Apple iPhone 3G, what gives - great price but still..

My musings... So the second iPhone was announced June 9. It was a 3G smartphone, and that is good. And it has a fantastic price now, at 199 dollars (in the USA, subsidised and locked to AT&T). Yes, this is a great move by Apple and certainly they will easily reach their 10 million unit sales target this year 2008. They also announced a big set of operator/carrier deals (70 countries will be in the the iPhone official market footprint this year)

That is all good and well. But I've been receiving a lot of emails about the iPhone and we had a couple of good discussions about it at Forum Oxford etc. Obviously the tech press in America is buzzing with the fancy, fast and cheap iPhone 3G. And here at Communities Dominate we are very interested in digital convergence and of course mobile phones, so the iPhone 3G is a good story for us, in this new iPhone era of "modern" mobile phones.

BIG JUMP FORWARD

What is there to like. Yes, it is true 3G this time (Apple calls it UMTS, which is W-CDMA, the world's prevalent 3G technology and the natural evolution path for the GSM operators/carriers who were the first to launch the 2G iPhone). Now the iPhone 3G will be possible to sell in Japan and South Korea for example, countries that have W-CDMA 3G, but do not have GSM/EDGE in 2G. Very good. It had to have 3G to be viable in the more advanced markets of the world.

Actually, the iPhone 3G is well better than that on the network technology merits. It is actually what many call a 3.5G smartphone, as it fully supports HSDPA as well, the next step in the evolution. So this phone could very legitimately have been called the iPhone 3.5G. On its network technology speed, this is now totally on par with the top-of-the-line models from Nokia, Samsung, SonyEricsson and LG, there is nothing faster on the market. A Nokia N-96 or N-82 is only as fast as this, not faster (on the cellular telecoms connectivity speed)

Then it adds assisted GPS. This is another expensive radio unit to the device. With all that, the iPhone 3G has seen its price slashed, dramatically, to 199 dollars (subsidised). Wow. Retaining the glorious 3.5 inch screen of the first iPhone and all the cool and glitz and sexiness of that device, yes, at 199 this will jump off the shelves, and is bringing tears to the eyes of many a product-manager at Nokia, SonyEricsson, Samsung and LG. And compared to recent Motorola product launches, it illustrates the night-and-day comparison of the David vs Goliath and what Apple really can do in this space. Amazing.

PRICE IS BIGGEST CHANGE

The really big story is not 3G or GPS, it is the price. At 199 dollars, this really is a compelling device. If we assume its unsubsidied price is in the 300 dollar range, even if it ends up at the high end say at 350-400 dollars, it would be far far below the unsubsidised cost of say my current Nokia N-82 which in its unsubsidised cost runs about 600 dollars (300 UKP SIM-free today). Both are 3.5G HSDPA smartphones with GPS. Both have musicplayers, cameras, WiFi and Bluetooth. With the Nokia N82 you get a far better camera and Xenon flash, but with the iPhone 3G you get far better music interface. Both have the motion sensors to re-orient the image but Apple's sensors set is stronger. With the N82 you get a real keypad but it has very tiny keys close to the bottom of the handset, not very easy to use in SMS. With the iPhone you get a touch screen which some prefer for navigation. With the iPhone 3G you get the far larger screen (a 3.5 inch screen is twice the size of a 2.5 inch screen). The iPhone is larger and heavier, the N82 smaller and lighter. The Nokia records video (at DVD quality) and has two cameras for video calling and has FM radio and 2D Barcode reader and supports MMS, etc etc etc but... the Apple iPhone costs half that of the N82 - and is FAR better looking. The N82 looks like a modest phone at best but the iPhone 3G looks like an iPhone! The must-have gadget of the moment, still, a year after launch.

If the natural rival of the original iPhone was the Nokia N95, because of the high cost of the iPhone last year - and this I am certain drove lots of more sales to the N95 (and other high-end phones by SonyEricsson, Samsung and LG) - now at 199 dollars, the iPhone 3G is NOT pushing sales to top-end models like the Nokia N96, or even high-mid range phones like the N82. Rather the Apple iPhone 3G is causing very strong push for the major makers to bring top end phone features (WiFi, 3.5G, GPS, large screen) to mid-range phones.

Ok, Apple fan-boy Ahonen, so you love the iPhone 3G? Hold your horses.. 

STRANGE GAPS STILL

I am very surprised by the "flaws" of this second generation iPhone. Yes, it is an Apple play into the smartphone field, and they are nearing the mainstream both in better price and more common feature set (3G required for markets more advanced than the USA). Fine. But they are still quite quirky. I am reminded of the early Saab cars which had all kinds of quirky design issues like floor-mounted ignition key switch, and the steering wheel mounted manual gear shift lever etc (I'm thinking the old Saab 96 models now when I drove for my driver's licence in the 1970s, which shows my age, ha-ha). Yes they were cars, great cars, but they bucked the trend of the industry and at times in ways that eventually they just gave up being so weird, and joined the mainstream.

I think on a few issues, Apple is on that path as well. MMS most obviously, video recording and video calling on a secondary level. So lets start with MMS.

Americans are still getting to grips with SMS text messaging (and I've written at length about the poor experiences of sending SMS text messages on the original iPhone). I've said repeatedly since my second book M-Profits in 2002, that SMS text messaging is addictive; it is the only addictive service we have in mobile telecoms. It is a 100 billion dollar industry all by itself in 2008, delivering about 15% of total mobile operator revenues and in many markets from 35% - 60% of total mobile operator/carrier profits.

WHY NO MMS

The "next evolution" in the messaging experience, according to the mantra, is MMS, multimedia messaging system. Sending pictures, short clips, sounds, (and advertising) from one phone owner to another, and accessing various content and services. Blyk for example does its picture ads based on MMS. MMS was measured by Portio Research in its June 2008 report to account for 14.5% of all mobile data revenues, so during 2008 MMS alone should be worth about 21 Billion dollars. Thats more than all mobile music revenues (including ringing tones), plus all mobile videogaming revenues, plus all mobile TV and video revenues, plus all mobile advertising revenues - combined. But note - this includes double-counting, so MMS is used for example to deliver some video clips, some ads, etc. Still, from the first MMS in 2001, we're at 21 Billion dollars in 2008, this is huge success story for the mobile industry.

But the new and improved iPhone 3G is still not supporting MMS. That is very strange to me. It costs quite a lot to integrate a GPS unit into the phone, in terms of hardware cost, space penalty inside a tiny pocketable device, CPU processing power, battery drain, etc, as well as the software to enable it and integrate it to the other features of the phone (like Google maps etc). Even more so for 3G (UMTS/W-CDMA) and 3.5G (HSDPA) which require also all kinds of compatibility testing etc and the handover problems and so forth.

But MMS is essentially only a software solution, if the phone is already a colour screen cameraphone. Those are the two primary technical components that are needed for MMS - a camera and screen - and the rest is only software. As far as I know, there are no significant prohibitive licensing issues, etc. This is very strange about Apple. I am quite certain they were asked by the operator/carrier community to add MMS and why did they not do it?

To illustrate, imagine buying a laptop computer today, which has the WiFi and broadband connectivity and the internet browser, but if the laptop was unable to connect to any email systems? You'd be stunned. What, cannot do email? And they'd say, yes, it has instant messaging clients and you can also go to the web and get some third party email systems that it can work with, etc, but no, the laptop does not support email. You'd be quite disappointed.

Now, hold that thought. About a third of the phone owners on the planet are already active users of MMS - thats just about the same amount as the total email user base globally. But the new cool 3G iPhone is not compatible with MMS? So your kid wants to send you the picture of the cool trick he did on the skateboard, while you were on a business trip, and then your phone can't receive it? The grandparents are at the ball game and see the picture you took with the cameraphone and ask you to send it via MMS like they do regularly with their other kids and grandkids, and then find out that the new fancy Apple iPhone 3G is unable to do what every basic cheap Motorola, Nokia and LG  simple cameraphone can of course do.

