have an iPod or Mac, to now upgrade very seriously to the iPhone, and promote it more as a new pocket Mac or a "super iPod", and have the customer think not that they are replacing a 100 dollar phone with a 500 dollar phone, but rather that they are now getting their fave Mac/iPod experience onto their phone."),
but this doesn't seem to be quantitatively explored in your model.

Evidence for a game-changing business plan can be seen from Apple's COO interview in January:

"The traditional way of look at a market you look at products you are selling, you think about the price bands that are currently market, you look at price band your product is in, and you assume you can get a percentage of it. And that's how you get to the addressable market. That kind of analysis doesn't make really great products. The iPod would not have been brought to market if we would have looked at it that way. How many $399 music players were being sold at that time?
Today in the cell phone industry, a lot of people pay zero for the cell phone. Guess what? That's what it's worth! And so, if we offer something that has tremendous value and is sort of this thing that people people didn't have in their consciousness -- it was unimaginable, I think a whole bunch of people will pay $499 and $599. Our target is clearly to hit 10 million and I would guess that some of those people -- there are some of those in the audience -- who are paying zero because it's worth zero, will pay more a bit more because its worth it."

The difference to the iPod is, of course, that the iPhone enters a well-established huge market that you have analyzed so well - based on the existing market behaviour.
However, in the iPhone's addressable market (the wealthy mass-market in the industrialized countries), phones are pretty much perceived as, well, phones. Internet and mediaplayer usage is (still) a minor segment, mainly confined to smartphone users, who are capable and willing to put up with the quirks of these devices and the operator services (voice mail, Internet access etc.).
If Apple really delivers a device, and together with operators a service, which "just works", couldn't this open up a new growth segment for "smartphones", which is little overlapping with the existing smartphone segment?

Under these assumptions, several of your obstacles for Apple become a lot less relevant. E.g. brand loyalty (to existing smartphones), missing camera features, removable memory cards, and the numbers don't look so bad (e.g. 2.6 M needed AT&T iPhone users are 5% of total; 39% of smartphone users is not relevant then).

About 3G in Europe during 2007, I am not quite sure. Yes, it vastly improves the Internet experience. But is it critical for the majority of phone users, who has never before accessed the Internet with the mobile? Maybe, maybe not. If Apple can engineer a Europe version with substantially new hardware until November (maybe, maybe not), then how about 3G in and WLAN out? That would balance out about the size and cost. I think we agree that WLAN is not essential for the 1st iPhone in Europe.

Anyway, I agree that Apple needs to include 3G in Asia, otherwise they have no chance.

I am far more concerned with the SMS. I also find it hard to imagine a target segment in Europe (or Asia), which could be attracted to the iPhone but not appalled by the lack of tactile feedback when writing SMS. Fully agree with you.
But rather than going "backwards" to physical keyboards, I'd rather expect Apple to solve this with new touchscreens that provide tactile feedback. Possible for your conjectured "iPhone II in mid 2008" the earliest.

Biggest unknown factor in my mind is how Apple can deal with the fragmented operator landscape in Europe, which you described so accurately. I agree with you that Apple can solve it over time, but with a huge risk for slow start, which could easily prevent the large sales figures in 2008 to reach the overall0 M. For example, Apple might need the proof of a large initial sales spike in the US to convince the first European operator(s) to overthrow their "holy" principles how to introduce new services and devices. So November for a significant Europe launch looks like a tall order to me, not even counting in new hardware (3G).
On the other hand, Jobs is pragmatic and I don't believe that "exclusive launch with one operator per country" is set in stone anywhere at Apple. They will try to be innovative also in the go-to-market to Europe, and maybe surprise us with a different model.

Asia looks more hopeless to me than you have outlined. cdma version I don't believe in, looking at Apple's history to stick to selected key standard technologies; after all, Apple is pretty profitable and not known to accumulate huge costs just to conquer more market share.

So overall, I would challenge your analysis that it is not "game changing" as Apple probably assumes it to be.
Therefore I would be more optimistic in North America, and more pessimistic in Asia.

Best regards,
Alex

[Manish]

Tomi, thanks for the response - agree that they can pull off the next version in the incremental cycle. That would land them with the right v2.0 only if they are already learning their lessons.

Alex, I would like to catch one part of your comment, although it's for Tomi to reply in complete. You said "What if the iPhone appeals largely to mobile users without smartphones? For people outside the relatively small smartphone segment, the iPhone could bring value that has prevented those people from even considering a smartphone in the past."

