Apple takes a bite out of the telecoms market

Business Management was as excited as anyone at the recent announcement of the upcoming launch of Apple’s much-anticipated iPhone. But what will its launch mean for the rest of the telecoms market?

Not content with its global dominance of digital music players, Apple has recently announced it will launch the iPhone in an attempt to break into the telecoms industry and repeat its success in the smartphone and multimedia player device sector. The iPhone will go on sale in June, exclusively from Cingular Wireless, with a starting price of $499; users will be able to not only talk, but also access the internet and listen to music on its built-in 4GB or 8GB iPod. Its creators are hailing it as a “magical device”, and it’s a possibility that the three-in-one gadget might over time replace the iPod. Time will tell whether the iPhone will have as big a cultural impact as its illustrious older brother, but hopes are high that the device will cause a similar buzz when it hits the shops later this year.

Business Management caught up with Gerry Purdy, VP and Chief Analyst for the Mobile and Wireless sector at Frost & Sullivan, to talk about how the launch will impact on the mobile telecoms sector. We also asked him to speculate on how Apple might look to develop the iPhone over the next few years.

BM. What is your initial reaction to the announcement of the new iPhone?

GP. I think it is good for the industry. The iPhone has a user interface that is pretty natural and intuitive. First, its introduction will challenge the industry to address the issue of ease-of-use. Using a phone to get access to (and interact with) different types of media has, in the past, been challenging. WAP hasn’t been the greatest of success stories, at least in terms of its user interface. I think the iPhone is characteristic of a new class of device providing multi-function capability including music, internet and cellular telephony.

We haven’t had a chance to use the iPhone yet, but it looks promising. If third parties are also embraced to build widgets and web services to run on this platform then we will have an ecosystem that will turn out to be good for Apple, Cingular and other third-party software developers.

BM. Do you see it as a very significant development in the evolution of the mobile device then?

GP. They [Apple] probably realize this is the first model and that it might have some initial shortcomings – for instance, many commentators have been quick to criticize the fact that it doesn’t ship with 3G. However, Apple did start development on this project a long time ago and I’m sure they have a 3G handset convergence of the iPhone planned over the next few years.

Apple will also segment the market into different portions. For instance, there will be some consumers that will want a lower cost version, so it is likely they will look into bringing out a $99 version just like they did with the iPod and the Nano.

Another sub-market I expect to see is Apple or their partners going after the enterprise space with Blackberry-like functionality, support for Good Technologies and back-end web service interaction. Eventually, services like Backweb will probably be operating on an iPhone.

BM. Although this is viewed as having a consumer electronics base, how much potential is there to cut into the Smartphone or PDA market and maybe take a big chunk out of it?

GP. People said $495 was a high-end smartphone price point. Well, Apple has a lot of R&D to pay for and early adopters are less price sensitive. I think this price is close to the first price point for an iPod. Apple will take this down in price points aggressively. Because they went with GSM, radios are going to expand into Europe much easier rather than if they were on CDMA. On the other hand, there is no reason, if it is successful, why they would not come out with a Verizon or Sprint CDMA version of it. If they are out to be a major player in the market like Samsung, Motorola, Nokia, etc. with a total environment, then they have to look at the entire marketplace. If Verizon market customers want iPhones, then I’m sure they will find a way to bring them to market.

BM. You mentioned a couple of manufacturers there. Do you think they will be concerned by Apple’s market entry?

GP. On the one hand, they need to take a serious look at it from a competitive environment. But on the other, Apple are selling zero units right now and won’t sell any for five months. After this time, there will be market adoption. However, Apple are not going to sell a billion units in the first year and take 100 percent of market share. I do think, however, that the iPhone is good enough to sell hundreds – rather than tens – of thousands of units. If Apple plays their cards right in this market place, they will be a serious handset manufacturer.

In the future, the company may roll the Apple TV with the iPhone. This will enable people to control all their home electronics using their phone. It would be good to be able to carry around an intelligent single device so that the media in your home can be controlled. It might be possible to bring up an Apple TV application on the iPhone that provides the ability to, amongst other things, record shows and receive video as you are walking around the house.

BM. What do you think it will mean to Apple itself? As a late-entrant to the telecoms market, what will they need to do to guarantee success?

GP. First, they will need to make customers happy. The iPod wasn’t necessarily a well-known brand when they first came out, but their introduction was accompanied by a lot of arm-waving and dramatic statements. However, their introduction was a great experience. It was that experience that drove people to recommend the product to others, and before you knew it we had this cultural phenomenon on our hands. They need to guarantee that customers are delighted with the experience in order to replicate this with the iPhone.

Second, they need to think strategically in terms of where they take it next. I expect they will be pretty aggressive when trying to expand into the market. They need a product roadmap that segments the markets and provides a good, solid total environment for these particular markets – software, hardware and services.

BM. How do you think it will impact on the iPod market? Do you think it will cannibalize it to some extent?

GP. Yes, I think so. If you are interested in music then you will probably go ahead and buy a Nano. However, if a consumer was thinking about buying their next phone and didn’t have an iPod, then they might go ahead and buy an iPhone. There is, therefore, a need to be thinking in terms of the class of the iPod user and whether they are in the high-end rather than the low-end of the market. Uptake is going to be greatest amongst the more technology savvy early adopters who are waiting for their next phone.

There is a possibility that eventually Apple might kill the iPod. I don’t know for certain whether they will, but it is possible. Wireless connectivity is really where the future lies. For me, there are two new features they could add. The first would be the ability to buy a song using the iPhone and then listen to it via the iPod on the iPhone. This is something that cannot be done today as you have to buy a song via a PC. The second would be the ability to share music. With digital rights it would be cool to be able to share music between all iPhone users using wireless. This would also include video and pictures.

BM. What do you think about the time lag between the announcement and actually being able to get hold of an iPhone?

GP. I wish the time span were shorter. However, this is Apples’ first wireless cell phone product and I think they have a commitment to making sure that the thing actually works. What I expect is that we will watch future iPhone models come out and they will be available the day they are announced.