I just am surprised. What research is Apple reading about end-users that I have not seen? When they were willing to cram so much more high tech components to the iPhone 3G, and had a year of time, did they really not have the moment to install a basic MMS client to the device? It would be in no way an "either-or" decision, so the phone could fully support both MMS and any other Apple picture sharing services etc. I am just surprised. I do think this reflects the fact that Apple is ignoring input from the mobile operators/carriers, and doing it their way.

And then - I am very sad to point out - the Apple top management is of course based in America, the backwaters of mobile telecoms, so they tend to hold outdated views on many things, which means that the "stubborn" view of "we know better at Apple what end-users want" may indeed be relevant to the US market, but grossly misunderstand the opportunities in the more advanced markets, starting with Japan and South Korea and Scandinavia etc.

But yes, MMS missing is a small thing, and especially in America, this will not be seen as a major drawback, and we may well see a mid-term software upgrade to the iPhone 3G that allows it.

WHY NO VIDEO RECORDING

Similarly I am surprised that a year after the original, Apple still does not support video recording out of the box. Yes, there are independent providers with video recording apps that can be installed to the iPhone, but come on, all other 2 megapixel cameraphones on the market support video recording - typical top-end Nokia phones record video at DVD quality - but not Apple iPhone 3G. Again, this does not mean a radical expensive technical component to add, it is only software. But it leaves the iPhone 3G as surprisingly lacking. Its like you buy a top end luxury car, and then find out it does not come with air conditioning standard. Why is this an optional extra? In particular a paid optional extra.

OTHER MINOR MATTERS

Then I did think that for their 3G phone, Apple would respond to the operators/carriers who ask for support of video calls.  This is a very long term journey, to teach future generations to become familiar with videocalls on 3G networks and beyond, and the total traffic of videocalls is very slight, but growing quarter after quarter. It is in particular young user who like videocalls, who use it in playing. Obviously the iPhone 3G today is no plaything, but in 2011 there will be lots of iPhone 3G devices as second generation hand-me-downs to the younger kids for their first phone - when we have far better phones as our primary phones - and then again these will be lacking in industry compatibility. No videocall support. No fun...

But to add videocalling would certainly need a second camera (or a twisting camera feature) so yes, that would add cost. But most 3G operators/carriers around the world have announced in their 3G launches, that videocalling will become mainstream down the line in the next 15 year license span of their 3G networks, and now suddenly in 2008, a new 3G smartphone is suddenly incompatible with these strategies. Nokia tried this in 2003, and their first three phones for 3G did not support videocalls. They were hit hard by the operators/carriers and quickly adjusted their product mix. I do expect we'll see a videocall supporting iPhone in the future, perhaps next year's model?

Ok, finally the camera. I said last year that 2 megapixels was not too impressive, it is quite underwhelming now. Not obsolete as such, but not very impressive. However, at the 199 dollar price range, this is more acceptable than if the iPhone 3G had cost say 599 dollars. Still, the other fault with the camera is the lack of any kind of flash. Still, this is a clear choice that Apple has made, it is not aiming directly at the Cybershot SonyEricsson top end cameraphones or the top end Nokia N-series with their Carl Zeiss branded optics. The iPhone series is clearly the standard-bearer in the music experience, and does a reasonable job on the other fronts. The smartphone is always a compromise. I'll accept this, but then it does of course divide users. Me personally, I've always been a camera buff so give me top end resolutions, optical zooms and Xenon flashes, and I'll happily trade away any music player functions, ha-ha, the camera is more important to me. But its just the way I am wired. We are different, and it makes a lot of sense strategically for Apple to focus on the iPod user base and keep the iPhone as the ultimate standard in music consumption on a mobile phone.

With all that, yes, a nice improvement. Still not the perfect smartphone. A remarkably big drop in its price. And a major step up by Apple to take more than 1 percent out of the total mobile phone market place in the next 12-18 months.

But but but...

SO APPLE STRATEGY

I wrote last year when doing the major blog on handicapping the iPhone that Apple would have its challenges to reach 10 million iPhones sold this year. The early numbers in 2007 looked promising in America, but this year's numbers have been quite disappointing, in total iPhones sold, and in the contracts abroad to reach enough markets to generate the level of sales. Obviously as I said, the rest of the world demanded a 3G iPhone and now that battle for the market can truly start.

So then, if you can't gain your stated market share with your original concept, you can do one of four things. You can change the product (but this change comes quite late and is not yet a superphone by specs). That is very time-consuming and expensive. We see it now in the iPhone 3G. Secondly you can change your distribution. That is very time-consuming and can be expensive. Apple has been doing that, going from a handful of authorized resellers (mobile operators/carriers) in a the US and a few European countries, to 70 now. Yes, checking the boxes. Or thirdly, you can do marketing communciations - advertising, promotion, PR. Well, we saw the ultimate marketing hype for the original iPhone last year, nothing even by Apple now, for the update iPhone, could match the fever pitch hype that the iPhone generated last year. So by altering the marketing communciations is not going to get Apple to its target. The last thing that classic marketing theory tells us we can do - is to alter the price. And wow. Apple drops its price to a third of the original. This is a MASSIVE change. If they sold 5 million 2G iPhones in the second half of 2007 for 599 dollars, and now offer an improved iPhone 3G for 199 dollars, then yes, by every logic and economic theory, they should sell significantly more of the new phones in the second half of 2008.

This is good news and bad news. On the good side, Apple will be no doubt able to announce around Christmas time this year, that they've passed their initial targets and sold x million more iPhones this year than the original target. Fine.

But if they were able to sell the 2G iPhone for around 499 dollars or so, and made a handsome profit on that, and now they slash the prices to 199 dollars, all while adding several more costly components to the device, this is cutting deeply into their profits. Deeply.

My feeling is that if Apple positioned the original iPhone as the cool, must-have top-end smartphone, with the Apple luxury feel and user experience, tons of customers around the world were willing to go for that - clearly with all the smuggling that was happening around the world, the iPhone was the must-have gadget among technologists. They were willing to pay a high premium for the Apple cool on a modestly outdated smartphone within its class, with the compromises the original had, and yet pay a very high premium for it.

Now Apple abandons that strategy of premium pricing. It jumps into the fray of the mid-field. Partly the iPhone exclusivity will be lost when everybody has it (or can afford it). Partly the cool factor disappears when iPhones are on every table. Partly the very fickle nature of the customer tastes in the industry will bite back at Apple. They cannot wait 12 months for a new model (from year to year into the future) if they intend to take on mid-market Nokia, Samsung, LG and SonyEricsson model ranges - who release models every month, Nokia releases new models almost every week. I've said before, that it advanced markets the replacement cycle among young employed adults is 6 months - two new phones every year - such as in Japan, South Korea, and here in Hong Kong for example - so if the iPhone does not evolve and improve - it will soon suffer as a mid-field phone model. At the top luxury end, you can wait, but not in this crowded mid-field.

Now I fear Apple is entering into a similar mis-step it did with desktop computers with the Macintosh line some years back, when they tried to take on Windows computers head-on, tough low-cost pricing and almost identical feature set and just fighting the "moving boxes" game. Apple is far too expensive a design company to be able to afford to win in that game. That is mass market bulk game, and the winners will inevitably be those with the scale to crush Apple, ie Nokia, Samsung, LG. This new price strategy suggests a clear shift away from being the premium top brand - that can command a premium price - and go ahead the Nokia N-Series and SonyEricsson Walkman series etc. But slashing prices so rapidly brings the iPhone series to the trenches. It can work this year, but it will automatically attract a multiple front attack by all rivals. Not every phone maker can pull of a 600 dollar smartphone but every phone maker worth its salt can do a 200 dollar feature phone - and do it better than Apple.

