Why Apple's iPhone Will Succeed

I have read article after article, on this site included, about the reasons why the iPhone will fail to ship Apple's (AAPL) forecast of 10 million units in 2008. Having spent a lot of time covering wireless and working under one of the Street's top ranked wireless analysts for some time, I believe most of the negativity is baseless.

First, people gawk at the price. Uh, the iPhone is priced competitively with most other smart phones and has a $200 to $300 MP 3 players embedded. The iPod, which has 70% plus market share in Apple's target market for the iPhone, in the US, shipped about 20 million units in the fourth quarter alone, so it wouldn't take too much cannibalization for an iPod replacement cycle alone to drive strong unit sales.

Also, Cingular will likely subsidize the cost of the phone by at least $150. Carriers love the idea of adding higher ARPU customers that use data plans and extensive SMS and MMS services, so subsidies should be expected. This means the phone will likely cost consumers about $350 to $450, or inline with the new Treo 750v at Cingular and the soon to be launched Blackberry 8800.

Second, Cingular has about 60 million subs. The average replacement rate on these subs is about 1.5 to 2 years. At the mid-point, the company will sell about 35 million phones in 2007 to existing customers. Given the large installed base of iPod users, their replacement rate, iPod cannibalization, and the potential for churn at other carriers looking to change to Cingular to grab an iPhone, it's not too hard to get to 10 million units.

Third, Apple will likely announce at least one more phone this year, possibly at the lower end with a modified OS with a longer battery life that is geared more towards iPod users than pure wireless customers. This will eliminate some of the pricing questions as the phone will be priced competitively with the Pearl from Research in Motion (RIMM).

Fourth, Apple's first offering includes Wi-Fi, making it one of only a handful of phones sold in the US with such capabilities. This will, among other things, make it possible to browse the web at home or in hot-spots at higher speeds than Cingular's 2.5G network.

Fifth, the current iPhone does not support 3G. The company said it is sold on EDGE because it is more widely deployed right now. Cingular will continue to build out its 3G network this year, as will other carriers, and the company will likely release a web-browsing friendly UMTS based phone before year end.

Sixth, it's still not clear to me whether or not Apple will sell the phone in its retail stores, but this is another channel. Apple stores have higher average sales per square foot than most luxury retailers, which I extrapolate to mean that Apple customers that make their way into retail stores are not shy about opening their wallets for cutting edge technology.

Seventh, a virtuous cycle of higher iPhone shipments leading to higher Mac shipments will likely get underway this year as the iPhone runs Mac OS X thus creating a platform for interoperability that rivals no other wireless/PC platform on the market. The end result will be great comfort among consumers looking to switch to Apple for their computing needs.

I have written in the past about my expectation for potentially 30 million iPhones to ship in 2007. I stand by this despite the negativity.

Comments

[Jon T]

Well said!

I have been astounded by the many reports of the 'iPhone will fail' nature and do wonder what drives them.

Is it envy? Or is it an anti-Apple thing? Or is it a knee jerk reaction to progress?

I also go with your 30m figure for this year. Amazon Germany's number one product is iPhone at 99euros or $1,200.. If that doesn't say something, nothing does.

[Jose Hales-Garcia]

Jon T writes: "Is it envy? Or is it an anti-Apple thing? Or is it a knee jerk reaction to progress?"

I think it's calculated by the network of people who make their money from Microsoft's technologies. They are in influential places on the bloggosphere and in companies who can make a lot of noise opposing Apple's advances. As Apple's successes increase, watch how intense the anti-Apple campaign will become.

Apple just needs to stay on course and not let these things distract it. Eventually this generation of loosers will slough off and be replaced by a generation who've grown up knowing Apple only as a successful, always innovative, can-deliver-the-goods company.

[will gabrielski]

Thanks for the kind words.

[Jon T]

Err, that was 999 euros and I think we both mean 30m in 2008.

I had in mind 10m in 2007.

[carleast]

Lol! I suppose we'll just have to wait and see.

But your argument is severely flawed here Will. In fact it's so flawed that I'm struggling to believe that you would publish something like this.

