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iPhone v2.0 is the Real Weapon

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 (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 (NOK) phones have sunk Billions of dollars into R&D on phone software, but Apple releases a new phone for 1/100th 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 (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 from the competition.

I do not think Apple will meet their goal of selling 10M iPhones in 2008 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 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 massively disruptive device, and cleared a high bar set 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.

Discussion

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  1. Andrew,

    Good post, if the numbers you state are ~accurate then looks like a sound argument.

    I think in the modern age you always have to consider the ability of consumers (employees) to drive change in to a corporation. It seems like the iPhone is a pretty neat PDA/computer with some interesting possibilities outside of plain telephony.

    If voice is the real hook, then I think the biggest issue is whether corporations will allow people to log in to email servers using POP3 or IMAP. Seems like often they don’t, but for some reason they trust email to a Blackberry server. Are there any more alternatives to Blackberry emerging? This would seem to be the problem Apple has to address, and then I think the floodgates can open, because iPhone is probably a better computer in many respects. Seems like the way Steve emphasized IMAP he is hoping that people see that as an alternative to Blackberry, but …….

    Posted by mark seery | January 16, 2007, 1:47 PM
  2. Well thought out argument.

    But I’m not sure I agree. I’ve been plunking down $300-400 for unlocked Sony Ericsson handsets for a several years now and didn’t blink at the cost of the iPhone.

    While the fact that it’s locked to Cingular is a deal-breaker for me (unless Cingular’s coverage in my area beefs up in six months’ time), $600 buys me the following:

    -A vastly improved call experience: contacts, voice mail, etc, over my SE W810i.

    -Vastly improved Mac integration over my W810i, which does integrate, but it’s burdensome.

    -Vastly improved music features. While the W810i is a “Walkman” phone, it’s nothing compared to the iPhone in this regard.

    -Vastly improved physical features. The screen size and resolution alone justify the added cost over my W810 (which, btw, retailed for about the same price at launch). Add the touch-screen features and it’s a no-brainer.

    -Vastly improved internet experience. My W810i “does it all” but on a small screen with faux mail and browsing.

    -Vastly improved everything else. To tighten up this post, I’m just going to say that all of the iPhone’s features relegated my W810i to the was cool category instantly.

    $600 for all this, plus Apple’s legendary resale value, all add up to what I consider a “value.” After all, the first iPod sold for $499 and it only did music, and it did it nothing like the iPhone does music.

    Posted by Matthew | January 16, 2007, 3:06 PM
  3. Using the old Panasonic slogan; the iPhone is a beautiful design slightly ahead of its time. It may be more note worthy as the future iPod standard design than a futuristic do-it-all phone. My first iPod was 15 GB and I liked it. My next one was 30GB w/video and I loved it. Apple needs to:

    – Add higher capacity storage so it could replace current iPods.
    – Sell it at the price point of video iPods.

    Then why not purchase a beautiful iPod that is also your cell phone not to mentions runs MacOS X and other PDA type apps. Definately the best pocket size web browser I’ve seen.

    It needs to support MS Exchange for businesses to use them for email even though they may still be reluctant unless they already issue iPods for training, etc. purposes.

    Posted by Ray Stahl | January 16, 2007, 3:59 PM
  4. Matthew – the original iPod at $500 didn’t sell that well though many people did covet one. Same with iPhone v1.0

    Think Nano, that is the goal of iPhone v2.0 and what will propel this concept forward. The iPod didn’t really take off until the lower priced flash versions hit.

    Posted by Andrew Schmitt | January 16, 2007, 4:08 PM
  5. Estimates of 2006 global cellphone sales are around a billion units, many of which are low cost/featured going into China and India. I’m guessing the 200 million you cite is a subset of that (3G or otherwise). 1% of the global market does not sound like that much, but I wouldn’t lay a lot of $ on them reaching that number at $500 ASP.

    Posted by Dave Sherry | January 16, 2007, 5:03 PM
  6. Andrew:

    Not only is version 2.0 something worth thinking about, but consider the product in between the “classic” iPod and the iPhone: The touchscreen, non-phone iPod.

    There is a full chart of potential price points, from $50 to $600 here:

    Apple iPhone/iPods http://bigpicture.typepad.com/comments/2007/01/apple_iphoneipo.html

    Posted by Barry Ritholtz | January 16, 2007, 7:43 PM
  7. # of phones sold is 2006 is ~1B, not 200M as stated..this changes the #s

    Posted by Sampath | January 16, 2007, 9:59 PM
  8. Andrew,

    I don’t think that enterprise business will have much, if anything, to contribute to the iPhone’s number. It’s lack of HSDPA and MS-Office application support make it a non-starter.

    IMHO, the iPhone will only hit 10M if it is a successful with the fashionistas. I just went on ebay – Lebron James sneakers are $299. This crowd will snap up the iPhone – just watch.

