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Analysis: What exactly is the iPhone?

'A lousy phone but a breathtaking media device'

It's more than a week after Steve Jobs' blockbuster iPhone announcement, and longtime industry observers and analysts are still debating the iPhone's impact. The most important issue analysts are wrestling with is: just what is an iPhone, anyway?

Before commenting on its potential success, four analysts I spoke with first struggled to define exactly what an iPhone is.

"If you take the telephone out of the equation, the effect of iPhone will be profound," noted David Chamberlain, principal analyst for wireless issues at market research firm In-Stat. That is to say, Chamberlain said, the iPhone isn't much of a phone but it is an awesome... something else.

In an industry accustomed to slotting products into narrow categories and measuring success within those categories, the unclassifiable (so far) nature of the iPhone has created a Jobsian, Alice in Wonderland-like atmosphere where t's are being dotted and i's are being crossed.

Herewith, with the help of some highly regarded industry analysts, we'll try to throw a lasso around this galloping pony and understand just what the iPhone is and what its prospects are.

What is the iPhone, anyway?

Trying to figure out what the iPhone is can be a matter of addition by subtraction. One thing the analysts agree about is that it won't be much of a mobile phone, let alone a smartphone.

"It does seem under-horsepowered as a phone," said Neil Strother, research director for wireless devices at NPD. "It doesn't have (3G), which I don't get. How can they expect people to spend that much money ($500 for the 4GB version) and it doesn't even have 3G?"

Among the reasons the iPhone isn't a smartphone like the Motorola Q or the Treo line is that it doesn't support corporate email or viewing attachments in Word or other formats commonly used in the enterprise sector. Nor can it use third-party applications like smartphones, many plain-old, not-so-smart phones and even old-fashioned PDAs. Nor is it a plain iPod since media players don't have even mediocre voice capabilities.

"It's been billed as less a smartphone than a super-smart iPod with phone functionality," noted Miro Kazakoff, a senior associate for wireless technology at market research firm Compete Inc. "It comes from a place of being more of an entertainment device with phone functionality added on."

Added Ken Dulaney at Gartner: "It's either a weak phone or a hot device in the network media category."

Another thing that the iPhone isn't is just another mobile device. "The interface is absolutely breathtaking," In-Stat's Chamberlain said.

Got it. The iPhone is a lousy phone but a breathtaking media device that acts like a phone but isn't.

What does it compete against?

Let's move to the next level down in the rabbit hole. The fact that the iPhone isn't anything like a smartphone doesn't mean it won't compete against smartphones. And against a lot of other things as well.

"Yes, iPhone takes sales away from the (BlackBerry) Pearl," Kazakoff said. "Devices like the Pearl or (Motorola) Q also would seem to be primary competitors for iPhone." He said that because people will tend to only buy one phone-like device and, until the iPhone is released, those are the current high-tech hotties.

However, as is the case with most Apple-related things, Kazakoff hastened to add: "But it's not really that simple."

In particular, the iPhone also helps Apple and its iTunes online media store compete against other online media vendors such as (surprise!) Microsoft and its Zune device and Zune Marketplace.

"If you buy an iPhone and you are locked into iTunes, chances are your next phone will be an iPhone," Kazakoff said. "It encourages people to lock into carriers and services."

Then, there's what, in analyst-speak could be called "the Cingular play". While Cingular won't give particulars, the operator is clearly spending a lot of money and energy on iPhone and is reasonably upfront about one of its main reasons why.

"If a customer of another operator wants the device, they can buy it and become a Cingular subscriber," a Cingular executive told a press conference at the Consumer Electronics Show last week. "We fully expect this to grow our business."

So, besides Apple competing against phone vendors, the iPhone also could change the competitive landscape among mobile operators.

"Verizon owned the we-have-the-best-network position in the marketplace," In-Stat's Chamberlain said. "Now, everything is switched around and suddenly it's, 'network-shmetwork - if you want the hottest phone in the world, you have to go to Cingular. It pulls the rug out from under Verizon."

Okay then, let's recap. The iPhone isn't a smartphone but it is competing against the hot new generation of smartphones. It also is a tool to help grow Apple's media distribution business against competitors such as Microsoft. And it also is fomenting - Cingular hopes - a migration of customers from its competitors.

Are you starting to get the idea that the iPhone is much more than just a dandy device?

So who will buy it?

Few would disagree that Apple fanatics will stand in line for eternity in the bottom ring of hell to pay $500 for an iPhone. But who will buy it after those fanatics have their devices eagerly in hand?

"You can get a (Motorola) Q for 99 bucks and (consumers) may be willing to spend another 30 or 40 bucks for those (smartphone) capabilities," NPD's Strother said. "But if you jump up to $500, you have to call the wife, then get a loan. That's just the reality of the American consumer right now."

Put differently, some analysts doubted that, after the Apple True Believers get their devices, Apple and AT&T/Cingular will sell a whole lot more. And the $500 price ($600 for the 8GB version) will only be the first expense.

"People using other carriers will either have to wait until their contract ends or tack $200 on to the price of the iPhone (for breaking their contract)". Kazakoff said. "Very few consumers will do that."

So that means Steve Jobs' predictions that 10 million iPhones will be sold by the end of 2008 will be proven wrong?

"Will it sell 10 million?" asked Gartner's Dulaney. "As a media device, maybe. As a phone, it may be difficult." There we go again - trying to classify the thing.

"On a global scale, they have a shot at 10 million," Strother said. "I think it's attainable but in the US alone? No way."

Let's get this straight, then. Apple has a reasonable shot at making their stated goal of selling 10 million iPhones by the end of 2008, except that the thing is too expensive for most mainstream users. Also, Apple won't sell many iPhones as phones but they could sell a tonne of devices as a media player that acts like a phone. Finally, those who aren't willing to pay the price for the iPhone will be more attracted to smartphones, even though the iPhone doesn't compete against such devices.

Which brings to mind this quote from Alice in Wonderland: "I quite agree with you," said the Duchess; "and the moral of that is - 'Be what you would seem to be' - or if you'd like it put more simply - 'Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.'"

Where is all this going?

One thing the analysts do agree about is that, whether the iPhone is a media device, a regular phone, a smartphone or something else entirely, whether it will sell by the boatload and won't sell at all, its very design will change the nature of devices we'll use in the future.

"It could create a new category devices," Gartner's Dulaney said. "Does it raise the bar for everybody? Yes. It's a good thing for the industry because it challenges vendors to really think about ease of use."

"It has the potential to significantly increase stratification in the market," Compete's Kazakoff said. "People will increasingly look for devices that focus on one or two functionalities so, hopefully, we'll see devices that are exceptionally good at the (few) functions they're focused on."

And, of course, the analysts think that it will lead to heightened competition, even if that competition comes from copycats. That's because neither competing phone vendors nor other US mobile carriers will stand still in the face of the threat from the iPhone, uh... whatever it is.

"Right now, there are 10,000 engineers in Asia working on new things because [of the iPhone]," Chamberlain said.


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