I don't mean this time, I mean that now that this price level is set, Apple cannot release a new 4G iPhone next year with a 700 dollar price tag. The customers expect new iPhone models to be similar to the current price levels just announced. The rivals can easily adjust and do superficially similar phones with mostly similar feature sets, and some features always better than - the iPhone 3G. They can do that in their sleep, release a dozen such phones from each of the big four rivals (I am deliberately discounting Motorola as they are in disarray) before Christmas into the 150 dollar to 250 dollar price range and if your iPhone has 40 to 50 rival handsets by Christams, each designed "to beat the iPhone" you bet this is far stronger competition than the iPod range ever had from Creative Labs alone; or the original iPhone had with only a handful of rival models from the Nokia N-Series, SonyEricsson, LG and Samsung.

At this price point, I really think they are unnecessarily abandoning the Apple appeal and now their exclusive strategy hurts them really hard. As long as their new iPhone model is a legitimate hit - and yes, the iPhone 3G is a legitimate hit in July of 2008 - they will generate good sales till Christmas. But now, will we get a new iPhone for January-February 2009 (even December 2008) or do we see the market for the iPhone 3G disappear in the Spring of 2009 like it did for the 2G iPhone this Spring? And then what happens with the next iPhone next June. At this price (or possibly even lower still), they have to hit it perfectly, and I am certain they cannot sustain that year after year, against the competition they face.

BLACKBERRY

Then a final comment on the re-focus of strategy against the Blackberry. This was the often repeated opinion of analysts who studied the new iPhone 3G, that with the enterprise email support, it would go against the Blackberry more head-to-head than the original iPhone. The Blackberry has been gaining a lot of support this past 12 months as their product range has evolved far beyond just monochrome screen and wireless email support, to a full-function smartphone with excellent messaging interface (due to the excellent keyboards). First - a comment quickly on the Blackberry - I'm hearing from many insiders, that the biggest customer segment for the Blackberry are still corporate users, but the second biggest group are heavy SMS texting users - private users, who are power-texting users. I hope we'll soon get some industry analysts offer some statistics on how much Blackberry users generate text messages, in particular in markets beyond North America. SMS is the killer app, also for the Blackberry..

But yes, the original iPhone was not naturally a rival of the Blackberry. The 2G iPhone was most clearly aimed at the Nokia N95 and top end N-Series, the LG Prada, the Samsung Armani phone and the top end SonyEricsson Walkman phones. Not the Blackberry. Now analysts suggest that the new iPhone 3G will go head-to-head with the Blackberry. Yes, perhaps, its better suited for that, but still, this is not a good strategy at all for Apple.

The Blackberry users - many have both iPhones and BBs - love the keypad of their BB. And they tend to hate the text entry (SMS, and email) on the iPhone. Not all, there are those who claim top texting speeds on the iPhone, but anecdotally, many BB users will not shift messaging traffic to their iPhone (or other otp end business phones with good dedicated and even QWERTY keypads, such as the Nokia E-Series)

But more importantly, the corporate/enterprise customers of the BB are the IT departments of the corporate customers. They need their secure communciation systems, and they need to control the communciation. The Blackberry corporate email system is fully tailored to these needs. It is a package. The BB is authorized by corporate IT departments and managed by them. The very last thing the corporate IT departments want, is to add yet another devices and email client to their system to support. They absolutely will hate it. The existing BB customers will not abandon their current systems in favour of the iPhone 3G, due to the enormous migration and tech management headache that it would pose.

That does not prevent some senior executives from using the iPhone (3G) at work, or even having some VP's etc authorized to use one. Fine. But many IT and telecoms authorizations will also say that the iPhone is mostly a media consumption toy - musicplayer, digital camera etc - not a business productivity tool like the BB or the Nokia E-Series etc. This conservative thinking is why it took so long for RIM to install a camera to the BB or for Nokia to integrate the camera (or music player) to its Communicator series etc. Corporate IT deparments do not want to subsidise employees with toys. So "traditional business" phones were always very strongly business-functional, not overloaded with frivolous gadgets and features. Certainly, with the strong music focus, the iPhone 3G is seen by most IT/telecoms managers at miscellaneous enterprises and corporations as more a toy than tool, and if an executive wants one, they should buy it at their own expense, not on the company's approved smartphone list.

This is a very bad strategy for Apple. It took Blackberry - with clearly the industry's best wireless email device - six years to reach 10 million users worldwide with a system that was tailor-made for the best wireless email experience for users (the biggest need for any corporation/enterprise) and the most easily managed corporate IT system to support it. Apple would be the late-comer, with an inferior email (and now also SMS) experience, on a much less appealing corporate IT system into an environment that inherently rejects added complexity to IT management. Now for Apple to try to fight against that installed base, it will be extremely costly and be very disappointing in its success.

The management at RIM should sleep soundly, the Blackberry is not threatened by the iPhone 3G, the BB's primary rival continues to be the Nokia E-Series.

And then there are matters relating to GPS and location-based services. This is a whole separate issue, and not specific to the iPhone 3G, so it certainly deserves its own posting. I'll discuss the myths and failed promises of location-based services in a blog entry shortly. Stay tuned..

Ok, that is enough of my musings for now. The price is a big shock, it is great news for anyone who wanted an iPhone (I wonder how much 2G iPhone users will like this news) and certainly this 3G-3.5G-GPS improved iPhone 3G at this price will sell very well in the markets it will be introduced. Good news for Apple for 2008, and a great impact for bringing top features to mid-phones, for the whole industry.

It is not yet the perfect phone (and like I said, I am surprised by this, Apple should understand its customers and their needs better) but clearly getting better. Maybe with the more software-oriented changes, we might get a mid-term upgrade to the iPhone 3G before Christmas? But yes, at 199 dollars, this is a most appealing smartphone.

But it no longer is the exclusive superphone, and I am afraid that Apple has now forever abandoned the top end of the market to Nokia, Samsung and SonyEricsson. Apple moved downstream. And that battle is far more tough than the top-end market. This may prove to be a mis-step by Apple in its quest to become a major handset maker. I've said many times, this is a cut-throat business (just look at Motorola struggling now). Long term, this pricing decision is not good in my analysis. But we'll wait to see. Most of all I do like the ability of Apple to surprise us, so the game is far from over. And it is one of the poster-childs of the 7th Mass Media so of course we applaud its success. Stay tuned.

UPDATE - I have now added the follow-up article about the futility of developing LBS (Location-Based Services) which is more about LBS and the GPS (Global Positioning Satellite) part that is with the iPhone 3G but not a specific iPhone story. Read it at Elusive Pot of Gold beyond reach of LBS.

Comments

[david cushman]

Wow Tomi, another awesome analysis.
I'm sold on iphone II. The 3G is the killer blow for me.
But here's a thing. $199 is a very low price and it's impressed me. But I haven't paid a penny for any of my phones since my days as pay as you go.
In short the iphone has placed a real, willing-to-pay value on the handset for me. This is a first.

And for info, our Head of Tech reckons the changes in api they have announced, particularly in respect of email exchange will place the iphone on the list of approved handsets for business use in our company.

That's interesting.

[Mark]

Tomi,

Usually I agree with your analysis ~100%, this time however I think you've missed it...

The $199 retail with subsidy or probably ~$350 unsubsidized price of the new iphone is not Apple moving into the mid-range it's Apple (virtually) eliminating the high-range. Nokia, Sony, etc., will I expect be forced to re-price their current high end offerings in response to Apple's move. They may still create new $600 phones but the market for them just got much smaller as the iphone will be good enough at half the price for the majority of the users who were formerly in the high end of the market.

Apple gains market share for itself at little cost and squeezes margins and hence strategic flexibility for it's competitors.

[mark]

Just briefly (may have more to say later):

1. iPhone 3G at $199/299 now sits at the bottom of Apple's forthcoming family of iPhones. There is now room for an Oct or Jan intro of a premium iPhone "VideoChat" at $399/499, with 2 cameras (1 5MP), flash, higher resolution display, video iChat, etc. So no, Apple has not abandoned the high end; rather they just set the low end earlier. (At this point, I don't see them going lower in price. Since they didn't issue a 2G only model for less, I don't see what they can remove from the iPhone and still call it an iPhone (i.e., Phone, iPod, Internet communicator).