    Other examples of the “right” buying public:
    – China Mobile’s high end non-enterprise customers. Their subscriber base is approaching the population of the US.
    – Western Europe. 400 Euro feature phones are common and sell well (i.e. Samsung Ultra, and Motorola SLDR). Expect the iPhone to blow these devices away. IMHO – this is the biggest problem and opportunity for Apple. Consumers expect unlocked phones, and Apple is trying to single source the carrier. That would be a mistake, IMHO, as how do you choose between T-Mobile, Vodafone, Orange, and Telefonica?
    – Cingular’s fashionistas. Yup, the same ones who snapped up ~500K gen 1 RAZRs in about 3 months

    Apple noted that they expect to hit 10M units in 2008. I think that we’ll see 9 months of V1.0, which will only provide 3 months of sales in ’08. Then in the last 9 months of 2008, we’ll see V2.0, which should address:
    – HSDPA – Apple has publicly stated they already have built an HSDPA version
    – Microsoft MS Office apps – Office for OS X iPhone can’t be far behind
    – GPS – the Google Maps interface with GPS should give Garmin a run for their money, especially when combined with HSDPA access to the Internet for real-time traffic updates and the like.
    – Pricing – if the business analysts at Apple deem this necessary

    I think Apple will come very close to meeting their 10M shipment mark.

    Albert

    Posted by Albert Lew | January 17, 2007, 3:52 AM
  9. I think HSDPA isn’t a technical challenge – it’s likely the chipset and radio in the iPhone Steve Jobs was holding can do HSDPA. It is more about Cingular not wanting Apple to run HSDPA enabled apps on their network platform without a slice of the $$$. AN iPhone v2.0 does not solve this problem. I don’t know what does. Competition maybe.

    Albert – you and I disagree on the importance of MS Office apps. MS office on my WM5 phone is torture. I’ve tried multiple times to use it. It’s awful. If Apple can fix that, that would be a top 3 reason for getting the phone. (PS All of us are not GPS data junkies like you :) )

    I think v2.0 throws out the video, uses a smaller screen, smaller battery, and focuses on SMS, email, photos, music, and delivering targeted web apps.

    The Widgets everyone are talking about are perfect for the mobile platform.

    Posted by Andrew Schmitt | January 17, 2007, 9:15 AM
  10. Andrew-
    I agree with your assessment, but Apple hasn’t truly changed the way a mobile device should look and feel, they’ve just actually made it happen. This is the handheld that I have wanted for years and it looks awesome and I want one. As a mac user at home, this product looks like my desktop/laptop and I expect that when I use this, I’ll be able to sync everything (ical, mail, address book, etc) through either Bluetooth or my idisk server. At $599, it’s really allowing me to take 1/2 of my personal computer everywhere I go with my phone. It’s everything I want to take with me and it even has more disk space that my old school 4Gb iPod mini. But, it does cost too much, I’ll get one as soon as it’s $300 and supports Verizon CDMA. What happened to the carrier/protocol agnostic phone that was rumored? When will a CDMA version be released? Without the price point and a CDMA version all of this hype will translate into few Apple $$ for the phone. Can you say Newton? (with less hype of course) But, maybe, like the Newton, Apple is just so far ahead of consumer expectations and capabilities that this phone will not be an Apple mainstay, but will push others (the phone manufacturers) to raise the bar on their products.

    The one thing I don’t agree with in your post is the Apple development costs. It appears to me that Apple didn’t write software and an OS for the phone as much as developed a phone to run their existing tools. So, in that sense, the phone development cost was low, but the total development cost would include a lot of the R&D that Apple has put into the mac computers. Hence the name change from Apple Computer to Apple, this stuff applies to anything with electronics in it. Same deal with the iTV, iRefridgerator, iAirConditioning, etc. Apple has gone about the phone development in a different approach (think different) and the result is something that only Apple can deliver. Like the iMac and iPod, it will be copied. But, will something come out of this that will be widely adopted like the iPod? iPhone2.0 or ZunePhone?

    So, maybe someday Macworld will replace CES as THE consumer electronics show.

    DC

    Posted by DC | January 17, 2007, 9:53 AM
  11. Fair point on the Software R&D and Apple re-using.

    CPU horsepower getting so cheap and so efficient/watt that a desktop OS can be stuffed into a phone.

    Posted by Andrew Schmitt | January 17, 2007, 10:08 AM
  12. The stated goal was to sell 10M through 2008, not in 2007.

    Posted by Sid | January 17, 2007, 1:20 PM
  13. From the Engadget Macworld transcript:

    10:57am – 26m game consoles sold, 94m digital cameras, 135m MP3 players, 209m PCs, 957m phones… 1% market share is 10 million phones. “Exactly what we’re trying to do, 1% market share in 2008, 10 million units and we’ll go from there.”

