iPhone but the jury is out

Citation

Curwen, P. (2007), "iPhone but the jury is out", info, Vol. 9 No. 6. https://doi.org/10.1108/info.2007.27209fab.001

iPhone but the jury is out

iPhone but the jury is out

A regular column on the information industries

Peter Curwen Visiting Professor of Telecommunications in the Department of Management Science, Strathclyde University, Glasgow, UK. E-mail pjcurwen@hotmail.com

On the 26 June 2007, the share price of Apple fell by 2 per cent – on the face of it a fairly trivial event except that it was about to launch (exclusively in the USA) the arguably most-hyped mobile device in history known as the iPhone. The iPhone is a variant of what are generally categorised as smartphones, although your average handset is now so smart compared to even two years ago that the term is becoming outdated. As smartphones go, the iPhone was not unduly expensive at $499 for the entry level model, nor was the scale of monthly service charges which were set between $60 and $100 in conjunction with a two-year contract. But the Apple shareholders were edgy: the value of Apple had risen by $34 billion since the iPhone had been announced to the world and they stood to lose much of their gains if the iPhone proved to be a one-week wonder.

The iPhone first surfaced at the MacWorld trade show in January 2007 when Steve Jobs announced that, having previously changed the music industry via the launch of the iPod, Apple now intended to do the same for the mobile communications industry via the iPhone. The curious aspect of this was that the device in question was, by the standards of the time, fairly expensive, relatively large, on the heavy side, lacking a keyboard, short on memory and would initially at least be launched over a so-called 2.5G network rather than one capable of 3G speeds – the sort of attributes that would leave the reputation of any “normal” handset manufacturer in tatters.

But not that of Apple because it had set out to address the fundamental flaw in existing handset design, namely the inherently user-unfriendly nature of the beast. Anyone working their way through a lengthy series of drop-down menus or trying to type accurately on a tiny keyboard finds the experience frustrating, and may also be unable to access parts of the Internet. What Apple set out to do was to give the user unrestricted access to the Internet via an operating system (OS) comparable to that found on most desk-top computers as well as to simplify the process of making voice calls, listening to music and managing contact lists. That was achieved by replacing the keyboard with a touch-screen that could immediately replace one set of button functions with another according to whether the user wanted to make a voice call, send an e-mail or whatever.

So why were shareholders edgy? In the first place, with the iPod market reaching maturity, Apple effectively had a large chunk of its future profitability resting on the success of the iPhone. However, it was not taking on the manufacturers of MP3 players as with the iPod but the giants of the handset market such as Nokia, SonyEricsson and Samsung, all of which had already introduced models that provided fairly effective competition for the iPhone even if they lacked its Mac OSX and Safari web browser. For example, although the iPhone touch-screen was relatively large at 3.5in, touch-screens had already been introduced for the LG Prada and HTC Touch. Apple chose to make direct comparisons with three Qwerty keyboard smartphones, the BlackBerry Curve 8300 (similar to the 8800 and Pearl 8100), Palm Treo 750 and Samsung Blackjack, which was arguably counter-productive as it accentuated the fact that the lack of a Qwerty keyboard meant that the iPhone was somewhat unsuitable for anyone wanting to send lots of mobile e-mails or do lots of texting – that is, businessmen and youths. Apple also compared the Nokia N75, a top-end consumer handset, but this was one of the few models that, with comparable storage of either 4GB or 8GB, cost more than the iPhone.

In addition to the N75, Nokia’s N95 with its far superior five mega-pixel camera and video capability, not to mention a built-in GPS locator, cannot be ignored. Like the iPhone, the N95 is marketed as a “multimedia computer” – after all, $700 seems a touch pricey for something merely called a cell phone. The HTC Touch, which is regarded as somewhat inferior to the LG Prada, partly because the small touch-screen needs the application of a stylus for accuracy, may, like the Prada, prove to be a niche product, but if buyers want a sophisticated camera then the iPhone is not state-of-the-art and, significantly, it has drawbacks as a music machine. The iPhone is designed to work exclusively with iTunes software so users must set up an online account with the latter. This may seem a price worth paying, but if a user simply wants to replace his or her MP3 player with a handset incorporating similar capabilities then the N95, the SonyEricsson Walkman series and K810i Cyber-shot, the forthcoming Motorola Rokr Z6, the Samsung SCH-u540 (available from Verizon Wireless), the Samsung Synch (available from AT&T) and the Samsung Up-Stage (available from Sprint Nextel) all fit the bill.

