Christmas comes but twice a year for the iPhone

11th July 2008. The launch of Apple’s eagerly awaited iPhone 3G has attracted hot interest from consumers as it went on sale in operator and Apple stores in 22 countries today. By end 2008 this will be expanded to over 70 countries, including Brazil and India. In London, Apple’s Regent Street store had 150 eager customers queuing before 8am, while other central London operator outlets reported queues of between 20 and 70.

Although called the iPhone 3G, it uses a technology called HSDPA which is at least twice as fast as WCDMA 3G devices which first went on sale five years ago. What it delivers is faster internet access and faster downloading, delivering a true mobile broadband experience.

Global demand for advanced applications and high speed internet access is now significant. The iPhone 3G clearly delivers on that point. But many markets have had 3G or faster devices for a number of years. The sophisticated subscribers in these markets are well attuned to what high-end smartphones and their myriad associated applications can offer. Only now is Apple’s iPhone 3G providing this level of technology, and a marked increase in available applications. But has it arrived too late?

Already Apple has surrendered its attempts to change the game and had to adopt the mobile handset industry’s subsidized pricing model. But has it done enough to attract this wider band of subscribers other than its acolytes?

On the face of it, Apple’s decisions to sell the “twice as fast” iPhone 3G for “half the price” of last year’s model and to no longer offer exclusivity deals should help Apple to meet, if not surpass, its oft stated target of ten million iPhones by the end of the year. Despite predictions that this estimate may be undercooked, the company has been consistently maintaining this target each quarter.

Yes, Apple now has access to an enormous distribution channel selling through some of the largest mobile operators on the planet, excluding China for the time being. Based on all the announced operators this will give the iPhone access to over 480 million subscribers by end-2008. However only 4% of these currently subscribe to HSDPA plans. How many of this addressable market will succumb to the charms of Steve Jobs’ latest baby?

Present current economic circumstances may also see many baulk at the thought of parting with around $1,000 a year for at least two years for the device plus mobile contract, as available from AT&T. The price for the device may have lowered but it would appear that anyone signing up for a new iPhone 3G contract will actually be paying more over the life of the service contract than the original 2.5G model.

However, the appeal of the iPhone 3G is such that Apple’s main challenge may not be with demand or distribution but in fact with its capacity to supply. This may be the fundamental reason why, for the time being at least, Apple is sticking to its target of 10m units for 2008. In its short life in the mobile phone industry, has the company built the scale, sourced the components and signed the contracts to produce 15m phones or more in less than 12 months?

Whilst it is highly probable, and perhaps even desirable for Apple, that demand will outstrip supply the company will want to secure a high-margin for its new device whilst generating economies of scale. It may have additional suppliers lined up to deliver capacity in addition to its principal Taiwanese manufacturer Hon Hai. In addition, it is believed that Apple has invested in on its own CNC tooling machines perhaps as a means to ensure stringent quality control.

With Christmas expected to come twice this year for Apple, sales should be buoyant to year end, with expectations from Informa Telecoms & Media that sales of its iPhone 3G will pass the 12m mark in 2008. Added to the estimated 2.2 million 2.5G versions sold in 2008, this brings a cumulative total of 14.4m for the year. The signs are good for 2009, particularly if Apple can secure deals to Chinese and Russian operators before the end of 2008, but Informa Telecoms & Media believes next year’s iPhone 3G sales will not exceed 20m at best.

The iPhone is not alone in the handsets market. It has sparked a number of competing touchscreen products and indeed been the catalyst for creating a new class of device called mobile internet devices (MIDs). It will face stiff competition before the end of the year with heavyweight me-too offerings soon appearing on the market from top handset vendors, including Samsung’s Omnia, Sony Ericsson’s Xperia, LG’s Dare, not forgetting Nokia’s ‘Tube’ and the N96.

Furthermore, openness is becoming a key feature in the mobile market. While the forthcoming Google Android and next version of Nokia S60 will be open enabling users to access to a large number of innovative applications, the number of iPhone applications remains limited. Meanwhile the iPhone 3G’s lack of support for Java and Flash may prove problematic.

As with any mobile handset, Apple’s iPhone 3G will, in time, need to be updated. It remains to be seen whether the next iPhones will be further re-inventions of itself year-after-year, extending its product lifecycle, or whether Apple will segment its portfolio to move into lower tier devices. iPhone nano anyone?