You know of *anyone* who has 500 dollar/euro to blow on a phone (and that too with subsidies. Unlocked one would be much higher as Tomi points out) and doesn't already have a smartphone? I don't think there would be many people in this category, at least not in Europe and Asia. There may be few (besides the few of those who don't really need a smartphone at all no matter how cool or convergent it is e.g. old folks with money) but then, hey, no-one said apple would draw a blank :-)

[Piot]

Tomi, as others have already said, I commend you on all your hard work.

However I am curious if you could have made your points in less than 16000 words.

It is obvious that you know your business but I feel that you may be getting a little too wrapped up in the figures and statistics of the mobile industry.

Here is my, totally uninformed, prediction. I think that you will have to totally revise your model after the iPhone's 1st quarter of US sales. Maybe even after the first four weeks.

PS. I think you will find that Steve Jobs' 10 million target was for 2008 alone.

[alex]

Hi Manish,

you have raised the key question.

The answer was "yes" for the iPod, i.e. many people who maybe once had bought maybe a Sony Walkman but never a digital music player (before the iPod) bought iPods and even paid more for the iPod than existing users of digital music players.

Now we don't know whether such a game-changing miracle can happen with the iPhone.

I certainly know many people with smartphones and who have even paid a lot for them, but don't actually use the typical smartphone features (Internet, media player, downloadable applications) - they decide for a "smartphone" for image and style reasons.
This is particularly common in certain Asian and European markets (Tomi mentioned Italy as an example).

So I would say, yes, there are many people who are willing to pay a lot for a phone if it provides value for them.
I think that also Tomi has argued that price is not a critical barrier for the iPhone (besides reducing the accessible market to the wealthy, which I fully agree with).
See also the last quoted statement from the Apple COO.

Next: I do know many "normal" people (who are not technology enthusiasts) who are surprised to hear that phones can access the Internet and have other "smartphone" capabilities.

Apple could create a market perception that "finally phones can show Web pages" if iPhone is so much simpler and better at Web browsing as Apple promises. Never mind that smartphone users will say they have been viewing Web pages for years.

So yes, Manish, I do believe that such users exist in large numbers, but if you would ask them now (in Europe or Asia, outside the iPhone hype bubble) they would probably not believe themselves that they would ever pay that much for a phone. That's the point of "game-changing".

Another way to look at it, is to start from the existing iPod user base, as I suggested in this forum back in January.
For, let's say, 100 Million iPod users (still growing until end of 2008), the price delta to the iPhone does not look extraordinarily big.
Would about 10% of iPod users upgrade their iPod to an iPhone until end of 2008?
How many iPod users have a mobile phone? Probably nearly 100%.
How many iPod users have smartphones and use their smartphones for Internet and media player? Maybe 5%, just a wild guess.

I'm not going to propose here a full-blown analysis like Tomi's, but just would like to point out that a different angle to the assumptions might be needed to capture a "game-change".

Alex

[mark]

Tomi, thanks for this comprehensive overview, though I must say my brain was in numbers overload and my attention was flagging by the time I got to Asia. So, forgive me, if you covered this and I just missed it.

A question as I got confused. Does the 1.04B target market include all likely cell phone (not smart phone) users in the industrialized world?

A comment. To Apple, the 1% or 10 million is just a statement to others that Apple is serious about being in this market. Whether they actually pull out the stops to reach the target is subordinate to lots of other criteria and factors. In other words, I think Apple is willing in Europe to hook up with smaller new entrants, rather than compromise severely with the larger carriers. Of course, they would first thorougly explore the larger carriers. But in the end, Apple would take the risk to change things, and risk falling short of the 10m target.

A comment. Apple intends to issue upgraded software for its devices. So although new hardware features aren't added to older iPhones, Apple could add capabilities and design via software to make its iPhone retain its newness and coolness. So question, when people keep buying up new phones, esp in Asia, what is it that they are truly looking for? New designs? New software capabilities, including better UI? Or new hardware capabilities?

As for missing capabilities: Agree on 3G and Jobs effectively said it's coming. An extra battery could be attachable to the 30pin connector to do quick recharging. The removable memory card is not needed for moving content from phone to phone because the iPhone syncs seamlessly with iTunes, which flows the content (albums, playlists) onto a new iPhone. Yes, this iTunes use is a new behavior, but Apple surely intends to make iTunes (and .Mac or a renamed Web successor) an integral part of using the iPhone. I'm sure Apple is looking to where the mobile web will be in 2008 and aiming for it. (Jobs quoting Gretzky, something like "Not where the puck is but where the puck is going to be.")

