Countdown to new iPhone: 1 day

July 10, 2008 4:55:54 AM PDT
Apple Inc.'s iPhone has had a remarkable run over the past year, shaking up the stodgy design of cell phones and securing Apple a lucrative slice of the wireless business. To sustain that momentum and keep fickle consumers and Wall Street happy, the company needs a dramatic second act with the next generation of iPhones, which roll out Friday with faster Internet access and lower retail prices.

But even with Apple's untouchable image in the eyes of the Macintosh faithful, there are no guarantees against a letdown for the company or its volatile stock.

After all, Apple has stumbled before in its foray into the cellular business, with a poorly executed price cut two months after the iPhone launch that left many early buyers fuming. And now that it's a significant part of the wireless market, Apple faces some of the same threats as more-established handset makers.

Among those pressures: intensifying competition and the uncertainty of a fractured market with many big players. There's also the risk that even with Apple's sparkling reputation, the iPhone might become so widely available that it loses some of the cachet that inspires buyers to wait in lines outside stores.

No one disputes that Apple and Chief Executive Steve Jobs have rattled the cell phone industry with the iPhone's design and features, which are furiously being copied by other handset makers.

And Apple appears on track to meeting its sales targets for the iPhone - essential to appeasing investors.

However, unlike with the iPod, which became a blockbuster thanks partly to the device's tie-in with the iTunes music service, Apple is wrestling a crowded field of entrenched competitors with the iPhone.

That means Apple must maintain the iPhone's cool factor as rival handset makers race to catch up. The landscape could look even tougher after new types of phones and applications emerge with Google Inc.'s upcoming Android mobile operating system.

"It's something that's still probably overlooked - people aren't thinking that the iPhone is a product that could get commoditized. People have made the assumption that it will continue to generate strong margins," said Andy Hargreaves, consumer electronics analyst with Pacific Crest Securities. "But you have to start thinking about it."

Apple declined to comment.

The iPhone is a small part of Apple's business - only 5 percent of its overall sales in the latest quarter. Macintosh computers and iPods typically generate 75 percent of Apple's revenue.

But iPhones are hugely profitable. By some estimates, Apple stands to make between $100 and $400 on each new iPhone sold, depending on the model and wireless carrier.

Investors have put down big bets on Apple's plans, pushing the company's shares up from $120 in March to around $180 today, mostly on anticipation that Apple will blow through its sales projections for the iPhone.

Put another way, though, anything short of a blowout could slam Apple's notoriously volatile stock.

"To keep the stock price up, they'd have to do well, very well, amid high expectations - it's a very tough stock," said Shaw Wu, an analyst with American Technology Research.

Apple has a target of selling 10 million iPhones by the end of this year. It's more than halfway there, having sold 6 million of the original iPhones before the supply ran dry in May.

But some investors question why Apple hasn't increased its projections, even with two price cuts on the iPhone and the technological improvements in the new version - which is being launched in 22 countries, soon to expand to 70.

In the U.S., subsidies from carrier AT&T Inc. mean that the price for an 8-gigabyte model has been slashed from $599 when the iPhone launched last year to $199 for the new models launching Friday. A 16-gigabyte model is set to cost $299.

"If the bar is so low that in the next 12 months Apple will only sell another 10 million iPhones at the $200 price point, I would not consider that to be a success," said Trip Chowdhry, an analyst with Global Equities Research. "I would consider that to be a complete disaster. At that price point they should have sold 20 million or 30 million units, and I don't think they can sell that many."

Apple will likely make as much money, if not more, on each iPhone as it did with the original models. The difference is that now wireless carriers must pay Apple heavy subsidies to sell the iPhone, and they make up the remainder with higher service charges.

However, wireless carriers also are freer to determine prices for the iPhone hardware - including giving away the phones, as some overseas carriers are doing, when customers lock into certain service contracts. A free iPhone? That could dilute the brand - making the device feel more like other cell phones - even if the expensive contracts help Apple retain an element of exclusivity.

To keep buyers excited, Apple has upgraded the iPhone to work on so-called 3G, or third-generation, wireless networks and improved its support for Microsoft Corp.'s widely used Exchange corporate e-mail program.

Apple is also allowing third-party developers to build applications for the iPhone. It's critical they create relevant programs for corporate America if Apple is to steal a lot of customers from its two biggest phone competitors: Research in Motion Ltd., which makes the BlackBerry, and Palm Inc., which makes the Treo.

Although Apple has less than 1 percent of the overall cell phone market, it has 19.2 percent share in U.S. smart phones, which pack more functions. That put it ahead of Palm, which had 13.4 percent, but far behind RIM's 44.5 percent, according to research firm IDC.

One key question is whether Apple's improvements in version two are enough to satisfy the enormous expectations of Apple die-hards. At least some who shelled out several hundred dollars for the first iPhone say they're irked to see the devices now coming out for much less - though of course, they still plan to shell out for the new one.

"The problem is the price keeps dropping ... and the early adopters feel like they've paid the most," said Ed Ho, 40, a co-founder of a mobile music company in Palo Alto who bought the most expensive iPhone when it came out and plans to do it again. "That leaves you with some distaste."

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