Reviews of the iPhone and its capabilities have been widely published and therefore will not be one of the main topics of this paper. Rather, we will focus on a number of key features and their implications for customers, device manufacturers, and the mobile carrier, media and cable industries.

Consumer or Business Device?

While Apple and AT&T naturally hope the iPhone will be popular with corporate users who comprise the majority of the smart phone market, the iPhone is likely to remain primarily a consumer device. The main reason is many corporate IT departments do not want to support the iPhone due to security concerns about supporting a new non-Blackberry/non-Windows mobile device. Apple could choose to license software from Research in Motion or Microsoft to allow iPhones to interact with corporate Blackberry and Windows email servers respectively, but there are no indications that it will do so. Alternative solutions require opening corporate email servers to the public Internet and inherent security risks.

The second reason why the iPhone is unlikely to appeal to most business users is that the touch screen keyboard will not satisfy a business person’s messaging needs. The keyboard works well with one finger, but it performs poorly when using two thumbs similar to what most Blackberry and other smart phone users do today.

Jump Start for the Mobile Web

By embedding a full-fledged web browser and running Mac OS X on the iPhone, Apple effectively has taken its desktop computer and made it mobile. The Safari browser will help to fragment the walled garden carrier deck model by giving consumers the ability to more easily surf the mobile web (i.e. off-deck sites) in the same way they do on computers today. The scaled back browsers on most other phones have limited mobile browsing capabilities to this point.

Will full browsing with a mobile device become mainstream or will content providers need to develop content tailored to mobile devices? That probably will remain an open question until Apple releases the next-generation iPhone for 3G networks. Initial versions of the iPhone will operate only on AT&T 2.5G EDGE network rather than the 3G HSDPA network, resulting in significantly slower data speeds. Apple argues that the iPhone can utilize Wi-Fi networks for data intensive needs, and initial reviews agree that the iPhone effectively identifies and accesses Wi-Fi networks. While this is an acceptable alternative for stationary users, it does not work for those on the go, roaming between different Wi-Fi networks.

Apple vs. Traditional Handset Manufacturers

With the iPhone’s release, Apple immediately has become a major player in the handset market. The threat of Apple’s entry into the mobile handset market has already spurred innovation as competitors such as Nokia, Sony Ericsson and others rush to deliver handset and smart phones with more advanced features. Apple’s entry can be expected to drive faster product cycles and increase the pace of innovation in the mobile handset industry. Apple is targeting total iPhone sales of 10 million units by the end of 2008, which represents about a one- percent market share. However, the share is much higher when considering the just the smart phone market or domestic markets alone. According to the research firm M:Metrics, about 19 million people in the U.S., or roughly nine-percent of cell phone users, are highly interested in purchasing the iPhone, even knowing they will need to pay $499 or $599 to buy one of the two versions and will need to be an AT&T subscriber.

While the iPhone definitely represents impressive steps forward in terms of software, user interfaces, and music and video playback, it is not without limitations in comparison to other devices. The lack of a SIM card prevents using the iPhone internationally, except with a roaming plan from AT&T. Although its battery provides an impressive eight hour talk time, lack of a replaceable battery means that users must monitor their use of the advanced features or be prepared to charge the device frequently.

On the software level, the iPhone is a closed environment and developers cannot create native applications for it as they can for Windows Mobile, RIM, Palm and Symbian. Third-party applications for the iPhone can only be run through the web browser interface. While Apple has embedded an impressive array of applications, the closed environment restricts outside innovation that could spur broader capabilities and adoption. A key gap is that the web browser is still missing support for advanced features such as Adobe Flash.

New Pricing Model for Devices?

The iPhone’s $499 and $599 price points run strongly counter to the existing model of highly subsidized cell phone pricing in the US, where users often receive their devices for free in return for two-year contracts. If successful, the iPhone may pave the way for unsubsidized pricing models that are more prevalent in other areas of the world and allow other feature-rich phones to be offered without such long break-even periods for carriers due to handset subsidies. This would bring more feature rich phones to the US market, but the question is whether other device manufacturers can match Apple’s level of innovation and develop comparable consumer demand. While Motorola’s RAZR initially created very high demand and some people paid $500 or more immediately after its release, carriers later subsidized the RAZR as the initial craze faded.