2. Apple may be wrong and may upset carriers, but they are moving towards the Web; see MobileMe intentions. The lack of MMS creates a disconnect with non-Web-enabled phones, thus creating an iPhone/Internet community where pictures and other content are shared via Web access.

3. Apple is also banking on the iPhone SDK and lots of applications (i.e. games) to drive it way past other phones. As usual, Apple is zigging as others are zagging. More about this later.

BTW, Can you comment more on how you see MobileMe and the SDK fitting into the mobile future?

[ASG]

Hi Tomi,

Usually I agree with your analysis ~100%, this time however I agree with Mark. :)

I'm not entirely sure the mass market needs a new phone every 12 months.

If we assume that Apple can build a strong ecosystem of compelling applications - combined with the substantive iTunes library of music, video and games as well as MobileMe - and layer social recommendations and personalisation as well, then the switching costs to purchase a new (non-Apple) phone may simply be too much to overcome for the normal user.

However, I live in the US so am surely wrong in many respects. :) Cheers.

[ASG]

Sorry, one other comment...as the various segments of the mobile phone market continue to mature, it is the applications and services which will serve as the point of differentiation going forward. As Nokia is moving from hardware to software and services, so indeed is Apple.

In fact, Kleiner Perkins and many other Silicon Valley venture firms are actively seeking investments in iPhone-related applications and services as they see the attractiveness of the iPhone platform.

[Tomi T Ahonen]

Hi David, Mark, mark and ASG

Thank you for the comments.

David - good points and yes, now the iPhone 3G is of the class of device - and at this price point - that many in "your category" ie professionals who have been treated to free phones all along, can feel that urge to go and pay actual money for the device. Ha-ha, yes, Apple can do that. I am already quite tempted, but no, the 2 megapixel camera without video and flash, is simply not enough going backwards from my N93 with optical zoom and my N82 with 5 megapixels and that wonderful real Xenon flash... At this stage I want MORE megapixels not less ha-ha.. The camera is more important to me than the other features.

About your IT department. That makes sense, for some companies, and the more likely this is to be approved, when the smaller and more creative-arts oriented the company would be. I don't see this at a giant insurance company for example, with 10,000 employees and certain benefits tied to certain management levels etc. Blackberries yes, iPhone 3G's no.. But there will be employers whose tech departments (perhaps want the iPhone 3G's for themselves as well) are willing to do it. Sure. But not the majority of enterprise/corporate customers with employer-provided phones.

Mark - good point, but I do respectfully disagree with you. Yes, Apple moved some high-end features down to mid-range phones (WiFi, HSDPA, GPS and 3.5 inch screen). But they didn't move anywhere near all high-end features to that price level. No DVB-H TV tuner, no 5 megapixel, no optical zoom, no Xenon flash, no near field radio (FeliCa chip ie m-payments like in Japan) etc. There is lots that exist on higher-end phones that are not on this one. Then go really top-end, like the 1,200 dollar true superphones, like the Nokia E90 Communciator which adds two cameras, two screens, fully QWERTY keyboard, a far wider screen at full VGA width, FM radio, on and on and on and on.

Yes, the iPhone (2G/3G) is sexy and desirable and for its mid-range price it offers the best music player, tied for best network speeds and tied for best navigation (assisted GPS). But it had an inferior camera even last year and misses on most of the bells and whistles of real 1,000 dollar plus priced superphones from SonyEricsson, Samsung, LG and Nokia. Five megapixels? Samsung had an 8 megapixel cameraphone two years ago in Korea, and 10 megapixels last year. Their top DMB digital TV tuner phones have hard disks - like your home TiVo or Sky+ PVR - so yes, there is a far greater superphone set out there - and yes, these devices sell in the millions around the world. But Americans don't see the superphones, because for them 500 dollars is "too much" for a cellphone. In Italy and South Korea where phones are not subsidised, customers will not blink at the price tags of 1,200 dollars for top phones.

But you are right, Apple pushed the price point of the GPS phone (and HSDPA 3.5G phone and even WiFi phone) down greatly to about 350 dollars unsubsidised, from about 600 dollars unsubsidised. That is a major move to shake up the industry.

Now, can Apple sustain this race and this pace. That feature set can be matched - profitably - by any of the powerful big four, and can be incorporated into their current model lineup easily for the end of the year. There are plenty of phones with the necessary form factor close enough to "clone the iPhone 3G" but to do it with a better camera (and basic flash) for example. Think LG Prada and Samsung Armani phones for example, easy platforms to do the quick rival.

At this price point each maker releases at least one 300-450 dollar phone per month in one of the major markets. And certainly they had designs to bring GPS and HSDPA (and perhaps even WiFi) to this price point already. This is a very nasty game soon, for Apple. Their "leadership" position in the form factor and feature set, will not last many months.

Note, I am not arguing the elegance and style of the iPhone, nor the exceptional user interface. But for the average mass market customer, these matter less, than to the style conscious Apple brand buyer, or the geeky Apple user-interface fan who owns every iPod, every Mac and every Newton ever made, ha-ha..

So yes, Apple brought some features down in price, but they did not manage to wipe out the premium phone market. On the contrary, by their launch of the iPhone at 599 dollars last year, they opened up the last remaining market - North America - to high end smartphones last year. That market is not about to disappear, the unsubsidised cost of the top-end phone models from Nokia, SonyEricsson and Samsung - the three makers who offer very high end phones - have crept up year after year. I was pained to see the price of an earlier Nokia Communicator model cross the 1,000 dollar level, and that was years ago, yet I had to have it ha-ha...

Still, to be clear, if the contest will be for 300-400 dollar phones, that is a mass market scale contest. At the 1,000 dollar range (where the original 2G iPhone was initially in its unsubsidised price level), there were only a couple of Nokia top phones, N and E series, and a pair of SonyEricssons and a few Samsungs in that price range. No LGs, Motorolas, Blackberries etc. But at the 300-400 dollar price level there are dozens of models and every one of these makers fights in that space. The competition is FAR tougher than at the top end.

Then we are in a race for scale. Here Nokia is by far the best, with their scale they get the best component deals - as these are bought in the dozens of millions and bought 6-12 even 18 months in advance, anything from CPUs to memory chips to screen display units to batteries etc. A change in customer tastes, and a need for a different form factor screen, who gets the majority of the limited supply globally - Nokia, hands down. This is now a totally different game.

The benefit Apple has, is at its very peak in July. By August it erodes, and by Christmas I promise you, the iPhone 3G is not the must-have phone in the sub 400 dollar unsubsidised price range. Now, will Apple start to roll out more models per year? Then yes, it gets to be ever more like the other makers, moving away from being unique and desirable and exclusive and cool, and being just another personal electronics brand. This is a battle FAR stronger rivals than Apple have failed in. This is not as easy a cake-walk in terms of pathetic competitors for Apple as the PC and portable music business were. Nothing is as demanding in electronics as the mobile phone. If Apple abandons its luxury desirability niche and moves to the mainstream, it will be crushed on all sides.

Not that it will go under, but that the product lifecycle for the iPhone 3G is certainly not viable for 12 months. Absolutely not. They will have to refresh the product long before June 2009 (in my humble opinion, and I've been quite spectacularly wrong about the iPhone already before ha-ha..)

mark - yeah, I see what you mean, and I think that is what Apple will have to do, to expand the iPhone into a line of phones, not just one.

As to "Apple may upset carriers" - this is total death in the mobile telecoms industry. This is what killed the Nokia N-Gage for example. This is what is dramatically hurting Motorola right now. The operators/carriers hold the trump cards. If they don't want your phone in their network, they simply stop supporting it, and no matter how much its the Rolex or Rolls Royce of phones, if the operator sales staff in their stores tells customers - oh, you won't like it, take this SonyEricsson instead - that is what customers do. There was a survey that found that more than half of all customers in a leading European market, who went into a mobile phone store wanting a given model, ended up walking out with another model - because those were the phones that the store staff were pushing, for whatever sales bonus etc reasons.

