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The last time an unannounced product got as much attention as the Apple (NASDAQ:AAPL) iPhone, Dean Kaman was going to spur the remaking of American cities with the Segway.

Sanford Bernstein’s Toni Sacconaghi weighed in on the iPhone last Friday, in a report I only caught up with earlier today. I’m a bit late on this, but it was worth the wait.

Sacconaghi basic view is that the iPhone isn’t going to be the dramatic game changer that people hope - and that in fact it could substantially cannibalize sales of free-standing iPods. The way he sees it, Apple can either create a product that is marketed as a phone first, and only secondarily a music player; or it could be sold as a music player with a phone built in.

Sacconaghi thinks the second choice is more likely. He says announcement of an Apple iPhone is a near-certainty in the next quater or two, with sales in mid-2007. Sacconaghi expects the company to partner with Cingular in the U.S. He thinks it is unlikely the company creates an MVNO., or virtual carrier, using its own brand.

There are several reasons he thinks it is not likely Apple would sell its new device as phone-centric.

  • Engineering difficulty: He asserts that it is harder to build a phone into a media player than the other way around.
  • Tough competition: Key players in the phone market - Nokia (NYSE:NOK), Motorola (MOT), Sony Ericsson, Samsung and others - “have significant financial resources to invest in music phones.”
  • Thin margins: Since Apple does not have its own cell phone technology to fall back on, it will have to license all the required technologies, which could account for as much as 25% fo the cost of a high-end cell phone.
  • Distribution challenges: Apple has no relationships with global wireless carrriers, unlike companies like Nokia and Motorola. If this were so easy to do, he wonders, where are the phones from Dell (NASDAQ:DELL) and HP (NYSE:HPQ)?

But if the company chose to make a device that is a music player first, it would chew into existing iPod sales, he says. He also estimates that in order to sell a device with at least a 20% gross margin, Apple would have to sell the iPhone for at least $300, which would put it at the very top of the current handset market.

Sacconaghi is neutral on Apple shares; he has a price target of $90.

Source: Apple iPhone: Not The Game-Changer Many Expect