Effects on Mobile Carriers

We have already noted that the Safari browser may weaken the walled gardens within carrier portals. The iPhone connection with iTunes is another factor that will weaken carriers’ control over handsets and how subscribers use them. Though initial iPhone versions do not allow iTunes downloads over the carrier network, users will side-load content through synchronizing with their PCs. In addition to listening to songs on their iPhones, users will be able to select 30- second clips from songs to use as ring tones at a cost of $0.99 for licensing the song for ring tone purposes (total costs of $1.98 per ring tone including the initial $0.99 cost to purchase the entire song from iTunes). These costs compare to $2.99 pricing for ring tones on carrier decks. While non-iPhone users will continue to purchase ring tones from carriers, the iPhone is a serious threat to this very lucrative carrier market.

From a mobile carrier subscriber perspective, the iPhone represents a significant boon to AT&T. While AT&T remains the largest U.S. carrier in terms of subscribers, its lead on Verizon has been dwindling, and Verizon has been viewed as more innovative. AT&T is counting on the iPhone to reverse these trends, and some projections indicate that as many as 60% of iPhone customers will be poached from competitors. This could result in as much as a five-percent market share shift to AT&T by end of 2008. T-Mobile USA may be the carrier at greatest risk of defections based on its high percentage of subscribers in the 18-24 age group, who are especially attracted to the iPhone rich multimedia capabilities. An M:Metrics survey shows 12.5% of T-Mobile USA customers express a high interest in the iPhone followed by 8.1% for Sprint Nextel Corp. and 6.7% for Verizon Wireless.

Aside from market share changes, it also should be noted that AT&T was forced to make significant concessions in return for being the exclusive U.S. carrier for the iPhone. Apple refused any AT&T branding on the device, controlled which applications would be included, and determined the pricing and warranties. Based on these concessions, other device manufacturers will try to negotiate similar conditions with AT&T as well as other carriers for their latest and most innovative handsets.

Finally, because the iPhone provides both Wi-Fi and 2.5G cellular network support, it may encourage the trend toward fixed-mobile convergence. An all-in-one device like the iPhone could spur consumers to ditch their landlines if they can use it as a phone over their home Wi-Fi network with support for solutions such as UMA or the addition of a VOIP client such as Skype. This would have wide impact not only on landline service but also on cellular service. VOIP over 2.5G or 3G could change the economics of voice plans in the same way iTunes changed the economics of the music industry with its 99 cent song downloads.

Impact on the Media and Cable Industries

Media

IBB predicts the iPhone will accelerate over-the-top place-shifted content as well as over-the-top content in the living room. Winning media companies will be those that make their content available across all platforms and offer extras for the iPhone. Apple has realized that content is king, not only over the air and over the Internet, but also over mobile channels. The deal with Google to make YouTube content available on the iPhone is proof of Apple’s commitment to this strategy, whereas Verizon is only now beginning to build out the content library for Vcast. In addition, the combination of the iPhone with an upgraded Apple TV has the potential to allow for an easy way for consumers to use their content across multiple platforms.

Cable

The iPhone represents a threat to MSOs plans for a quad-play with Sprint. This threat results from the iPhone, iPod and Apple TV finally giving consumers a viable way to move content around anywhere and enjoy it any time. The pace of Apple’s product innovation may exceed that of the Sprint JV with the Cable MSOs. That said, we believe the MSOs will spring back quickly and offer comperable devices in partnership with Sprint.

Conclusion

Reviews in advance of the iPhone launch indicate the device is mostly living up to expectations for a truly innovative device pushing the bar higher for smart phone capabilities and usability. IBB expects the iPhone to remain a consumer rather than corporate device, but it has excellent potential to encourage broader roaming on the mobile web and the collapse of carrier walled gardens. Though deserving of much of its hype, the iPhone is not without limitations and competing handset manufacturers can be expected to step up their innovation and product cycles in response. The iPhone may serve as a catalyst for Fixed-Mobile Convergence, and smart media companies will make their content available across all platforms with extras for the iPhone.

Interactive Broadband Consulting Group, LLC (IBB Consulting) is a premier boutique consulting firm serving leading broadband-related product and service providers in the Cable, Mobile, Media and Technology industries. We offer the collective expertise of a team of broadband industry veterans, with world-class industry knowledge and business, technology and operational experience.

Throughout the history of the broadband industry, we have helped our clients conceive, build and grow some of the industry's most significant strategic, marketing, product, technology and operational initiatives.

To learn more, contact us at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , or visit our website at www.ibbconsulting.com.

See Also:

• Apple iPhone VS Nokia N95 - you decide!
• Apple. iPhone May Struggle Initially to Cross the Chasm
• Review - Apple iPhone: Welcome to the Mobile Applications Party! Comments on mapping and App Dev.
  

For more on the iPhone see iPhone Update - The iPhone Blog!