A projection. Apple will release a 3G model with video chat/recording/uploading in Nov 2007 at the same $499/599 price points but 8GB/16GB memory; includes one-button upload to YouTube and .Mac. The EDGE model (either the 4GB or 8GB depending on Flash RAM costs) will get a new price of 399.

[mark]

Forgot to say this. I agree with alex that your (Tomi) analysis is based too much on the way things are today (which Apple surely knows, if nothing else from reading your blog), and not enough on the game-changing aspects of the iPhone. (You covered the touch-screen GUI but not the other things as much.) These aspects involve user behavior changes; of course there are barriers to adoption. But unlike typical companies, Apple, through marketing and loyal users, will make the actual user benefits sound so glorious that people will do it. The current 5 iPhone ads and 25-minute video clearly demonstrate this.

So a few game-changing aspects:
1. simple seamless link to iTunes (computers) as a digital hub for content
2. regularly upgraded free iPhone software (like for computers) for about two years after purchase
3. dramatically increased use of web services (over 3G or wifi), not just cellular carrier services

Possibly you can comment on these in another post.

[Tomi T Ahonen]

Hi Alex, Manish and Piot

How nice, you guys are having a conversation here on our blog, I feel like just sitting on the sideline and having you guys explore these issues. Very delightful, honestly.

Alex - Very good point about creating market space and dramatically raising the price levels. Apple did that with the Mac and the iPod. And arguably they were just too early with the Newton, could have repeated it also there.

It is definitely a possibility, and partly, especially for older (middle-aged ha-ha) adults, the iPhone can be a revellation, a novel access to a "pocket internet".

But I do think, that the Mac and iPod situation is drastically different from the current iPhone situation. When Apple took on IBM with the Mac, IBM was still delusional about PCs, and IBM was focusing on mainframes (this was 1984 if you remember, most of IBM's money was made in mainframes still then). And the other giants in computing (the so-called BUNCH - Burroughs, Univac, NCR, Control Data and Honeywell) - were also quite oblivious of the PC market. So Apple's competition in 1984 was not the top line of the computing world. Their competitors were the "farm league" with no real marketing effort or budget etc. In other words, the Mac faced inferior competition.

With the iPod launch, the portable music player belonged to Sony. Sony felt the player market was long since saturated. Sony was trying to migate C-Cassette users to the minidisk player and didn't see an MP3 player as a viable rival. But most of all, Sony's total focus was elsewhere - with Playstation 2. Sony felt it had ridden the Walkman experience and market to its logical conclusion, and again, the strongest rival for the iPod actively ignored the market. So Apple only had to fight tiny rivals like Creative Labs.

Now, in mobile, Apple faces rivals as big as Apple is. Nokia, Motorola, Samsung, SonyEricsson and LG are all completely focused on winning in the mobile phone handset market. But the competition includes in part also other giants such as many of the mobile operators/carriers - NTT DoCoMo in Japan specifies all of its phones, Panasonic, Sanyo, Sharp, NEC etc do not design phones for DoCoMo. So NTT DoCoMo is a direct rival to Apple's iPhone. Same is true of SK Telecom in South Korea - this is the parent of Widerthan (ringback tones) and Cyworld (the world's biggest social networking site by revenues and corporate presense and pictures shared and videos uploaded). And don't forget Microsoft is pushing into the mobile phone operating systems; Google is going mobile; Dell is going mobile; Disney is going mobile; fashion brands like Dolce & Gabbana and Prada are going mobile. And there are the second tier players like RIM with its Blackberry etc. Its not a stagnant neglected market. Mobile is a very active, fiercely competitive and innovating market.

And of Apple's ability to re-invent the smartphone experience. Here it is very late to the party. Nokia's Communicator in 1997 was a truly colossal innovation, the real internet on a mobile phone, on a "pocketable" brick-sized gadget that cost more than three times the price of the second most expensive mobile phone on the market at the time. But that was revolution - and Nokia has milked that super-premium priced Communicator phone line for over ten years; its the best-selling PDA in the world while being far the most expensive one.. That the iPhone has the internet, is to me not re-inventing this market.

