Telephone market competitive, tough

The Baltimore Sun

CHICAGO -- Apple Inc.'s iPhone, rumored and speculated about in technology circles for years, is an attempt to create the holy grail of portable devices - one elegant machine that contains a telephone, music and video player and Web browser.

Still, Apple will find the phone market to be much tougher turf to conquer than the mobile music business, analysts say, particularly at a heady $499 price tag for the iPhone. The wireless world is more complex and extremely competitive, dominated by veteran phone makers like Motorola. And over the past few years, those manufacturers increasingly have been stuffing their phones with music, video and Web capabilities.

In other words, Apple's much anticipated phone foray isn't quite as revolutionary as the company's chief executive officer says.

In November, about 32 percent of all phones sold in the United States had some music-playing capability, according to a survey by NPD Group. During the same month, 6.4 percent of phones sold were "smart phones," which have e-mail and Web capabilities.

Apple is stepping in because it sees a "massive opportunity," said John Jackson, a wireless industry analyst at M:Metrics. In the U.S. alone, the cell phone market is almost four times bigger than the MP3 market.

Apple clearly believes that the cachet of the iPod - built on style and functionality - will lure consumers to the iPhone.

The device was rolled out Tuesday at the firm's annual Macworld Conference & Expo in San Francisco, with Apple Chairman and CEO Steven P. Jobs claiming that the company has "reinvented the phone."

The rectangular machine, which runs on Apple's Macintosh OS X operating system, features advanced touch screen technology. Essentially, most of its functions are done via a screen, not buttons.

At 11.6 millimeters thick, the iPhone is similar in size to Motorola's "Q" smart phone, which is fashioned from Motorola's sleek Razr.

3.5-inch screen

The iPhone will sport a 3.5-inch screen, an inch bigger than the current iPod screen. It includes video, and the basic model has storage capacity for around 1,000 songs.

"This is the Rolls Royce of cell phones," said Roger Entner, a wireless industry analyst with Ovum. "This is more of a really small computer that also makes phone calls."

The iPhone will begin shipping in June in this country and during the fourth quarter in Europe. It's expected to be available in Asia in 2008.

In the United States, it will be sold through Cingular, one of the nation's two biggest wireless carriers. An iPhone with 4 gigabytes of storage will cost $499; with 8 gigabytes, the price is $599.

That cost might fall over time if the iPhone follows traditional pricing trajectories in the wireless business. But even then, it will likely never sell for less than $200, analysts said.

Americans typically don't pay more than $100 for a mobile phone - unless it's positioned as much more than a phone.

"Americans don't bat an eye at spending a couple of hundred dollars on a personal entertainment device," Entner said.

Apple rebuilt its fame on just such an entertainment device, the iPod, and its accompanying iTunes online music store. Apple has sold more than 70 million of the devices since they were introduced in 2001, capturing about 70 percent of the MP3 player market.

The device transformed Apple from a boutique computer company into a full-scale electronics firm, something it recognized Tuesday by changing its name from Apple Computer to just Apple.

Jobs said Tuesday that he expects to sell 10 million iPhones in 2008, grabbing 1 percent of the mobile phone market. Nokia leads that market globally with over 30 percent share; Motorola is next with about 20 percent.

Johan Eidhagen, Nokia's North American marketing chief, said Apple's entry into the business "confirms" his company's strategy.

Last year, Nokia sold more than 40 million devices featuring music, video and the Internet.

Eidhagen said Apple's mobile phone initiative will be good for the industry. But he noted that "entering the telecom sector is tougher than entering the MP3 sector." That's partly because the phone business is much more established than the MP3 business was when Apple launched the iPod. But it also reflects the nature of phone retailing, which is dominated by wireless networks like Cingular.

"There's a lot more complexity in the mobile phone business than just selling [an MP3] player through Wal-Mart, Best Buy and Circuit City," said Neil Strother, an analyst at the NPD Group.

A phone, including the iPhone, is usually sold with a contract for a network's wireless service, usually for two years. So, networks usually exert more control over the devices they sell, perhaps demanding special features.

But Apple also is known for keeping tight control over its technology. Apple's first dip into the mobile phone business couldn't have left its partners too thrilled, Entner said. In September 2005, after much ballyhoo, Motorola and Cingular released the Rokr, the first phone to feature access to Apple's iTunes service.

Little promotion

Apple did little to promote it, Entner said, and it launched its iPod Nano music player at the same time the Rokr came out.

"Steve Jobs gave the iTunes phone five minutes in the sun and then eclipsed it with the Nano," Entner said. "Everyone looked at the way they treated Motorola and Cingular - they treated them like lackeys."

Apple also might find that the cell phone business is a particularly fickle one, too.

Look at Motorola: For almost two years, it was flying high with the Razr, the iPod's prime rival for pop culture status. But even the Razr couldn't protect Motorola last week when it suddenly announced it expects a big shortfall in fourth-quarter profits.

Mike Hughlett writes for the Chicago Tribune.

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