And here Apple has NO power at all. The store staff (in all countries where phones are subsidised and sold bundled with contracts such as the USA and UK) is controlled by the operator/carrier. Apple can't do the volumes needed through their own stores, etc.

What Apple cannot do is to upset its carrier/operator community. But - for now - they have the honeymoon period. The new iPhone 3G is "exactly" what the operators wanted - especially now that apparently Apple has abandoned its insistence on revenue-sharing from operator traffic revenues. By "exactly" I mean that operators who have the iPhone deal, can happily look the press in the eye, and say, yes, this is clearly a top end phone, 3G, HSDPA, GPS - what more do you want (and not bother publically commenting about MMS, video calls etc which they would ask Apple only privately)

So during this honeymoon period, when the operators who have the iPhone deal - in 2008 - can use it to try to capture good customers from rival networks (which don't have the iPhone) - like our friend David in this discussion ha-ha.. So the operators/carriers will be all smiles now. But if Apple makes too strong moves onto their turf, they will strike back with a vengeance. Nokia lost 12 percentage points of market share in two years, as a direct effect of operator/carrier reaction to the N-Gage and Club Nokia (Nokia's initiative to sell content bypassing operators). 12 percentage points would be 156 million handsets today and worth about 14 billion dollars... Even the only gorilla in the telecoms space, Nokia - who are to telecoms what Microsoft is to PCs or Google is to the internet - responds to that kind of pressure. Apple has no chance whatsoever trying to muscle its dealers. They hold the cards.

About MobileMe and SDK - let me get back to these later in a blog.

ASG - ha-ha, I love that "I'm not sure the market needs a new phone every 12 months" - yeah, I totally see where you are coming from. But America lags drastically in mobile telecoms. The world average replacement cycle was 18 months in 2006 (we don't have 2007 numbers yet, but my analysis says it shrunk again and will be 16 months). The USA average in 2006 was 24 months. Then consider that the world average cellphone ownership has 28% of us with two subscriptions (usually also two phones). The Western Average two phone ownership is over 50%. For any European who has two phones - anyone with a job essentially - where the average replacement cycle is 18 months, for these people their effective replacement cycle is 9 months.

It is FAR shorter than 12 months. Now, what about the leading countries. For the young employed adults, in Japan, Hong Kong, Singapore, Taiwan and South Korea - the replacement cycle is 6 months. Two new phones every year. One in the Spring, one in the Fall.

This means that the new phone cycle has harmonized with the fashion industry, with its fall and spring collections. In Japan the three big carriers all have their Spring and Fall collection launches - with the fashion industry and supermodels on runways - which happen in February and September (I've attended one). These are coordinated with the color patterns of the Armanis and Brionis and Canalis and Dolce & Gabbanas and Benettons and Diors and whathaveyou brands.

Do we need a new wardrobe every spring and fall? Of course not. But Fashion is a giant industry. And phones are now merging with that cycle. And yes, ladies in Japan do color-coordinate their phones with their shoes and handbags...

I agree with you, that this is not "necessary" and very well might be "undesirable" even in a global ecological sense, but it is reality and very serious money. And I deal with reality... I report it as I find it.

Incidentially, it is in the interests of the mobile phone handset makers to drive this cycle ever shorter, so they get to sell more phones. If we get average people to go from 24 months to 18 months to 12 months to 9 months to 6 months, we are increasing the velocity of new phone sales. And yes, if you get two new phones per year, you soon have a big collection of old phones in all kinds of shoe boxes and in the basement and so forth. Then there emerges the used-phone market, and in Africa, over a third of all phones in use are second-hand Western phones, with their local branding and all. Not all a bad thing - we get very high end smartphones at reasonable prices for the Developing World, where the locals would not afford such devices, and certainly cannot afford laptops, but now get equivalent pocket devices to use as their cameras, music players and internet access devices, in addtion to voice calls and SMS text messages that any basic sub-100 dollar phone would give them..

On switching costs - yes you are very correct, it is part of that reasoning, to build as many sticky applications to your phone and service. In South Korea for example you get very inexpensive music services via services like Melon Music but then your song library is dependent on staying with that operator (SK Telecom in the case of Melon). Exactly that thinking. But also, remember, with 28% of the world having two phones (and 15% of Americans already), the true loyalty is far less, if we have two phones and accounts. We might "technically" still be with a given carrier, but if the rival network gives us a nice Nokia superphone next spring, perhaps the iPhone is the one more left at home and we start to carry the Nokia as our primary phone instead. It is often the pattern with those who have 2 phones, that the newest phone is the "must carry phone" and the slightly older one is the "carry when needed" phone..

By the way, I just created a new content category of iPhone for this blogsite, so you can click on it and find "all" older blog postings that discuss the iPhone to any meaningful way. As this is not an automated process at Typepad, it took me forever to scroll through our more than 1,000 blog postings, but I think I have all the relevant ones (and many I had already forgotten, that may be of considerable interest ha-ha..)

Thanks for writing

Tomi :-)

[mark]

Just wanted to point out that Mark and me (lower-case mark) are actually two different people. :) Quirky.

Picking up on ASG's comment, Apple will not play the insane new-hardware-model-every-quarter game. Apple will instead provide both owners and prospective new customers with increased value by releasing quarterly software upgrades (2.1, 2.2, etc), selling a variety of new native applications via the AppStore, and growing services via MobileMe (or the Web cloud). Apple is going to aim to change the rules of the industry and expectations of the consumers. If they fail (and they very well might), they will adjust.

As for new hardware: I expect Apple to follow the iPod pattern. So I'd expect a premium iPhone in early Nov or Jan, or if sales are going really well, not until next June. There will be more colors in Feb, June, or Sept. And there will be memory boosts, with the 8GB model moving down to $149. At some point, they will have a model at (subsidized pricing) $149, $249, $349, $399, $499, etc. And in 2009 or 2010, they might shift major new iPhone hardware releases to Sept, and minor updates (colors, RAM) to Feb-Mar, to capitalize on 4th qtr sales.

[Tomi T Ahonen]

Hi ASG (second commment before my previous response) and mark (also again)

ASG - great point, yes this is the direction the industry is going, from hardware to software. Nokia has been saying they are an internet company, and I think recently - but am not sure - they may have been starting to say they are an internet-like company (like an internet company, as distinct from an internet company)

mark - yeah, I figured you're different from Mark, that was why I greeted both of you and addressed replies separately..

About the "insane every quarter" game. No, its far worse. New models every month (for Nokia, almost every week). This is the industry, the mass market phone biz. It works that way. The rate of change is FAR greater than the MP3 player market, the PDA market (Newton) or the PC market. By FAR the fastest evolution. A new phone now by Nokia is obsolete SIX months from now. They make interim models to revise a range, such as the N93 leading to the N93i, or the N95 going to the N95 8 gigabyte model, etc. But this is the nature of the beast.

If you plan on a cycle for a year - and make your manufacturing projections for the year - and source your resources to sustain production for a year, and your model has an appeal only 4 months, you are pushing a dead product next spring. Look at Motorola and the Razr for example. This industry won't put up with a lack of innovation. Siemens died this way, were not able to keep up with the ever increasing rate of change.

Now, the first 2G iPhone sustained appeal quite long, but by this Spring was clearly losing its edge. It was unique, in being the "long-awaited" Apple phone, that so many Apple fans had dreamed of. Mac users, iPod users, even Newton users. So that had an exceptionally strong initial demand. But now that these people already have that iPhone. They will not all rush to go replace it with the iPhone 3G. In fact, most are tied to their 24 month contract with AT&T, and won't get their upgrade iPhone until 2009...

The economics of mobile telecoms. This is a vicious business, very weirdly operating, and so dependent on the operators/carriers (and where used, the subsidies)

Now, for a super-premium phone, it is quite feasible to release one new model per year. Nokia's Communcitor has run new cycles at longer than a year, about 18 months currently.

But in the trenches, the battle is intense. There is continuous feature-creep with just new technology crammed to the phones. What is a top phone in July will be eclipsed by December. It totally does not matter how far the top phone in July can go, the rivals are that strong, that even more advanced phones - in the same price range - will appear in the next half year in this segment. Relentless..

