iPhone's Second Version Will Pose the Real Threat

| About: Apple Inc. (AAPL)

Viewed in the context of last week’s CES, the iPhone’s greatest impact should be felt by incumbents. Why? The iPhone has enlightened consumers to the fact that existing mobile phone interfaces suck. But people are mistaken if they think a $599 iPhone is going to sell 10M units in 2008. It will take a $299 iPhone 2.0 to make this happen.

Consumers subconsciously knew mobile interfaces were terrible, but didn’t realize how much better they could be. In 90 minutes, Apple (NASDAQ:AAPL) clearly raised the bar on what consumers should expect from a phone. Even if the iPhone were to never appear in the market, Job’s 90 minute demo changed consumers perceptions forever about how a mobile phone should function.

Motorola (MOT), Sony/Ericsson and Nokia (NYSE:NOK) phones have sunk billions of dollars into R&D on phone software, but Apple releases a new phone for 1/100th of the R&D that blows them away. The billions sunk by these mobile makers are likely to be a financial albatross, and will further hinder innovation as senior managers refuse to internally admit defeat and write these costs off.

I now look at my HTC 8125 running Windows Mobile 5.0 with disgust, but Microsoft (NASDAQ:MSFT) deserves more kudos than it receives. Few know that Microsoft is the #1 provider of smartphone software (if you throw out the low-end Symbian phones) globally. They reached this incumbent position regardless of the naysayers who pointed out the superiority of Palm and Nokia interfaces. As for the threat of the iPhone, Microsoft has shown an uncanny ability to "share" (if you use Napster’s definition of the word share) good ideas with the competition.

I do not think that Apple will meet its goal of selling 10M iPhones in 2007 if the device they demonstrated last week is the final product. Before the announcement, analysts tossed around 2M unit numbers. After the blockbuster demo, most are swallowing the 10M phone target. Regardless of hype, Apple faces some simple math.

* iPhone Cost - $599
* Total phones sold globally in 2006 - 200M
* Total phones sold with ASP > $300 - 10M (5% of market)
* Total Blackberrys sold in last 12 months - Approx 5M
* Share of phones > $300 purchased by corporations - >80% (est)

I think the iPhone is awesome and a welcome innovation. I believe Apple can singlehandedly disrupt the mobile business. However, unless Apple positions the iPhone successfully with corporate buyers, there isn’t a snowball’s chance in hell it will sell 10M units. You don’t need to be a genius to see an inherent conflict between corporate America and the Apple iPhone. Last time I checked, Apple’s share in the Enterprise (outside of professional bloggers and photo/video editors) was a Microsoft rounding error.

The only area in which I could be wrong is if the iPhone creates a new class of consumer device, and raises the price/pain level consumers will accept for a mobile phone - by a lot. I don’t think this is the case.

The iPhone is a massively disruptive device, and cleared a high bar set for consumer and market anticipation. But the iPhone v1.0 will not be the 10M unit seller. It will be an evolutionary device, the iPhone v2.0 that sells for less than $300, that makes the disruptive iPhone concept a breakout consumer success.

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