It may be argued that the iPhone has something that its touch-screen competitors lack, namely the support of a major carrier, in this case AT&T – important because it means that the iPhone can be subsidised by the operator. However, this is not the case if the competing models are defined more broadly, as noted above, and it may also prove to have unintended consequences. In the first place, AT&T is selling the iPhone contract in conjunction with its EDGE network – although the iPhone automatically switches from EDGE to much faster known Wi-Fi networks. Now EDGE is a major step up from GSM/cdmaONE, but it is a carthorse compared to HSDPA and cdma2000 1xEV-DO Rev. A, so users may prefer a combination of more speed combined with one of the handsets previously mentioned. Whether the availability of Wi-Fi connectivity is a plus or minus for the iPhone is a moot point, in the first place because Wi-Fi is usually more expensive that downloading on a 3G network and secondly because the iPhone is largely directed towards the consumer rather than the business market and it is the latter that makes most use of Wi-Fi. A further drawback for potential corporate buyers is that whereas their Blackberries are compatible with their office systems, the iPhone may prove difficult to integrate, while for their part, personal buyers may need to switch network operators at some initial cost to themselves.

Second, the arrangement between Apple and AT&T has altered the nature of the commercial strategies pursued by both companies in the USA. Because the great majority of all handsets in the USA are bought initially by operators, equipment vendors have been obliged to adopt the specifications that operators impose, which, it is argued, explains in good part why handsets have remained user-unfriendly. In contrast, Apple has always controlled rigorously what has gone into its products but has now exposed itself to any shortcomings in the AT&T network. Apple, not surprisingly, has been able to insist on far more control over the iPhone’s features than AT&T normally allows to other vendors, and these may be unable, in practice, to ride on Apple’s coat-tails, but AT&T may not have properly taken into account the fact that iPhone owners will be able to synchronise their devices with iTunes over a PC connection – so-called “side-loading” – and thereby avoid downloading (at a price) over the air.

Downloads are a critical issue for operators – given the billions of dollars spent on upgrading their networks – for one simple reason: not enough downloading is going on. The ring tone and mobile gaming markets no longer look to provide long-term growth potential, and, somewhat surprisingly, most handset owners simply store their pictures in their handsets without sending them on to others. As a consequence, texting remains the main source of revenue-generating data flows while push e-mail is increasingly popular, yet neither requires a 3G network to work satisfactorily. With the likes of Nokia also planning to provide on-line music stores, side loading may also deprive operators of much needed revenue.

By much improving the Internet browsing experience, Apple stands to gain a decent share of the worldwide market for handsets. However, it is doubtful that Apple will be able to replicate the marketing plan implemented for the iPod that resulted in market segmentation and progressively cheaper variants of the device. The costs of re-engineering the iPhone will almost certainly not be economic given the likely size of the potential market. And if the iPhone remains expensive, it had better deliver a superior performance or the initial euphoria will soon fade.

In essence, therefore, the issue boils down to one critical proposition: The iPhone will make access to the internet on the move a much more pleasurable affair, but almost certainly not a satisfactorily speedy one for now. It will, in due course, be launched over 3G networks, but if the initial reaction to the iPhone experience is one of disappointment then the hype will rapidly turn into a catalogue of woe from which the iPhone may never fully recover.

It should also be borne in mind that when the AT&T network is upgraded to W-CDMA and HSDPA, the initial versions of the iPhone will not be compatible. Nevertheless, given the hype, almost the entire initial stock – AT&T would not reveal the numbers but 700,000 is the best estimate – was sold on the opening two days, although many buyers appeared intent upon an immediate, profitable, resale on eBay.