You say that Cingular will ship 35m phones in 2007. This I would probably agree with if they have 60m customers (and that's contract customers and not pay as you go customers I assume). That's where our agreements end.

- How on earth will a third of these replacement phones go to the iPhone? What you first of all say is that the price is in line with the new Blackberrry. So what you're telling me is the iPhone's target market are Blackberry users? Rubbish! Palm top users want a phone that can do every thing that they need and is proven to do so. The iPhone may yet do that but I doubt you will find many palm top users becoming early adopters of the iPhone. It's too much of a risk to they everyday business life. So the iPhone is in the same price bracket as the Blackberrs but seeing as how it's not Blackberry users who will be buying this thing I think it's a bit much to ask your everyday Nokia, Sony Ericsson, Motorola and Samsung users to spend all that extra money on something that has a rubbish camera and is bigger and bulkier than their current phone. And even if it were palm top users who were buying this phone how much of a market share do palm top mobiles have in the US? 5%? It's just such a silly idea to start bracketing the iPhone with palm tops as far as I'm concerned.

- Then you go on to contradict yourself by saying that it isn't Blackberry users who will buy these 10m phones but people looking to replace their ipods? Again this is ridiculous. Most of the 20 million iPods shipped in the last Q of 2006 won't have been replacement mp3 players but first tie buyers. So I doubt you'll be finding many people getting rid of their 30+gb iPods to get a measly 8gb phone with a worse battery. Or, for that matter, people with 40 gram nanos getting rid of a super tiny mp3 player in order to get a bulky 140g iPhone that will never be able to strap around their arm in the gym and has a much worse battery. Plus the iPhone costs a hell of a lot more than both.

- You say it's lack of 3g is a good thing? Why? Not in Europe it won't be. Nor in Japan. The new Nokia N95 has the iPod right where it wants it as far as this is concerned.

To be honest I'm not sure where in the market Apple are aiming the iPhone for. It's the same price as a palm top but surely they want more of a market share than just palm top users. It bigger and bulkier than and more expensive than normal phones. It has a limited camera which most people would regard as a more important function on their phones than an mp3 player. I think Apple has just built this without knowing which part of the market they're aiming for.

Put it this way. You could get the Samsung D900 which weighs 82 grams and a nano which weighs 40 odd grams. They would both cost less than the iPhone and weigh less. Plus you wouldn't always need to take both out of the house. Plus the battery life on both is better. Plus the D900 has a far superior camera. Plus you can strap the nano to your arm when exercising.

I'll eat my hat if the first gen iPhone sells 10m in 2007 and 30m in 2008. Weight, size, cost, poor camera, and lack of specific target market count against it.

The iPod is successful because it has very little competition. The iPhone is entering into the Lions den. The mobile phone market is a far bigger fish than the mp3 market so don't expect the Apple name to carry it all the way to the top of the podium any time soon.

[will gabrielski]

Thanks for taking the time to reply. I think Cingular will be one of many carriers with an iPhone in 2008. I think Cingular will pick up 10-15mm users alone from the iPhone introduction.
There is an inherent replacement rate with all CE product, specifically the iPod. This is based on average life span of the product, churn, and new product introductions.
-
I dont say its lack of 3G isa good thing. also, I doubt this phone will ever be big in Europe, where Apple has very little traction with any product, specifically MP3 players. Also, Europe 3G adoption is far behind the US because of the pricing of data plans that doesn;t allow for unlimited browsing.
The iPod is successful because it has very little competition. The iPhone is entering into the Lions den. The mobile phone market is a far bigger fish than the mp3 market so don't expect the Apple name to carry it all the way to the top of the podium any time soon.

[Osamede]

You said: "I doubt this phone will ever be big in Europe, where Apple has very little traction with any product, specifically MP3 players. Also, Europe 3G adoption is far behind the US because of the pricing of data plans that doesn;t allow for unlimited browsing"

Are you joking? Do your research before writing. Ipods do very well here in Europe. Really.

As for the 3G, European adoption of 3G on GSM far outstrips the US. So it really doesnt matter what is going on in Kansas or Idaho. If Apple wants to sell meaningful quantities of this phone here in the year 2007, it better have 3G. end of story.