Japan's J-Phone really innovated and built a new market space when it became the first mass market provider with a series of cameraphones in 2001. Again, that was revolution, it required courage, and took a lot of heat and ridicule. But today three fourths of all phones sold - and half of all in use - are cameraphones. That was clever. That the iPhone is a cameraphone, this is not really brave by Apple.

Music? Three years after the iPod launched, South Korea innovated with full-track MP3 songs sold directly to smartphones (musicphones). Today 45% of all music sold in Korea is sold to musicphones. Yes the iPhone is a beautiful music device. But as last year 309 million musicphones were sold against 46 million iPods, I'd say it was the South Koreans on SK Telecom's Melon Music service and their first musicphones which created the disruptive technology to the music industry.

Bringing me to the iPod. What we have underneath the iPhone hype, is in reality a desperation move by Apple. They saw the writing on the wall in 2005 when musicphones started to outsell iPods worldwide. And at the same time PC sales growth had stalled. Now Apple admitted in its January investor conference that Japan has become the first PC market where PC sales are in actual decline - while mobile phones sales keep growing. No surprise, two years ago Japan became the first country where the majority of internet access is from mobile phones. It is then a natural shfit, not all PC users will abandon PCs, but the trend starts to go from PC use of internet to mobile use of internet.

So for Apple, they saw the writing on the wall. The iPod was losing its battle and the days of the Mac carrying Apple were also numbered. That is why Apple Computer is now Apple Inc. That is why Steve Jobs announced the iPhone before they even owned the rights to the iPhone name, ha-ha.. They had to do it.

Now, if you "have" to launch a new technology, especially one which is likely to cannibalize your current products (iPods and some Macs/Powerbooks especially for occasional internet access) - then you do it with the best fanfare and most PR hype you can. If anyone will cannibalize my product, it best be me..

So back to the point, Alex, very good point. I think it will happen to some degree - Apple is too good at this game. But I don't see reasonably any major success out of the iPhone creating whole new market spaces because the rivals are too strong and already massively innovating all over the globe.

Manish - good points. But let me also be a bit of a Devil's Advocate here. I do think there is a good, accessable market, for Apple to target. Older, adult employed people, who are somewhat uncomfortable with modern feature phones and smartphones. Our parents for example. Smart people, would perhaps like to explore the internet in their pocket, watch some videos, use a cameraphone, send messages, but don't like the experiences they had on a WAP phone two years ago, or aren't for example willing to learn to tripple-tap SMS text messages on a classic phone keypad.

Any senior exec in business, who is NOT addicted to a Blackberry (lots of them around). Suddenly the ease-of-use of the iPhone, its intuitiveness, and the full alphabet (touch screen) keyboard, these are all good for an older - non-addicted - smartphone prospective customer. Easily wealthy enough to buy one, but really has no interest in learning to use a modern "classic" smartphone.

So yes, there are some niches which can be very attractive to the iPhone, among those who currently are not users. But I do think, this is a small part in the 40s - 50s in age, not very much working with technology, say a medical doctor, a lawyer, etc. And one of these walks into the mobile operator store, looks at a couple of phones, sees how easy an iPhone is to use, and its a very easy sale. This customer is blissfully ignorant of any "superior" phones that might be out there, and will be perfectly happy with the first iPhone, and will upgrade eventually to another and another iPhone. And be proud of the new powerful phone.

But obviosly, Manish, you are totally right that the vast majority of this potential market size, has had phones for a long time, and so my scenario here, is a small exceptional case.. You're very right.

Piot - I'm sure I could have tried to edit this down, and with a couple of days of editing and cleaning of the writing, I could have maybe cut it to half.

I'm very sorry, but this blog is purely a hobby for Alan and me - notice we have no advertisements, we make no money out of the blog, its just here for us to engage with readers of our book Communities Dominate Brands and other random visitors who pop by.

So I have to do a full time day job (I'm a consultant to the telecoms and converging media space) and I really don't have the time to edit every blog here to be "elegant". For that, you have to wait for the next book(s), so we quite deliberately, with Alan, treat these blog entries as very rough early drafts of our thoughts, notes, partially processed ideas.

Then if we find one compelling, we refine it, and it becomes something more palatable - like recently say the 7th Mass Media discussion, which I wrote into a Though Piece and now Alan has released as a White Paper.

But yes, I am sorry, this was a horribly long blog posting. But I am flying out again tomorrow and have really no time to clean up old blogs. I have new ones to write about already, ha-ha..

