Thursday, June 28, 2007

Apple Iphone Review - Apple's iPhone: Not A Disrupter ... Yet

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Oxford Analytica 06.29.07, 6:00 AM ET
The Apple iPhone launches today, June 29. The new product encapsulates a significant shift in Apple's strategic focus, which is extending steadily beyond the computer into the broader realm of consumer electronics and digitally connected lifestyles. However, the exclusivity and terms of the agreement between Apple and AT&T means that, in the short term, the iPhone will have a limited impact on the structure of the U.S. market for mobile telephony. In the longer term, the device probably will instigate a process of innovation and diversification.

Apple (nasdaq: AAPL - news - people ) is hoping that the distinctive design of the iPhone will disrupt and even re-invent the concept of the mobile handset in the United States and worldwide. Apple has forecast relatively modest sales of 10 million units by the end of 2008, which would translate into an approximate 1% share of the world market for handsets.

The iPhone represents a natural extension of the successful iPod franchise from a standalone digital music player into a multi-functional communications, media and information device with Internet access. In particular, as Apple marketing drives interest in smart phone features, iPhone design will force other mobile handset makers more aggressively to develop and diversify their offerings.

The handset includes a sophisticated operating system (based on Mac OS X, which is used on Apple's existing computers); innovative applications, including visual voice mail and improved full Web browsing capabilities (using Safari); and multi-touch screen technology, enabling users to interact with the device using their fingers rather than a stylus.

Similar to other Apple products, the iPhone has attracted considerable media attention and publicity. Sales of the iPhone probably will benefit from short-term stock shortages, thereby stoking demand and anticipation throughout the summer months. However, the relatively high price of the iPhone ($499 for a four-gigabyte model; $599 for an eight-gigabyte model) will limit mass-market customer adoption.

Like the iPod, the iPhone will be a closed technology platform, sacrificing openness for simplicity in the user experience. However, there will be scope for software developers to create third-party applications for the iPhone, which must operate within the confines of the Safari browser.

In recent years, the first generation of Apple products have suffered from relatively higher levels of manufacturing defects compared with competitors. For example, customers reported problems with screens on the first generation of the iPod Nano, as well as earlier versions of the PowerBook.

Apple sought to allay concerns about the iPhone, announcing an upgraded glass screen, and extended battery life, in the two weeks preceding launch. However, several characteristics have raised debates about the appeal of the first-generation iPhone.

These include:

--the general durability of the device, compared with equivalent mobile handsets, and the life of the battery, which is not removable;

--the user interface, particularly for those accustomed to tactile feedback with keys when sending text messages; and

--the speed of Internet access, which will rely on AT&T's (nyse: T - news - people ) relatively slow EDGE network in areas without wi-fi.

Apple essentially has focused on entering rather than disrupting the U.S. mobile telephony market. The flawed yet necessary agreement with a provider such as AT&T is illustrative of the challenges facing entry into this market. The closed nature of the iPhone means it will have relatively limited implications for the structure of the market, at least in the short term. However, it does signal the beginning of a new era of multi-functional mobile handsets, consisting of media, communications and information.

Over time, there will be growing pressure for handset makers, including Apple, to enhance the networking capabilities of handsets--notably by taking advantage of faster third-generation (3G) networks. There will be pressure on Apple to maintain a steady stream of new iPhone models, address design limitations and offset the competitive threat posed by potentially more open and flexible devices from rival firms.

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