[meetbeforetalk]

tend to agree with Carl Eastwood on Will Gabrielsky, blind optimism.
I like Apple Innovation and the Iphone wil certainly please many users
but it is not because something is new that it's going to be as successful as you say: 30 Millions in 2007 (with shipping starting mid 2007)?.
all the functionality of the IPhone are already available from many different manufacturers internationally.
and the iphone today, is not the best offering in all the funtions.
why also do yout think multimedia phone manufacturer have added keyboard?
not because it is bulky, cost more, ..
it is because of customer demand! customers have asked for keyboards
so who will not buy?those looking for:
higher camera resolution (Mega pixel rules even if the optics is not good!)
more Memory (compared to best MP3 players)
keyboard
higher speed transfer 3G and or Wimax
Larger screen
light weight,
On time
cost,
battery charger ;o)
provider other than Cingular (the Nokia, Motorola, sony-ericson and co will not abandon those potential million customers easily! having already clos relationship with the major providers worldwide)
...
I do not say that another phone exists with all this features, but only that the market is segmented
Apple will take a share but not the millions you hope.

[meetbeforetalk]

LG is nnouncing shipping of a similar Iphone in February !

[Osamede]

This article is full of holes.

- The pricing has already been announced and the annunced prices are subsidised prices, and for new account sonly. Mind you some of the people buying this phone will aready have Cingular accounts and will have to pay even more since they will need to pay fees to terminate existing accounts.
- The Wi-fi in this phone will add little value since it is crippled and cant make VOIP calls. If you buy the phone, you'd already be on a data phone and have paid for banwith to use the internet. The killer app for Wi-fi on a phone is the VOIP calls and this phone is unable to give you that.
- Third, you say Apple will soon release a "lower end phone" but arguably this one here is a lower end phone - albeit at a high end price. It doesnt have 3G and it cant make VOIP calls, which is what high end smartphones do these days.
- Finally you claim that the iPhone has a $200-$300 Mp3 player included. Well listen anyone with a smartphone can buy a memory card and stick it in there to create an MP3 payer for a lot less. That's been going on for 2-3-4 years before and recently companies like Sony started explicitly releasing wildly succeful Walkman phones like the W950i, W850 and W800 . Apple didnt create it and in fact are way behind on the curve.

[will gabrielski]

There is no doubt in my mind that there will be additional subsidies. Subsidies are always for new contracts (accounts). VoIP on Wi-Fi is not important. If it was capable of making Wi-Fi VoIP calls, Cingular's network wouldnt be necessary anyway. There are no high-end phones that are good for Wi-Fi VoIP, save the VoIP intended Skype Phone from NTGR, and I believe one other OEM.

[Osamede]

It has been announced that Apple is strictly forbidding operators to subsidise the phone - and Apple is estimated to be seeking a 50% margin on this model. Then they will lower the price on other folling models.

In other words, this first modle is the sucker phone - at a sucker price.

[Dan Poarch]

To critical posters here, you have valid points concerning some of the facts portrayed in this article. However, I don't know a soul who can make a VOIP call via WiFi. I run servers and I have no interest in fiddling with VOIP. How many times must Apple prove that specs are just a baseline, experience is everything. My RAZR had great specs when I bought it, then I found out it has the worst address book I've ever had on a phone.

The critics' obsession with tech specs does not bear out with Apple products. Do your research, Apple is chronically behind the curve on new technologies, that is, until they have watched what it is that the consumer wants and then they leapfrog the industry. Don't hate, they have 30 years of proven experience to use as leverage for the risk of launching this phone.

To this end, this phone is a first for Apple. They have the luxury of dropping in 3G whenever they darn well please. Perhaps Europe will never see an iPhone without 3G. I would avoid complaining about this feature, you will only be embarrassed when they release a 3G phone in November, or even the following February. Does your mother know what 3G is? Bet she knows what an iPod is though...