Piot - you give your forecasts that the iPhone will radically outperform its goals. That my model would need to be re-adjusted in four weeks you say. That may well happen, honestly nobody knows. I am, however, quite confident in my analysis, that there are very significant reasons which limit the potential for Apple. I think you'll find almost all telecoms experts who have commented on the iPhone's chances - saying that the 10 million sales target, is very aggressive, and many express serious doubts that Apple can even reach that.

I've personally gone on record already months ago, that I think Apple will reach 10 M but not much more, as it has so much ability to manage the actual achievement thought things like price cuts (trading profitability for market share)

But you may be right. Let me say this, for the record - I am a huge Apple fan. I am ex Nokia and a very loyal Nokia smartphone user still today. I would love for Apple to strongly exceed that 10 million target. Why? Because the mobile telecoms industry needs the innovation. And if Apple is successful, it will help breed innovation, not conforming to the standard candybar/clamshell concepts.

I wish your forecast the best of luck to come true. But also, in all seriousness, I don't see that happening. But we don't have to wait long, it launches in three days (its 3 AM here in Hong Kong already)

Finally Piot - you said you thought Steve Jobs's 10 M is a target for one year, calendar year 2008. I am very sure from reading carefully the early announcements, that the goal was set for the launch period from June 2007 to end of year 2008.

That may have changed since, but I doubt it. Since Jobs originally set the goal to run 18 months to reach 10 M sales, he would be doing a dis-service for the owners of Apple (stock-owners) by now raising the target (by shortening the time available to reach 10M, in other words, achieve MORE than 10M by December 2008).

But also, I have not checked the last statements. You may be right. I'll look into it. If I find that statement to be wrong, I'll return here and admit my mistake.

Meanwhile, if you happen to have a link to where that was said, I'll be happy to take it and follow it.

Alex (again) - First, I really love it that you and Manish are discussing those issues between you two. Please do continue

But yes, Alex, very good observations about changing the game, and the price expectations. I do agree, that is a very likely scenario, it is more a question of how much of it will happen. We did celebrate the iPod specifically as a brilliant case study of creating market space in our book Communities Dominate Brands, so I can totally agree with all you say, it could be as if lifted from our book, ha-ha...

Thanks all for visiting and writing.

Tomi Ahonen :-)

[Tomi T Ahonen]

Hi Mark

Thanks for the comments. Just a very brief note, I'm about to go to bed (its 3 AM here in Hong Kong). I'll definitely come back to your comments and we'll discuss them, you make good points. Talk to you tomorrow... :-)

Tomi :-)

[Steve]

Hey nice blog on the iPhone. I am linking to it off of my Squidoo Lens. If you know of any good iPhone links please add them to the Squidoo Lens. It has all the how to videos that apple released last eek on how to use the phone.
Here is the URL for the lens. http://www.squidoo.com/iphon There is a ton of junk out there right now so if you have any good resources I would be happy to have them.

[Manish]

Alex: You start by making the assumption that iPhone can be a 'game changer' by targetting people who don't use a smartphone today. When I asked for your estimations of market size of such people i.e. those who can afford to spend 500+ euro/dollar on a (subsidized/locked/contracted) phone and yet don't have a smartphone already, then you pointed out that there are lots of people in this category who have a smartphone but don't use those features!

Hey, but this wasn't the point, no? Sure, apple's iphone can convert some of the non-feature users, but can it bring any *new* numbers by targetting non smartphone *owners*?

Otherwise, as Tomi later points out, we are talking niches.

Oh by the way, for all you know, there might be a decent number of future iPhone owners too who wouldn't use its rich features - purchase it for novelty/coolness value. So..what does that prove?

And again as Tomi pointed out, using the ipod example (that it brought many non users into the game) is not right. The *new* users it attracted were non-consumers of mobile music. And anyway, the music-on-the-go market was hardly was focused and cut-throat.

[Robert Seidman]

I agree that for many mobile phone users who rely on their camera for video is a downside. Quickness with sending text/SMS will also be a huge deal. Though I am not a camera snob and 2MP is plenty enough for me.

I don't think the 1st release matters all that much so long as there will ultimately be a future stand alone ipod that incorporates many of the features (bigger touch screen handheld with Wifi). I believe Apple's plan is to ultimately own its fair share of media distribution (audio and video). It is already the third largest music distributor in the US and of course the largest digital distributor.

The phone is just one entry into this. Ultimately I believe they will build up AppleTV to the point where it is a full-fledged media server rather than simply the media extender for itunes it currently is. You will be able to access all your content on your media server via WiFi with your iPhone. I will hopefully be able to do this even running Windows Vista and Orb Networks client with the 1st version of the phone.