So yes, Apple may survive on a principle of a new phone every half year; but it probably needs to go to a new model every quarter to be viable in this market segment and sustain the approx 10 million sales levels (and perhaps growth at roughly the level of the industry annual growth, so perhaps 12 million units as the target for 2009)

Thanks for returning both of you...

Tomi :-)

[Martin Geddes]

Maybe the lack of MMS is because Apple want to create and control a mobile marketing/advertising solution of their own, rather than fitting in with the rest of the world?

[mark]

Tomi, just saw your response. I totally appreciate your insight and point of view.

In the end, the carriers will fight to get and keep the handsets that increase the number of subscribers, and/or raise the average revenue per subscriber for the carrier. I know how this works in the US, but I don't know enough about it for the other continents. It's some combination/bundle for voice, data, SMS, MMS, services/sales/subscriptions (music, ringtone, video, TV, etc), right? Is it mostly bundled or a la carte? How many people sign up for more than voice, SMS, and MMS? How much do they pay?

From the get go, Apple is a threat to the carriers, because Apple already has its own branded iTunes services. I assume Apple's pitch is "hey, using our handset, we'll increase the number of subscribers for data, but we'll be pointing them to our services (and we'll cut off your MMS revenue). And the carriers have to determine if it's a beneficial exchange.

Have you written about the breakout of revenue? Can you give me pointers to either your own work or to that of others?

Thanks.

[Paul Jardine]

I'm very interested to see what they do with GPS as I'm sure they have big plans for it. As you said, it is strange they didn't improve the camera, so I'm guessing they focused on a couple of areas they could take the lead in.
I think they will go head to head against Blackberry and if I was a BB exec, I would not be sleeping soundly in my bed. Apple seem to have been talking with a lot of companies during the development of the iPhone 2 and I would expect some big deals to be announced over the next few months. I know a lot of business people who bought an iPhone, but don't like the email/messaging capabilities. If they have solved that, then businesses will buy them, especially at the price point Apple have set. Incidentally, O2 in the UK are offering them FREE with certain contracts.
One of the things I think is quite exciting is the 'software platform' race. I had thought that this was coming down to a fight between Microsoft and Linux, but I think Apple is definitely in with a shout now. As devices go more mobile and the line blurs between the laptop and the smartphone the software will drive sales, perhaps more than the hardware.

[kdt]

"Apple gains market share for itself at little cost and squeezes margins and hence strategic flexibility for it's competitors."

This is not unprecedented. Apple set the price of songs in the US at $0.99 -- a price far to small for any other company to make a sustainable profit. By squeezing margins it kept competitors weak while making money off of iPods.

The true cost of the iPhone is not $199/$299 it is a subsidized phone. AT&T has already announced that they expect a hit on earnings from subsidizing it.

Apple doesn't have to release a new phone more than once a year -- you get new functionality from your existing phone via software updates. Nokia can't just update the software on all of their phones in one swoop across all of the carriers -- Apple can. Nokia may be able to get quantities of scale from buying in bulk -- but so can Apple from iPhones and iPods.

The other manufacturers (and Microsoft) had years to get the software right on mobile phones and failed miserably. Samsung had a year and half to come up with a competitor to the iPhone and the Instinct was the best they could do? The interface and browser is still not up to the original iPhone.

Lastly, Steve Jobs' Apple has never chased market share at the cost of profits. Apple is glad to let the Dells, the Acers, etc. have the low profit margin, low end, mass market computers and siphon off the midrange and high markets. Do you really think Apple wants to sell low profit margin phones?

[kevin]

I think Apple will never make an iPhone that's not also an internet communicator. In other words, they'll only make higher-profit smartphones because like kdt said as they're aiming to get you to the Internet.

In the longer run, the Internet is where the puck is going to be.

[Tomi T Ahonen]

Hi Martin, mark, Paul, kdt and kevin

Thank you all for the comments and several of you for returning. I'll reply to each individually

Martin - good point. I don't think Apple has grand designs to become an advertising channel - they are way too small in the big scheme of mobile advertising. They only are on one of the networks in most of the countries where they operate (a serious drawback) and their total population of all handsets in use is 0.4% even if we give them the 10 million units sold for this year. So that is not an appealing market position to go after the bigger mobile advertising players. Nokia with 100 times bigger reach (nearly 40% of all handsets) is the only handset maker of reasonable ability to do advertising.

But a related interest they may well have - in trying to push more advanced messaging to their own systems, rather than the industry-standard MMS. This sounds quite like Apple. But I do think that the two are not mutually exclusive, and do think MMS will appear on an iPhone of the future, and not so far in the future..

mark - thanks for the kind words. Actually, yes this is my core business and I advise the industry on exactly those issues, not only what ARPU levels, mobile data usage levels etc they do in a given country, but also often for global players, they want explicitly what you mentioned - the differences between US users, Asian users, European users (African, Latin American, Middle Eastern etc users).

Then its users times data traffic times data charge equals revenues (or data bundle charge if appropriate). Then minus partner/content fees and network loads, equals profits..

Lots and lots of data and stats and analysis and thoughts around that. I'm sorry I don't have easy pointers for you, we do this on a regular basis and for example I was just with Vodafone's global mobile advertising conference to talk about mobile phone users for the advertising brands and ad agencies to understand how mobile is different from the older media..

Seriously, to answer your question would turn this "essay" into a book :-) I really can't go into that much time and detail in a reply to a comment.

But let me jump to the "Apple is threat because of iTunes" - you are totally right. Nokia tried this with N-Gage and the operators revolted and shut Nokia out. Now that Apple is able to do this with the iPhone tells how desperately the operators want the iPhone. But also - the biggest sticking point in all the iPhone negotiations around the world was the revenue sharing part with traffic of iPhone users. Every handset maker had asked for that every time. And operators shut the door. RIM with the Blackberry was the first to get a share, through some fuzzy math so its not strictly "revenue sharing" of traffic, but they do gain from data usage by corporate/enterprise customers.

Now Apple negotiated really hard last year. The reason the iPhone was only launched in those handful countries in Europe was because these were the only markets that succumbed to the Apple negotiations. The rest of the world - most of Europe and all of Asia - stood firm. Today Apple has abandoned its requirement, which is why Apple is not available for free in the UK for example (standard procedure, far more expensive phones are available there for free if your monthly billing is large enough). The 2G iPhone was the exception last year, because of this insistence by Apple.

But it became obvios they would not get China, Japan, South Korea, etc vital markets they need to get to 10 million - if they insisted on the revenue share. Now they have quit that, and suddenly they have 70 markets to announce.. Ha-ha..

But it comes back to your point. Operators are very concerned about rivals coming to their pond. iTunes is a strange bird, in my mind. It would be a far better experience for the end-user to load the music over-the-air (like most 3G operators around the world do - in South Korea over half of all music sold, is downloaded straight to mobile phones - and the songs cost less than 99 cents each..)

So iTunes is a weird one. But operators do not like any side-loading. But Apple has kind of cleverly gained that, by initially insisting on the revenue share of data traffic. After Apple withdrew that requirement, this concession to iTunes is a much lesser evil to the operators. But yes, you are right, they don't like it.

Paul - hi! Yeah, you brought up three points. GPS, Blackberry and the software platform.

First on GPS - I won't mention much about that, as I've now written my essay about the futility of LBS. but yes, Apple is here struggling heavily with the US West Coast misconceptions that still linger because they don't yet understand the full potential of mobile (thinking for example the "real internet on the phone" which is like putting a real horse inside the engine bay of a car, our mobile internet is far superior to the legacy dumb internet, why on earth would anyone want to deploy that rubbish..)

About Blackberry. I am certain, that most business/enterprise customers (ie the IT/telecoms departments of them) will not abandon the Blackberry in favour of the iPhone. So, then it is one of two possibilities - to accept the iPhone in parallel to BB, or to go after new enterprise/busienss customers who are not yet using the Blackberry.