Carl - With all due respect, why on earth do you say that the phone market is tougher than the MP3 player market? Apple rules the MP3 player market but there's thousands of players out there and there were already a few hundred when the first iPod dropped. Anybody remember the Creative 5GB player? The iPod was "crippled" when it launched, and it still is when you get down to it. The iPod's success is iTunes, not playing MP3s. Unless Nokia can best iTunes, its MP3 offerings will be just that, "me too" offerings.

Everyone: No one gives a damn about the camera on their phone. Let's get that straight. I've never heard a person say to me, "Wow, this 3MP phone camera is so much nicer than my old 1MP camera phone." Nor will they ever say this. I'm not convinced that the camera and phone will ever mesh completely. I believe that the consumer will always recognize the difference between the two. You can build phones that work like computers because they're both communication devices. While a camera is a form of abstract communication, it's a stretch to think that the consumer is relying on Apple to resolve that abstraction for them.

A thought on crippling: Crippling, a term critics love to use, could actually be strong design. Keeping people away from complexity keeps the experience simple [you've read this far on an HTML page, simplicity already has you trapped in its fat bumbling fingers]. Again, I just want to point out my RAZR, I don't use any feature on it except the address book and it's abysmal. Had they focussed on experience I might love this phone because the form factor is absolutely perfect and it has proven to be more mechanically durable than I had expected. To summarize, I will take a "crippled" device over one that's utterly flawed.

One unknown that no one discusses: All any of us know is what we can use and have today. Perhaps OSX makes a better phone operating system than Windows? We don't know yet do we? But we do know that we love iPods and Macs don't we? Perhaps iPhones will run Windows Mobile better too. ; )

I won't commit to numbers, but I know better than to bet to against Jobs. Perhaps he's wrong, but his big mistake was NEXT, at this point he has a certain talent for golden eggs.

PS - If I can only get the distance out of an iPhone that I've gotten out of this 4-year-old Mac...

[Osamede]

The fact that you actually bought the RAZR - and then found out about the phone book, is not exactly boosting confidence in your ability to judge phones. I went in to the store, asked about it it and turned back around the moment they told me what it was capable of doing, or better said, what it was NOT capable of doing.

The iPhone is overpriced and will underwhelm. I'm sure Apple will come out with subsequent better ones, but this one here is just going to be a dud with the people whom it is priced for.

Too little on offer there, for far too much money - and a two year slave contract to a company whos approach to customers is best described as "customer DIS-service".

[Dan Poarch]

Thank you for illustrating my point. Perhaps the iPhone is not for the Phonerati.

[Osamede]

Asking basic questions about a product before you buy it, e.g. "can I put my phone numbers in it", is basic common sense you'd expect of a 16 year old - not "Phonerati" anything.

[carleast]

Lol Dan. You sound like someone who really doesn't have a clue about the mobile phone market.

How on earth could you say the mp3 player market is more competitive than the mobile phone market. For one the very word competition means that there is one competitor. Apple have the mp3 player sewn up. The only thing that will destroy their lead is when people stop buying dedicated mp3 players and use their phones instead. The mobile phone market on the other hand is competitive to the core. Nokia has a 35% market share followed by Motorola, Samsung, and Sony Ericsson who have just under 15% each. I cannot actually believe you just told me that the mp3 market is more competitive. Ridiculous.

As for people not wanting cameras in their phone. Where have you been for the past two years?!!! Obviously using your pathetic RAZR which apart from it's design has nothing else desirable about it at all. Come back to me when you get a phone with half decent features and then tell me how you like it. Say the Sony Ericsson K800i or the Samsung D900.

As for Apple's proven leverage experience. Well, fair enough their sat on the fence for about 18 months with mp3 players. But they've been sitting on the fence for a whole 16 years with mobile phones. Don't for a minute think that this is using the wait and see approach. They just had to wait until people wanted mp3 capability in their phones but he's underestimated the rest of the manufacturers and overestimated the Apple brand.

Don't get me wrong, I love Apple and think they deserve to have monopolised the mp3 industry. But that's all that they've done. They would be nowhere without the ipod. The Mac was always successful enough to keep them ticking over but nothing more. The ipod was their saviour but don't think that because of the ipod they'll win with everything else they ever release.

My predicted world wide market share for the iPhone by the end of 2008? 2-3%.