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Olga Kharif
BusinessWeek
Jan 8, 2007
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Even before the computer maker's music-playing phone hits stores, it's influencing handset design, distribution, and pricing.
In the runup to Apple Computer's Macworld Conference & Expo, speculation surrounding an expected iTunes phone has gone into overdrive. Debate has centered on the usual questions, including when it will be unveiled, what features it will boast, and what wireless carriers will provide the network coverage.
What is clear is that Apple CEO Steve Jobs intends to introduce a combined wireless phone and MP3 music player sometime in 2007—even as early as this week's conference. But contrary to recent speculation, Apple (AAPL) doesn't plan to enter the market by reselling a wireless carrier's service under its own brand, BusinessWeek.com has learned.
More likely, it will unveil partnerships through several wireless carriers, or the company will sell phones through its retail stores and they will be "unlocked," meaning the device can work on any of several competing operator networks.
Whatever form the final product takes, a more important issue is what impact Apple's entry will have on the wireless industry. Early signs suggest the computer maker will have a big effect on how cell phones are designed and distributed, shaking up handset makers and the network operators that generate upward of $100 billion a year in service sales.
From Nowhere to the Big Leagues?
Analysts at UBS (UBS) estimate that Apple could sell 5 million phones in 2007, grabbing a 0.5% global handset market share. Not bad for an entrant starting from scratch.
According to a recent Solutions Research Group survey of 2,600 U.S. residents, 16% of respondents over 12 years of age say an iPod phone is "a great idea." Given that some 20 million Americans already own Apple products, the company could in short order join the ranks of the biggest North American mobile-phone makers, a list that includes Motorola (MOT), Nokia (NOK), Samsung, and LG, says Kaan Yigit, study director at Solutions Research Group. "If they have a decent product out there, it could vault Apple from nowhere to the top five very, very quickly," he says.
Carriers such as AT&T's (T) Cingular and Verizon Wireless, owned by Verizon (VZ) and Vodafone (VOD), have cause for concern, too. Efforts by the U.S. mobile-phone industry to get subscribers to listen to music on cell phones haven't exactly taken off.
As of November, only 3% of U.S. cell-phone users listened to music on their phones, up from 2% in April, according to surveys of 16,000 users by consultancy NPD. That accounts for only a sliver of the estimated 32.5% of phones being sold that are capable of playing and downloading music files.
And it's not like mobile music downloads are going great guns. Most carriers won't share download data, though Sprint Nextel (S), a pioneer in wireless music, says users have downloaded 10 million songs since the service was launched one-and-a-half years ago.
The fact is, many music phones and services aren't yet easy to use or well integrated with PC-based applications, analysts say. "Consumers aren't satisfied," says Michael Gartenberg, an analyst with consultancy JupiterResearch. "Apple will certainly cause the industry to wake up."
Music Prices Going Down
Indeed, some manufacturers and carriers already have, cutting prices on mobile songs and the phones that play them. After rebates, LG's Fusic is available for $100. That's the right mass-market price, given that as many as 80% of the phones sold in North America go for less than $99, figures Hugues De La Vergne, an analyst at consultancy Gartner.
By contrast, Apple's consumer-electronics products traditionally sell for a premium. A 30-gigabyte iPod costs $249, and some analysts believe an iPhone could retail for around $400.
Music prices are also heading lower. Sprint, which normally charges $2.50 per over-the-air song download, has been running a special promotion since late last year that lets users buy three songs for the price of two, or about $1.67 per download. While that's still well above the 99 cents charged by Apple's iTunes, Sprint's price and other mobile download prices could fall further still.
"We will continue to have that conversation [about prices]," says Alana Muller, director of product marketing at Sprint. "We already compete with Apple in the digital music space."
So do other wireless providers,which is why several are overhauling their downloading services. They aim "to reengineer their portals to become like iTunes on steroids," says Andrew Cole, president of consultancy CSMG. Planned capabilities include letting users use a carrier's music service to share and download songs onto the PC, cell phone, the TV, or the set-top box.
Designs on Apple's Look
Apple's phone could also set standards from a design perspective. In recent months, the U.S. Patent & Trademark Office has granted Apple numerous patents, including one on an "ear phone" and another on different ways to transmit information from a phone to a separate display. Another patent is for a technology called "multiple personas for mobile devices," which would let users differentiate between business and social contacts and applications.
The gadget is also expected to run on two batteries, one used exclusively for making phone calls, the other for entertainment applications such as video (see BusinessWeek.com, 12/8/06, "A Wish List for the iPhone").
The device's greatest design leap will probably come in the form of social networking applications, an easy-to-use display, and close integration with iTunes. Apple isn't commenting.
Living Up to the Hype
Already some handsets are taking on a distinctly Apple feel. LG's Chocolate and Fusic and Samsung's Blackjack all resemble Apple products in key ways (see BusinessWeek.com, 9/5/06, "Easy Listening on LG's Chocolate").
Pantech has hired world-renowned designers like Lunar Design and fuseproject to create handsets that don't look like traditional cell phones (see BusinessWeek.com, 10/25/06, "Pantech's North American Offensive,").
With the rumor mill in high gear and the industry girding its loins, all Apple has to do is live up to the hype. Apple's first mobile endeavor, the Rokr music phone co-developed with Motorola and made available through Cingular's network in 2005, has failed to take off. Analysts blame design limitations such as the inability to carry more than 100 songs.
Taking on the wireless industry will prove a tall order, even for Apple. But before any iPod phone hits the shelves, the assault is well under way.
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