If there will be a "poor step child" stand alone iPod that has everything but the phone and is ~$200-$300 US, it will be very popular.

The true "video on the go" market (to borrow from Manish) hardly seems focused or cut throat to me here. The iPhone is the first thing that will do what I want. Full portability of my entire media server via wifi in something that fits in my pocket comfortably.

Right now the work I have to go through is fairly complex compared to what a mainstream user will ever do. But over time, I believe Apple will remove this complexity too, or at least certainly has the opportunity to do so.

Unlike music, which was portable long before digital music and the Internet came along, I do not think there is huge pent-up demand today for what I'm talking about. I think I'm just ahead of the curve, but I had my first 300 baud modem in 1982 and all that took another 10-15 years to catch fire.

I'm either ahead of the curve or just plain wrong. Either way, I'm glad the iPhone is coming.

[Tomi T Ahonen]

First to Mark's two posts yesterday

Thank you for the comments, lots of interesting ideas there.

First on the 1.04 B target market. Yes, that is all cellphone owners in the industrialized world, not just smartphones. Out of the 120 million smartphones sold this year (out of a projected 1B phones overall), the vast majority will hit this market. Outside of that, 1.2 B more people own phones in the developing world, and the total subscription market (allowing for multiple subscriptions) was 2.7 B mobile subscribers by end of 2006, projected to hit over 3B this year.

When you say "1% or 10 million is just a statement" by Apple, I think its very different. Steve Jobs has re-focused all of Apple. When they dropped "Computer" from the name at the same time as iPhone was announced, it was a very clear signal that the company future depends on achieving a position equivalent in mobile handsets, as the Mac had in PCs.

But for the Apple investors, analysts and followers, the 10 M is now the glaring target. It will be reminded and reminded and reminded by all analysts from now until January 2009. Is Apple going to reach this or not. And it IS an aggressive target, by no means an easy achievement.

Remember Research in Motion (RIM) has been offering its Blackberry, the "crackberry" - for six years and has only achieved 8 million subscribers by this spring (latest numbers I have seen, was perhaps February or so, so it might be in the 9 M range by now).

Bear in mind, BB started when phones were much more rare, ie they entered the market when it was growing much stronger; BB was one of the early smartphones so entered that market also early; and the BB model series is significantly cheaper than the iPhone. Yet it took them 6 years, and they still are not even near 10 M users.

Apple's iPhone target IS very ambitious (but like I've shown, I think it can be done, and RIM is no Apple when it comes to marketing resources and skill)

But my point, is that the 10 M is now the "make or break" target for Steve Jobs. If he achieves it by December 2008, he is a hero for successfully breaking into mobile and changing the industry. But if he falls short of that number, he will be seen to have failed - even if an 8 M or 9 M level would be very good performance for a new handset maker in this fiercely competitive market.

Apple has painted itself into this corner, but they must feel that they can reach this level, certainly they are not "dumb" to do this without knowing what they will set themselves up to.

About hooking up with smaller operators in given countries. You're right. Obviously Apple will need to be everywhere in Europe to achieve its goal. So if the number one operator in say Austria says no, they go to number two, then number three, etc.

Then two factors will run a conflicting influence. The appeal of the iPhone will help drive bigger operators to sign up. But the "arrogance factor" ie Apple wanting to control internal operator systems, will work against the iPhone.

About software upgrades - this is an interesting strategy. In theory that has been possible on smartphones in the past, but few smartphone users do much customizing (or upgrading) beyond what they do when the phone is new. Remember the average replacement cycle is 18 months (and shrinking); and for heavily mobile-addicted users with 2 phones, the effective replacement cycle is 9 months. Long before we'd bother to consider upgrading the old phone, we can get a totally new phone :-)

But yes, at the high end of the price range, and where the phone is more of a fashion statement like the iPhone, this can be a very compelling reason to extend the "age" window for the iPhone.

However, that then hurts the replacemnt cycle for iPhone owners to upgrade to newer iPhones, ha-ha. A tricky balance for sure..

My gut feeling, and I have seen no research to expressly support this - is that the American customer, with lots of experience from the IT side (and highest use of stand-alone PDAs) - will feel very comfortable with upgarding and modifying an iPhone.

European customers can well warm up to this concept, as at the top end, they tend to buy very expensive phones, and would then like to get added utility out of it.

