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Analysis: iPhone faces uncertain market

Price tag too big; market too small

Apple's iPhone could be a hit in the high-end phone market and work wonders for partner Cingular's image, but the device that stunned Macworld Expo attendees is likely to have a narrow market.

The device is really more a handheld computer than a phone, running Apple's Mac OS X and featuring Wi-Fi and 4GB or 8GB of storage. It's priced in the stratosphere for a mobile phone, starting at $499 for the 4GB version with a required two-year contract with Cingular, which is owned by AT&T. It's scheduled to ship in the US in June, Europe later this year and Asia next year. Along with voice and email, the device functions as an iPod.

Mobile analysts have said Apple is way ahead of competitors in putting so much in one slim device, but some have questioned how big an impact it may have.

"I don't think any of the existing phone companies could have come up with this," said InStat analyst David Chamberlain. "I think it will set the standard for a lot of consumer electronics for a long time." However, the phone won't do that by suddenly showing up in everyone's pocket, he said.

According to an InStat survey taken in the US in July, out of 1,800 consumers surveyed, only 21 had spent more than $400 on a mobile phone, he said. The picture is different in Europe, where consumers are used to spending much more on handhelds, Ovum analyst Roger Entner pointed out.

Analysts agree that the market for high-end smartphones is relatively small, and Apple's price is higher than average even in those rarefied circles. What's more, enterprises aren't likely to foot the cost of the entertainment-oriented iPhones.

In his Macworld keynote address, Apple CEO Steve Jobs said Apple is aiming for just 1 percent of the mobile phone market in 2008 – about 10 million devices. But even that goal is too high, Sanford C Bernstein & Co analyst AM Sacconaghi wrote in a research note. To do that, Apple will need widespread global distribution, and its brand is not as strong in most countries as in the US, Sacconaghi wrote. The price will have to come down, too, and carriers may not want to chip in much of a subsidy because the iPhone has Wi-Fi and uses iTunes, a competitor to mobile music stores.

However, analyst Seamus McAteer of M:Metrics thinks Apple has room to cut prices. By the end of the year, he expects to see a new iPhone that supports 3G (third-generation) mobile data – a notable omission from the first product – and a subsequent price cut on the existing phone to as little as $300.

The iPhone's impact may outweigh its sales volume, though. Roger Entner compared it to the Ford GT, an expensive, limited-edition sports car designed to boost the image of the auto giant.

The big boost to Cingular could come from being known as the carrier for cool phones, though to make that happen the operator will have to introduce other cool handsets at more reasonable prices, InStat's Chamberlain said.

Despite the uncertainties, Apple may succeed in changing the face of cell phones.

"Apple's entry does effectively reposition the mobile phone as a first-tier citizen in the computing world," McAteer said.


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