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Apple iPhone: Why it could fail

Concerns over compatibility and competition

Apple has finally announced its long-rumoured iPhone. True to the Apple "i" tradition, the iPhone is filled with features and touts an innovative interface more akin to a kiosk or video game than a telephone. By making music, videos and web browsing available to its users, Apple hopes to set the standard in the entertainment/phone, all-in-one device market, much as it did in the music player market.

Can it succeed? Frankly, and contrary to the reactions of Apple fans and the stock market, I am pretty sceptical. I don’t think this device will meet the fantastic predictions I have been reading. For starters, while Apple basically established the market for portable music players, the phone market is already established, with a number of major brands. Can Apple remake the phone market in its image? Success is far from guaranteed.

Why am I not impressed?

First, making an entertainment device is much different from making a phone. Over the years, plenty of phones offering lots of nice ‘toys’ for users have disappointed. Ultimately, they were not very good phones. And the bottom line is that you have to build a good phone first, and then add features on top of that. Otherwise, don’t bother. You can ask Nokia, Motorola, RIM and others about this. All have had flops with what on paper were devices that looked marvellous. Another difference between phones and entertainment devices is that phones must be much more rugged and less prone to breakage while being subjected to all kinds of abuse. Can the iPhone take such abuse without a high failure rate? We’ll have to see.

Second, the price is steep. Yes, I understand that the astronomical list prices of $500 and $600 are simply initial inflations meant for the early adopters willing to pay almost anything (and to limit volumes while Apple ramps up to catch up to demand). But even if the prices were cut in half, that is hefty for a phone device these days, even one with loads of features. How many consumers are willing to pay that much, plus $40 to $80 per month for a plan that includes data services (which will be necessary to access many of the phone’s features).

Third, who is the target for this device? At $300 to $400 (assuming the price falls rapidly), an iPhone clearly is not a casual buy. In the past, most high-end phones have been sold to business users willing to pay for a fancy phone with the capabilities they wanted. But these users almost universally demand connectivity to corporate systems, especially through push email and Outlook integration. How well the iPhone does at integrating to these systems remains to be tested. And although I would bet the iPhone will integrate and sync well with the Mac, very few businesses run on Macs. If the iPhone doesn’t do a good job with PCs, Apple has a big problem.

Fourth, the device runs the Mac OS. This is a major constraint, since few third-party application vendors (e.g., Good Technologies for a push e-mail client) run on the Mac. There are a lot of unanswered questions. Will these vendors port to a proprietary operating system when they have the option of running on Symbian with far more devices, or Palm OS or Windows Mobile? And will the iPhone support J2ME-based applications, of which there are a growing number? Apple can’t afford to build a dead-end system with no ability for users to enhance the device with third-party applications. But Apple will likely have a tough time convincing application vendors to build specialised clients for the iPhone until the volumes are there, and the volumes could be limited by the lack of third-party applications - a Catch 22.

Finally, the device is available (initially at least) only through Cingular. While this is a good gamble for Cingular, which hopes the device will be popular enough to cause some consumers to change carriers, such consumers are unlikely to do so immediately and risk early termination fees from their current carriers. Of course, current Cingular customers wouldn’t have to pay a penalty, but they would have to buy the phone, and probably add a data plan for an additional $20 to $50 per month. That’s a good upsell for Cingular, but will customers really go for that?

So, will the iPhone succeed? At some level, yes, given the cachet that the Apple brand carries and the company’s base of loyal fans. But Apple has a lot of questions to answer. If the iPhone is not a good phone first and an entertainment device second (even with its innovative user interface), the market will pass it by. Certainly the other major players (e.g., Nokia, Motorola, Samsung, LG) are not standing still. And they will offer stiff competition.

My advice: unless you are a die-hard Apple fan, wait a few months to see how this all shakes out, especially if you want to employ the device as an adjunct to your business. Find out how good a phone it really is and how well it connects to the world you live and work in before spending the high price for what could ultimately become an orphaned, stand-alone music player. An iPod would be a better choice for that, and much cheaper.

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