But in Asia, the fashion need of having the latest phone would dramatically alter the picture. Rather than trying to get more life out of last year's phone, they will definitely opt for this year's new model.

My two cents on that... We'll see how the iPhone software upgrades will fare in the market. I'm sure some analysts will be asking Apple in the investor conferences to come, in 2008 or so..

On the removable memory card, I hear you, yes, iTunes allows different type of synching, between a PC and the iPhone, or between one iPhone and anther iPhone. But - here is the key in Europe and Asia - if I today have a smartphone with a memory chip with half a gig of memories, and my second phone has its memory chip with 256 MB of more memories, and I now get a new smartphone - I want to bring those stored files with me... Then when I replace the NON-iPhone phone, for THAT which will be a Nokia, SonyEricsson, Motorola etc - I will want to again transplant my memories. Now the lack of a memory card slot is a very serious deficiency. And it is an "expected level" of utility in any modern smartphones. The comparison tables - where the store puts 15 phones on a chart, with features all mapped out - will show this deficiency very rapidly to the random buyer.

Some won't understand. But others will immediately be put off by this. I'd say the heavy user of the camera, video, music or messaging ability of a current phone, will really want this feature. I'm pretty sure Apple will soon bring it on, I'm not the first to be calling for it, and when Apple starts to get the returns - that will be one of the big reasons stated for returns..

LOVED the Gretzky quote, I use that always when I speak to audiences in Canada, handy if you deal with near future topics and then bring in The Great One's excellent line. I also used it in my second book m-Profits.

Onto your second comment. Thanks, I do appreciate it. I find it easier to make this model on the more familiar assumptions of the existing world and market, and project how Apple would need to perform in that, to achieve 10 M, than try to "guess" how a radically innovative Apple strategy of re-inventing the cellular telecoms industry, would perhaps succeed. I am not arguing it can't happen - Apple did it with the Mac and iPod (and iTunes) very successfully. But I do think, this is not a similar market situation, lots of players are already expanding the market for cellphones FAR beyond what Apple is doing - consider Nokia's jewelry line Vertu, of phones that cost tens of thousands of dollars. And watching video or listening to music or surfing the intenet - these are all activities we an do on hundreds of existing phones - with most definitely not as well - but for example, the Nokia Communicator, which has a letterbox style screen, wider than the iPhone. It gives a less cramped view of internet pages, but in letterbox form (very wide but not very tall) - is a very compelling offering for web browsing on a smartphone, and has had WiFi for it since 2004..

So back to my point, yes, I give you the issue, that Apple is very capable of reinventing a market and then driving the price up for its innovation in that market. That may happen with the iPhone. But even so, I'd say my business model here, with the target sales projetions quarterly and regionally, will serve as a guide into what Apple is doing. If Apple is suddenly dramatically performing above the projection, its almost certain, what you said, that they invented a new market for hte iPhone, must have happened.

I don't see it as likely, but it is certainly one scenario, and we will have to see how it develops.

Finally on the Apple fans. This is a REMARKABLE asset for Apple. They are very active, they know how to use networks (and web 2.0 methods) and they are already energized to support the iPhone. This is one of the marketing tools that is almost unique to Apple. Nokia doesn't generate any way near that kind of passion in its users, and much less so Motorola, LG etc..

Thanks for writing.

Tomi Ahonen :-)

[Tomi T Ahonen]

Hi Steve, Manish and Robert

Thank you for writing.

Steve - thank you for the mention at your blog. I took a look at it, and you have a ton of iPhone stuff over there, so its a good source for our readers to find iPhone-specific news and stories.

Manish - nice discussion with Alex :-)

A few of my observations "from the sidelines" ha-ha..

Its turning into an interesting splitting of potential target customers. One is the current heavily addicted smartphone user, for whom the iPhone price is definitely not a major issue.

One is the current not particularly addicted smartphone (or expensive feature phone) user who will greatly appreciate the looks and cool factor of the iPhone.

Another is the current non-smartphone user who is an existing iPod or Mac user (Apple loyal).

Another is a current non-smartphone user who aspires to high end functionality ie web browsing etc (say older adults who may "fear" current complex phones)

And then there is the rest who are pretty well out of the feasible target market for the iPhone.

Robert - good point about Apple intentions in the content distribution and making more money there. Also yes, the Apple TV initiatives are related and may become ever more closely tied to the iPhone.

