http://www.chicagotribune.com/techno..._0624jun24,1,7
51030.story?page=2&coll=chi-technologylocal-hed

Apple's iPhone casts big shadow on cell industry
If the device -- a melding of phone, Web browser and music and video player
-- is a hit, analysts say it will cut into market share of major
phonemakers, including Schaumburg-based Motorola


By Mike Hughlett
Tribune staff reporter

June 24, 2007

As if struggling cell phone-maker Motorola Inc. doesn't have enough to
worry about: Here comes the iPhone, heir to the mighty iPod, brainchild of
tech golden boy Steve Jobs -- and riding a tidal wave of hype to boot.

Due in U.S. stores Friday, the iPhone promises to stir up the mobile phone
business. Apple Inc.'s first phone isn't expected to take much business
from Schaumburg-based Motorola or anyone else in the short term, but it
will change the industry landscape nonetheless, analysts say.

"It will not be a financial disrupter, but it will be a psychological
disrupter, a research and development disrupter," said Roger Entner, senior
vice president of IAG Research's communications sector. "That's because
everybody will say [to competitors like Motorola], 'Why can't you do
that?'"

If Apple succeeds, it might be financial disrupter in the long term, too.
If it ultimately rolls out cheaper versions of the iPhone -- as it did with
the iPod -- it could eat into the market share of major phonemakers such as
Motorola, some analysts say.

The iPhone -- a melding of phone, Web browser and music and video player --
will hit the shelves at a heady $499 to $599, with the latter sporting
twice the storage space (8 gigabytes). The device will be available through
AT&T and Apple retail stores and Web sites.

Apple has been transformed over the past few years from a boutique
computer-maker to a consumer electronics giant, courtesy of the now
ubiquitous iPod. The company has sold 100 million of the devices, capturing
roughly 70 percent of the portable music player market.

But while Apple essentially built the MP3 player market, the mobile phone
industry is an entirely different animal.

It's dominated globally by Finland-based Nokia, which has a nearly 36
percent market share, with Motorola second at about 17 percent. In the
U.S., Motorola is still market-share king, despite the weakness in its cell
phone business over the past nine months.

Given that the U.S. is ground zero for the iPhone, Motorola could stand to
be hit harder than other phonemakers if it succeeds, analysts say. Motorola
executives interviewed last week didn't seem worried, though they wouldn't
likely let on if they were.

"Really, the iPhone benefits the entire industry," said Brian Stech,
director of global marketing for Motorola's phone division. That's because
the iPhone will bring more consumer attention to "multimedia" phones, and
Motorola has strong offerings in that space, too, he said.

Motorola and other phonemakers have been stuffing their wares with
Web-browsing and music- and video-playing capabilities. But U.S. consumers
still don't seem to choose their phones based on such features.

"I don't think many people go out and buy a phone and say, 'I'm going for
the music part of it, I'm going for the video part of it,'" said Neil
Strother, a wireless industry analyst at Jupiter Research. But if the
iPhone succeeds, such multimedia phones should really take root, spurring
more innovation, too, at established phonemakers, he said.

Audience may be limited

Apple geeks will be queuing up for the device, waiting to get their hands
on its advanced touch-screen technology and surf the Web on its big
3.5-inch screen. But the phone's steep price will initially limit its
audience to tech enthusiasts and wealthier consumers.

That's the conclusion of recent survey of online mobile phone shoppers by
IDC, a market research firm. IDC found that 10 percent of those surveyed
were interested in the iPhone at $499 and above, a number that jumped to 18
percent if the device was priced under $299.

Also, IDC found that the cost of switching wireless carriers will work
against the iPhone. Since it's available only through a calling plan at
AT&T, customers who break contracts with their current networks will have
to pony up termination fees of around $150.

Apple seems aware that the higher price will limit the phone's market --
initially at least. Jobs has said he expects to sell 10 million iPhones by
the end of 2008, which would barely give Apple 1 percent of the global cell
phone market.

Seeking 'mind share'

Initially, Apple is going after "mind share," not market share, said John
Jackson, a wireless industry analyst at the Yankee Group. But eventually,
Jackson and other analysts are looking for Apple to broaden its iPhone
offerings to include stripped down -- but cheaper -- devices.

In other words, they're looking for Apple to do what it did with the iPod,
where prices vary by device size and storage capacity. The iPod Shuffle can
be had for $79; the iPod Nano starts at $149; and an iPod with 80 gigabytes
of storage goes for $349.

"When the iPhone Nano comes out at $120, everyone is in big trouble,"
Jackson said.

The life cycle of Motorola's famous Razr phone offers a potential parallel.
It was launched in November 2004 at $499. But Motorola didn't really gain
big sales volume -- and a boost in its market share -- until the Razr's
retail price was cut to $199 and eventually $99.

Eventually that price-cutting went too far: As the Razr's price dropped to
$50 and below, it began cannibalizing sales of the Krzr, Motorola's
higher-priced follow-up to the Razr. Apple could face a similar risk if it
follows a Nano/Shuffle-type strategy with the iPhone, said Chris Hazelton,
a wireless industry analyst at IDC.

The iPhone is being marketed more as a super-iPod than as a phone. "At a
lower price, the iPhone could compete with the iPod," taking sales from the
latter, Hazelton said.

Another possible hindrance for Apple is the nature of its agreement with
AT&T, he said. AT&T gave Apple an unprecedented amount of say in how the
iPhone will be sold and what the phone will feature; Motorola and other
carriers, accustomed to obeying carrier dictates, would likely be envious.

But Apple has also given AT&T a five-year exclusive deal to sell the phone,
analysts say. Exclusive deals rarely run more than one year. Phonemakers
want to build market share by selling through multiple carriers. "AT&T gave
a lot, but so did Apple," Hazelton said.

The Yankee Group's Jackson said that AT&T's main rival networks -- Sprint
and Verizon -- may face a bigger threat from the iPhone than phonemakers
such as Motorola. That's because AT&T's approach to selling music is
different than Sprint's and Verizon's.

Sprint and Verizon sell digital music through their own stores: Tunes are
downloaded over their networks for a fee. AT&T didn't build its own store,
instead partnering with major online brands such as Napster and Yahoo to
sell music.

Now, with the iPhone, Cingular will also allow customers to directly
download songs from iTunes into their phones, a sort of end-run around a
carrier-based music service. "This is really Apple versus Sprint and
Verizon," Jackson said.

----------

mhughlett@tribune.com