3G iPhone: Few surprises, but now it gets really interesting

After months of speculation, Apple has finally announced a 3G version of its iPhone device. Supporting HSDPA and GPS, it will be available in 22 countries from 11 July and in a total of 70 by the end of this year. The 8GB version will sell for $199, with the 16GB version costing $299. So what's new? And what does it mean to the industry's key players?

Most important to users are the lower device prices, which we flagged up as a barrier to uptake in the first version. Furthermore, AT&T has since confirmed that the revenue-sharing model with Apple has now been revised and the device can be subsidized. This could help penetration even more.

However, AT&T has revised its tariff structure with unlimited data, and a comparison between the old and new tariffs is illuminating. The smallest available voice package plus unlimited data now costs $70 per month. This takes the total cost of ownership for the cheapest device (8GB) over the cheapest two-year contract to $1,879. This compares to $1,939 for the cheapest tariff and device (albeit 4GB) at launch in June last year – a total price reduction of just 3 percent.

HSPA availability will also prove a massive user benefit, as evidenced by the emphasis placed on it during Apple CEO Steve Jobs' launch presentation. However, how it will make existing iPhone users feel to have paid more for a slower device remains to be seen, especially as AT&T customers, at least, will need to sign a new two-year contract. Can they break the existing one?

Will they get a discount on the upgrade or a rebate, as occurred with the price drop six months ago? Unfortunately, such details were missing from the razzmatazz of the announcement.

A new breed of users was also highlighted at the launch – enterprises. Support of Exchange and Cisco's VPN was touted as a way to encourage enterprises to take the iPhone. However, we remain far from convinced that it will be a significant player in this space. We imagine that using iTunes to synchronize enterprise applications would make most IT departments quake with fear! This is in comparison to the wide portfolio of business-optimized devices and managed services that operators can provide. Furthermore, from our conversations with enterprises it is clear that they feel that even current devices are not really suitable for enterprise users. Such a consumer-focused offering is unlikely to gain major traction.

For Apple, the PR machine has gone into overdrive and more headline-grabbing media coverage can be expected for at least the next month. However, it is easy to be cynical. It is important to note that the announcement goes a long way to addressing some of the shortcomings of the original device: 3G, cost, geographic availability and third-party applications. HSPA will certainly help the user experience, as will the promised expansion of third-party applications.

Nonetheless, from a corporate perspective, the drop in price and dramatic expansion of the (legal) geographic availability of the device will provide a major boost to volumes, and the ten million target by the end of this year looks achievable. The geographic expansion is also the only way to ease the revenue leakage caused by the grey market that sprung up around the first iPhone.

For operators with the right to sell the iPhone, they at least get to share in the hype and reap the kudos associated with the device – most notably the operators claiming the largest geographic spread, such as Vodafone and America Movil.

However, as we have seen with the first version of the iPhone, there is also a halo effect as user perceptions of wireless data services are enhanced by the iPhone PR juggernaut. Therefore, those not winning a contract for the iPhone should not panic. Past experience suggests that although the iPhone will be center of attention, the main beneficiary is wireless data. This time around the lower device pricing means that the iPhone is more attractive and attainable, but there will still be plenty of users to attract, particularly if the price plans do turn out to be expensive.

Finally, we come to other device vendors. Should they be worried? Apple claims to have shipped six million iPhones since its initial launch at the end of June last year – less than 1 percent of total global handset shipments in 2007. Admittedly Apple is not targeting the entire device market, so their share of the high segment will be more, but it is important to put Apple's marketing presence in context with its size relative to Nokia et al. Furthermore, a halo effect surrounding the first device helped vendors to seize customers looking for iPhone-like capabilities but on a different network or for a smaller budget. There is likely to be a somewhat similar effect this time around.

However, this time Apple is competing in more markets at lower price points (again subject to price plans). Therefore, we feel that this time the potential for disruption is greater than before.

Fortunately for the other vendors, the new iPhone, much like the first, is doing nothing that other vendors haven't done already. However, Apple's marketing strength has allowed it to consistently punch above its market share weight. Vendors should not be complacent and must continue to focus on the user experience to regain the marketing initiative from the iPhone, or risk losing even more ground in the high-end device marketing stakes.

Fundamentally, the “3G iPhone” is little different from its forebear – it offers nothing that many other devices cannot offer, but, boy, is it better at selling itself! However, now that it is to be available at a lower cost in so many more countries, the iPhone is playing on a far more level playing field than it has to date. Therefore, users, operators and rival vendors will really start to see what it is capable of delivering from a performance, user experience and revenue generating perspective.

Courtesy: Steven Hartley, Senior Analyst, Ovum