Also you touch on another very compelling dimension of the equation. Apart from it being a phone, the iPhone is truly a portable version of our media, a "super-iPod" if you will. Just like the iPod allowed serious music enthusiasts to carry massive amounts of their music always everywhere, now similar ability comes to our video (not enough, obviously to convert our DVD collection ha-ha, but a serious step in that direction)

And it was kind of on the horizon already. Nokia was shipping the movie Mission Impossible 3 on the standard memory chip for the Nokia N-93 in December, so we're kind of bordering on this kind of ability in smartphones. But the large hard drive (8 GB version) goes a long way further into this, far beyond what other top-end smartphones tend to be able to do, as their storage tends to be based on memory chips which currently run 2 GB in storage.

So the iPhone arrives at just the right time, for this kind of media content portability "of a second generation" beyond just music and the iPod. Good point.

In some ways, this could open the market for the kind of customer who is heavily into media, but not into smarphones at all. Perhaps has 1000 DVDs, wants to carry a big sampling of his/her favourite episodes of the Simpsons always with him (to share given episodes with friends at the pub or whatever), or say a big Bond fan (like me) who really would like to have all Bond movies with him. If we can have near-DVD quality movies in under half a gig, then 8 gig would be just about enough for 20 Bond flicks ha-ha, especially if I cut out a few of the real turkeys of the series ha-ha..

Obviously this is a very niche market..

But yes, me too, very happy the iPhone is coming :-)

Thanks for writing

Tomi Ahonen :-)

[mark]

Tomi, thanks for your most informative responses.

To continue, Jobs says he thinks the iPhone will blow away the expectations for 10M in the Newsweek iPhone review with Steven Levy. Yes, it's likely mostly bluster but still he chose to say it. So why? I think Apple is seeing huge interest in the US from the Apple loyal (of course) and, more importantly, from the mobile-entertainment and the smartphone-too-complicated segments (see http://www.forbes.com/2007/06/26/iphone-apple-interest-tech-wire-cx_rr_0626techiphone.html)

I think the smartphone-too-complicated segment is much larger than you think in the US. It not only includes the older group you've mentioned but also many in the 35-50 group who've found the current generation of advanced phones (not just smartphones) way too difficult to use and not worth their time (time being their most precious resource). Carl Howe at blackfriarsinc.com/blog talks about the Tyranny of Too Much Choice leading people to look for simpler ways to buy and to use products, especially converged products.

I am in this group. And I am seeing it all around me. Almost all of my fairly affluent co-workers (earning well over $100K a year) are in this group. They're not Apple fans; most own iPods but not Macs. They clearly could afford more expensive phones and plans but they aren't making the jump from simple (and free) phones. The simplicity of the iPhone though has them actually considering spending ~$2000 over 2 years instead of ~$1000 ($50 phone; $40 a month voice-only plan).

The mobile-entertainment segment still values commercial productions, whether music, TV, or movies, and they would like to legally buy once and be able to simply play it in any environment, especially on-the-go. Apple's iTunes (and use of MPEG-4 standards AAC and H.264) is way ahead in North America (and in Europe for music). Apple is the only company developing products across multiple environments to use the same content (simplicity). Apple's Google YouTube deal is really about establishing the video standard. MS' Xbox strategy and Sony (no clear strategy) are falling further behind. Other US and global contenders are too small or are only strongly competitive in one entertainment component (Amazon, TiVo). Carriers (broadband/cable or mobile) have an opportunity but in the US, they've tended to focus on either providing living room content or mobile content, but not on using the same content in by environments.

So I think North America will be much higher than your projection because of these untapped markets. With a subsequent iPhone with 3G and other features and a huge US intro enticing European carriers to sign up, Europe might approach but still fall short of your projections as Apple doesn't have as much presence/ brand name/retail stores in Europe as in the US. And Asia will be far less than projected because even iPod and iTunes don't have much of a presence there.

I also disagree that Apple Inc thinks its future depends only on mobile (i.e. cellular) handsets. Jobs said at Mossberg's D5 conference that the future is "Post-PC devices". That includes iPhone, but also iPod, AppleTV, and a future in-the-car device (Apple has previously shown a grid with 4 squares: home (i.e., Mac), living room, car, and on-the-go.) No doubt that the iPhone is important; but if it fails, Apple may conclude that it's not their implementation that is at fault, but simply convergence failed - namely, the phone subscription is too expensive - and conclude that others can't do it either.

Anyway, thanks again for listening and sharing your insight.