So, the existing BB user base is safe (no worries at RIM). I'd further argue, that most users who are Crackberry addicts - cannot live without either the wireless email of BB or those who have migrated to SMS on the BB - will not abandon the BB in favour of the iPhone !!

Some will. the iPhone is far more sexy than the BB. But if forced to choose two, I'd say most Crackberry users - addicted BB users - will not give up the BB. Then - where is the iPhone? The employer will almost never give users two company phones (yes some high level techie geeks may have two, but not the mid manager)

And in this race - there is the gorilla. Nokia's E-Series outsells the Blackberry by a wide margin. Nokia's top model, the Communicator series - has outsold the Blackberry every year since the BB launched, even though the Communciator has been anything from 2x to 4x more expensive (in fact the most expensive smartphone for most of the life of that series). The current E90 Communicator is of course the top Nokia E-Series phone and that is a powerhouse of a pocket gadget (and yes, like all communicators, is the size of a brick)

Now on the platforms - sorry, Apple's OS/X is a trivial play into mobile phones. If we say they double their sales next year and sell 20 million iPhone 3G+ devices, their installed base would be 35 million or so. That is well under 1% of all mobile phones. Totally meaningless in the grand game of mobile telecoms.

The only significant platform is not Android or Microsoft Windows for Mobile, it is Symbian, at roughly the 100 million installed base level. It is no contest, and won't be for years. The numbers in mobile are enormous.

kdt - good points. But you might not know the extent of the price range of phones. The current subsidised 199 dollar iPhone 3G has a real unsubsidised price roughly in the 350-400 dollar range. That may seem like quite expensive, for example for American consumers - but phones 3 and even 4 times as expensive already exist in the most advanced markets like South Korea and Japan (which the manufacturers don't bother to release in the rest of the world which is not as advanced yet). Nokia has several top phones that have unsubsidised costs well beyond 1,000 dollars.

The original 499/599 dollar 2G iPhone last June had an unsubsidised price in the 1,000 dollar plus range. That is exclusive territory. Phone makers cannot afford to release several new models in that price point.

But in the 400 dollar range each of the big five have several models currently and release several new models each year. Several new models by Nokia, several new models by Samsung, several new models by Motorola, several new models by SonyEricsson and several by LG. This is a battle they cannot win over a 12 month span with one model. They are utterly doomed by Spring 2009 if they have not significantly upgraded the iPhone 3G or released a new phone. Sorry, that is the nature of the beast.

Each of these five global giant rivals is capable of copying the specs of the iPhone 3G now, and releasing a phone better on one or two key features before year-end. So when the customer goes to the store wanting the iPhone, the store staff will show, would you consider this SonyEricsson or this Samsung etc..

Some will not be appealing, but there are too many rivals with products already in this heavily contested range, that better models will appear automatically. And what is worse, clearly Apple is NOT listening to its operator-customers and what they ask. If Apple continues with this arrogant approach, soon they will find that only Americans like iPhones, and the rest of the world laughs at them..

Remember that America lags the world in mobile phones and networks and services by several years. Apple has to work double-hard to catch up to the South Koreans, Japanese, Finns and Swedes, in phone design, and in understanding what customers want.

The best example is SMS text messaging. They hear it every day from every mobile operator-customer, that the iPhone SMS texting is not good enough. What did they announce about SMS with the iPhone 3G? Nothing.

Apple is being arrogant and leading the iPhone down the drain if they continue this way. They cannot release one new phone next year, that ignores the cries of the industry on what the phone needs...

Finally on seeking profits. Apple has certainly done its math to set the price at 199 dollars (subsidised). Clearly they drastically slashed their price. They could have made a management decision to make a BIG price cut to 299 dollars rather than 199. The new iPhone 3G would have sold very well at 299 dollars?

Of course it would have. But if Apple has to sell 7 million iPhones this year to get to 10 million, that pricing decision cost Apple 700 MILLION dollars of PURE PROFIT. Apple has abandoned 700 million dollars of pure profit with this pricing move.

They are way to clever to have made a mistake in this. Why did they do it? The only reason they launched the iPhone 3G at 199 dollars (subsidised price) is because they had to. Their internal tracking had found that customers who were willing to pay through the nose for an iPhone already had them. The rest of the world was not hot for the original iPhone, not for the features (no 3G) and not at that price. But at this price they can gain their sales to 10 million, on which the Apple share price will depend at year-end. Apple has to reach 10 million sales.

And they had felt that at 299 dollars subsidised (ie about 500-600 dollars unsubsidised) they would not get there. That is what it cost Apple. 700 million dollars in abandoned profits. Note that they sell the 7 million phones in either price scenario, so all sales and marketing costs are covered at the 199 price point. But Apple could not risk 299 dollars.

Think about that. We all know that today 299 dollars for an iPhone 3G (if the 199 price was never mentioned) would have been big news in June 2008. But Apple could not guarantee the sales to sustain at that (far lower price point than last year) price.

This is bad news for Apple. And it is the reality of this business. It is cut-throat. No wonder such global giants of consumer-electronics, not geeky computers like Apple - have pulled out of the handset business or retreated into home markets etc.

On iPod scale. Sorry. 45 million iPods and 10 million iPhones make no dent in the scale advantages. Nokia sells 450 million phones. Samsung sells 180 million phones (and tons of other pocketable gadgets like MP3 players). SonyEricsson sells 140 million phones and who knows how many more PSPs and Cybershot cameras and Walkman minidisk players etc. No, Apple's scale is tiny, they cannot compete in the scale war alone. They need their premium brand to pull higher prices than the competition. That is their only way, and with that they have to be a niche player.

kevin - love the Gretzky quote (I often use it, especially when I speak in markets where they play ice hockey like Canada, Finland, Russia etc). Yes, the point is not to skate where the puck is, but where the puck is going to be.

And here you are totally mistaken, but so may well be Apple. The puck is NOT going to be bringing "the" internet, ie the legacy dumb and crippled PC based internet to the mobile phone. We have a far more smart, powerful and intelligent mobile internet on the phones, and it would be idiocy to bring the 6th mass media experience to the 7th mass media - as already today, total content revenues on mobile web are 50% greater than the content revenues on the legacy internet. This even though the dumb fixed PC based internet is almost twice as old as the mobile web. Think about it - 50% more revenues in half the time. Which do you prefer? Who should migrate to whom? Who should copy whom?

I have dozens of examples of internet companies who were making losses, until they discovered the mobile internet, and now make all their money on the far better mobile internet, even though they still offer their services on the legacy internet as well. We've discussed many here and in my books, from Habbo Hotel and Flirtomatic to Kart Rider and Cyworld.

Now, it is truly possible that Apple thinks they'll bring the dumb legacy internet to the phone. Sure. But that is not money, that is not profits. That will fail gloriously over the next decade. Apple is not limited to it, they offer SMS for example, so the iPhone does have some abilities to capture mobile data revenues. But the lack of MMS will hurt them - thats a 14.5 billion dollar pie all by itself that all other smartphones can tap into - and mobile operators can make money out of - but the "new and glorious" iPhone 3G does not join in the fun.

No, the future of the PC based internet with its free content will stay on PCs. The mobile data industry is far greater today and will soon tower over the legacy internet. And those industry players who understand that, will prosper.

Incidentially, the Blackberry is in exactly the same problem, they are bringing a next generation solution to enable an outdated model. All users are shifting traffic away from email to SMS and IM (Instant Messaging) in every market, including the USA, and including business users. So Blackberry's solution is inherently limited to legacy markets, older users and those who are not digital natives but digital immigrants, and need a crutch to join.

So no, the puck is most certainly not going to be in bringing the internet to mobile; it is quite the opposite. That is a fake move, the real puck will be in understanding the 7th Mass Media and its 7 unique benefits that no legacy media - including the internet - cannot replicate. Use the 7th Mass Media to build true billable services for mobile..

That is where the puck is. That is where all leading countries are now skating to. If Apple does not get that, they may win a small face-off but totally on the wrong pond, where the big game is on the big rink elsewhere.. That is where the puck is and that is where the puck is headed..