    BTW, I’d like to know where the 1BB phone sales number comes from. That would require 1 out of every 5 human beings on this earth to replace their phone annually. I can’t believe there are 800M additional 1G/2G phones sold outside developed markets….

    Posted by Andrew Schmitt | January 17, 2007, 1:36 PM
  14. Apple didn’t say they’d sell 10M iPhones in 2007. Steve Jobs stated that they plan on selling 10M iPhones by the end of 2008 – the first full year of iPhone availability.

    Editor: I didn’t say 10M in 2007, I said 2008. Jobs said FY08.

    Posted by Michael | January 17, 2007, 3:26 PM
  15. The phone sales numbers are about right – there are currently 2.5B worldwide mobile subscribers, and carriers replace phones at a frightening clip.

    I met with a tier 1 carrier in a very developed market last year that stated that they replace about 40% of their handsets each and every year, so that is consistent with the 1B handset number. I’ve also seen analyst studies that confirm the 1B phone per year number.

    I don’t see why everyone in the US is so up in arms about CDMA (i.e. all you Verizon and Sprint customers out there…). While CDMA subscribers DO make up more than 50% of the US cell phone subscriber base, they only make up 10% of the global subscriber base. And that number is declining rapidly. There are companies that have (VIVO in Brazil) or wish (China Unicom) they could jettison CDMA technology. If you were Apple, what technology would you choose to build upon, given that the product needs to play in the global market? The answer is pretty obvious.

    While I am admittedly a GPS biggot, we are just getting started with GPS applications. When you combine GPS with a cameraphone and mobile Internet, you have GPS enabled photo blogging. The applications for this, from real-time parking spot finders to instant urban get togethers to proximity dating, are limited only by imagination.

    Most of Apple’s V2.0 products have added more features, not more. Its not until V3.0 (iPod Mini/Nano is the prime example) that we start seeing features getting thrown out.

    I am very curious to see how open Apple will be with the software development on the iPhone. It is a little known fact that the latest generation pre-iPhone hard disk iPod has a dual core CPU for the express purpose of running gaming applications. Unfortunately, Apple has fairly tight restrictions on the type of content that can be developed. If Apple really wants to open up the utility of the iPhone, they could allow lots of third party application developers to build to not only Mac OS X, but also to the standardized IMS interfaces that the GSM operators are beginning to make available. But I’m not holding by breath for that one.

    Albert

    Posted by Albert Lew | January 17, 2007, 5:47 PM
  16. From today’s press release (see ERIC):

    Sony Ericsson estimates the 2006 global handset market as being around 980 million units, higher than previous forecasts of over 950 million units for the year.

    UBS forecasts peak global new wireless sub growth in 2006 at 320 million, declining to 275 mln in 2007. With total global subs at 2.1 bln as of 12/31/06, even a 3 year replacement cycle yields close to 1 bln units. And handset replacement is more rapid than it ever was for PCs.

    Posted by Dave Sherry | January 17, 2007, 6:25 PM
  17. So when was the last time you heard a teenager want an iPod because of what OS or processor it has inside.
    Apple is the King of demand creation and marketing.
    I see a lot of statistics and specs but I’d bet this iPhone takes off just because its Apple.

    Everyone just wants to strap one on and show it off. Who cares if its Palm, Windows, or Unix for that matter. I’d bet they’ll sell more at $599 than $99. Long term wise.

    Now if I can get my IT manager (someone above) to let us trade in our Treo 650’s for an iPhone, I’d be happy. Then my kids would love me more. :)

    Posted by Ed Draker | January 17, 2007, 10:09 PM
  18. iPhone is not a smart phone. People are not going to buy because it is a better high-end phone. They are going to buy it because they don’t want to carry several devices. With the iPhone I can dispense with carrying a phone, iPod and notebook computer. Ok.. its not a computer… no keyboard. But ok for web surfing. It also has the cool factor… the interface. It will attract dollars for style and cool. People buy for that reason, you are totally missing the point. A woman will spend $500 on this phone instead of $400 on a Coach purse. People will spend $500 on this instead of $300 on an iPod. Its not the function, its the pocket the money will come out of… the psyche of the buyer.

    Posted by Kirk | January 21, 2007, 11:56 AM
  19. The iPhone v1.0 costs about $300.00 in parts to produce a single unit, how on earth do you expect them to sell iPhone v2.0 at cost?

    Posted by Cody | July 4, 2007, 6:41 PM
  20. The cost of that screen is going to come down. And get rid of the media functions to make it a phone and web browser only.

    Looks like I may eat crow on the 10M prediction.

    Posted by Andrew Schmitt | July 5, 2007, 9:04 PM
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