Thank you all for writing

Tomi Ahonen :-)

[kdt]

"Martin - good point. I don't think Apple has grand designs to become an advertising channel - they are way too small in the big scheme of mobile advertising."

Apple probably wouldn't sully their brand with advertising. As a point of reference, Apple is the only major Intel customer that would rather not have "Intel Inside" stickers and lose the marketing rebates. They also don't stuff their computers with a bunch of crapware.

"Nokia with 100 times bigger reach (nearly 40% of all handsets) is the only handset maker of reasonable ability to do advertising."

Nokia has no control over the content or the OS on the phone once they sell it -- unlike Apple.

"Then its users times data traffic times data charge equals revenues (or data bundle charge if appropriate). Then minus partner/content fees and network loads, equals profits.."

Profits for the carriers -- yes -- but not for the manufacturers.

"Today Apple has abandoned its requirement, which is why Apple is not available for free in the UK for example (standard procedure, far more expensive phones are available there for free if your monthly billing is large enough). The 2G iPhone was the exception last year, because of this insistence by Apple."

The iPhone will be available for free in the UK this year...

"Now on the platforms - sorry, Apple's OS/X is a trivial play into mobile phones. If we say they double their sales next year and sell 20 million iPhone 3G+ devices, their installed base would be 35 million or so. That is well under 1% of all mobile phones. Totally meaningless in the grand game of mobile telecoms."

But you're counting all of the mobile phones -- including the really cheap ones where people will probably never buy any content. Apple has the much more desirable premium customers.

"The only significant platform is not Android or Microsoft Windows for Mobile, it is Symbian, at roughly the 100 million installed base level. It is no contest, and won't be for years. The numbers in mobile are enormous."

You're only counting iPhones. The iPod Touch also will run many of the same apps as the iPhone.

http://www.crn.com/software/208403610

"Munster said his estimates were based, in part, on his assumption that there will be an active App Store user base of 78 million, including iPod touch portable media player owners and iPhone owners by the end of calendar year 2009"

"But in the 400 dollar range each of the big five have several models currently and release several new models each year. Several new models by Nokia, several new models by Samsung, several new models by Motorola, several new models by SonyEricsson and several by LG. This is a battle they cannot win over a 12 month span with one model. They are utterly doomed by Spring 2009 if they have not significantly upgraded the iPhone 3G or released a new phone. Sorry, that is the nature of the beast."

Samsung and Motorola are tied to Windows Mobile. Microsoft and their hardware partners had years to come up with something groundbreaking and never did. Samsung's latest iPhone killer -- the Instinct -- pales in comparison to the iPhone. As I said before, the major disadvantage that every other competitor has is that they can't control the content distribution, the OS, and the hardware. They move a lot slower than Apple does.

"Each of these five global giant rivals is capable of copying the specs of the iPhone 3G now, and releasing a phone better on one or two key features before year-end. So when the customer goes to the store wanting the iPhone, the store staff will show, would you consider this SonyEricsson or this Samsung etc.."

Specs yes...but after a year and half...they still haven't been able to duplicate whole widget. There is no reason that Apple can't use the same hardware as the other manufacturers...the other manufacturers though can't come up with the interface and software design skills of Apple -- again the Instinct is the perfect example....

"Some will not be appealing, but there are too many rivals with products already in this heavily contested range, that better models will appear automatically."

Didn't commenters say the same thing about the iPod?

" And what is worse, clearly Apple is NOT listening to its operator-customers and what they ask. If Apple continues with this arrogant approach, soon they will find that only Americans like iPhones, and the rest of the world laughs at them.."

Apple also didn't listen to others about putting a radio on the iPod, or subscription music, or opening up the iPod to competitors. Every commentator said that Microsoft along with all of their hardware and content partners in the PlaysForSure program would wipe the floor with the iPod and relegate it to a niche player. Some of these same competitors (Samsung, Sony) also make phones.

"Remember that America lags the world in mobile phones and networks and services by several years. Apple has to work double-hard to catch up to the South Koreans, Japanese, Finns and Swedes, in phone design, and in understanding what customers want."

How big are all of those markets combined compared to the North American market?

"Apple is being arrogant and leading the iPhone down the drain if they continue this way. They cannot release one new phone next year, that ignores the cries of the industry on what the phone needs..."

In a few years, we will know who's right...but you do sound like you're making the same arguments that people made against the iPod. Software is going to be the major differentiator between Apple and it's competitors. Nokia and Microsoft (who makes the software for all other smartphones except for RIM and Nokia) have shown a complete inability to move fast.

"Of course it would have. But if Apple has to sell 7 million iPhones this year to get to 10 million, that pricing decision cost Apple 700 MILLION dollars of PURE PROFIT. Apple has abandoned 700 million dollars of pure profit with this pricing move."

What if Apple sells more than 7 million? You're assuming that demand won't increase with a drop in price. We know that it wasn't Apple's original plan to sell phones that cheaply or with the subsidy.

"Think about that. We all know that today 299 dollars for an iPhone 3G (if the 199 price was never mentioned) would have been big news in June 2008. But Apple could not guarantee the sales to sustain at that (far lower price point than last year) price."

We also have to consider that Apple may have never planned on the app store last year and wanted everyone to build web apps. When they realized that that wasn't going to work, they were forced to do an about face. Apple now not only gets money from the sale of the device, but also the sale of music, movie sales and rentals, MobileMe, and third party applications and because of the DRM associated with most iTunes content and apps that will only run on the iPhone/iPod, once people are in Apple ecosystem, it's a lot easier to stay there. None of Apple's competitors have that advantage.

"On iPod scale. Sorry. 45 million iPods and 10 million iPhones make no dent in the scale advantages. Nokia sells 450 million phones. Samsung sells 180 million phones (and tons of other pocketable gadgets like MP3 players)."

"SonyEricsson sells 140 million phones and who knows how many more PSPs and Cybershot cameras and Walkman minidisk players etc. No, Apple's scale is tiny, they cannot compete in the scale war alone. They need their premium brand to pull higher prices than the competition. That is their only way, and with that they have to be a niche player."

Neither Sony nor Samsung has been able to compete head to head against Apple in the MP3 market...they have the same weakness against Apple in the cellphone market...neither of them can produce decent software and both are dependent on MS in the smart phone market.

"Now, it is truly possible that Apple thinks they'll bring the dumb legacy internet to the phone. Sure. But that is not money, that is not profits. That will fail gloriously over the next decade. Apple is not limited to it, they offer SMS for example, so the iPhone does have some abilities to capture mobile data revenues. But the lack of MMS will hurt them - thats a 14.5 billion dollar pie all by itself that all other smartphones can tap into - and mobile operators can make money out of - but the "new and glorious" iPhone 3G does not join in the fun."

That makes money for the carriers -- not the mobile phone manufacturers. Why should Apple care about making the carriers money? Apple will make residual income and force lock-in via iTunes and the App Store.

" That is a fake move, the real puck will be in understanding the 7th Mass Media and its 7 unique benefits that no legacy media"

Isn't that what the App store is for?

[Dave Birch]

I have a N82 and it is an excellent phone, but I will still be dumping it for an iPhone on 11th July. I have never used the video calling feature, so I don't care that the iPhone doesn't have it, and I've used MMS maybe once in the last year (if I take a picture and want to send it to my wife or a friend then I send it by e-mail so I can be sure they will get it).

You've focused your excellent analysis on the handset, but the ecosystem is just as important to me. Nokia support on my Macintosh is absolutely hopeless compared to the iPhone support (you have to use Windows to download maps, software updates, that kind of thing): just look at iTunes and compare it with the Nokia "plug ins" for music transfer. Apple know that people like me can't be bothered with anything that is complicated: that's why I carry an iPod with me everywhere despite having a N82 with me all the time as well.

I just looked up the new "E" Nokias and they're pretty good too, but unless the iPhone really disappoints, I'm afraid I'm lost to the Sony/Nokia world forever!

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