Handicapping the iPhone
January 9th, 2007

Tomi T. Ahonen wrote two posts today about the Apple iPhone, both which were full of insight and advice for Apple. In the first post which was an open letter to Apple, Ahonen defines SMS Text Messaging as the Killer Application for mobile devices – even though that’s not how they are sold.

“….Make sure your iPhone is at least on par with top text messaging phones out there today. You have six more months to accomplish that. But please, Apple do it.

If you don’t , I am afraid you will fail. Voice is NOT the killer app for current mobile phones. Neither is music; neither is the camera feature; neither is video. The killer app is messaging, specifically SMS text messaging (and very rapidly also mobile IM ie Instant Messaging, and other collaboration such as mobile blogging). Understand that those phones that are not good at messaging are going to be returned to the store by dissatisfied customers, and the mobile operators will be forced to substitute alternate phones. You don’t want phones returned because of poor texting, as Nokia learned with its unconventional keypad designs in 2003 – and rapidly corrected this colossal error.”

In the latest post – Handicapping the race: iPhone markets and rivals, Ahonen weighs in on the iPhone vs. it’s competitors and while he likes many aspects of the iPhone, he feels it can not reach the lofty sales goals set for it by Apple:

:…To reach its target, Apple would have to convince every Cingular smartphone user (probably many very loyal to their Motorolas, Nokias, SonyEricssons etc) to switch to the iPhone. This means all Blackberry users in its network with corporate e-mail clients therefore as well; and then capture AS MANY new customers by stealing them from the rival networks. Cannot be done. Is totally beyond all reason. If the GSM standard based smartphone market in America is about 4.3 million, Apple cannot capture all of that. Not in one year, not even with a miracle phone. And the iPhone is far from a miracle phone.”

While I read a lot of hype and excitement about the iPhone today, Tomi T Ahonen’s reviews were very realistic, down to earth, from someone who is an expert in 3G networks, including social networks. Ahonen does think Apple can succeed with selling the iPhone as a “music phone”, however.

“…But all is not lost for Apple in America. While the analysts talk about the smartphone market, I would rather look at the music phone market. That is much larger. It includes many cheaper music phones, but for many considering a mid-range music phone, when the iPhone becomes available, it will well be a worthwhile alternative, even if on the high end of what that customer would be willing to pay.

How big? Gartner tells us they sold 309 million music phones in 2006 (vs about 40-42 million iPods. Can you guess the theme of my upcoming iPod vs music phone review next week when Apple releases official numbers for the Christmas quarter of iPod sales?). Music phone sales rocketed in 2006, more than doubling. It is fair to assume, even at very conservative rates, that music phone sales will reach 400 million units in 2007. This of course includes most of the 120 million smart phones mentioned above.

Now we are talking about a valid market opportunity for Apple. 10 million means only 2.5%, and that is quite do-able.”

Ahonen thinks the real reason for the iPhone is the erosion of the iPod as the dominant music player in the portable device market.

“….I would say 10 million iPhones – with prices in the 499 and 599 dollar range, and with only a GSM model and launching with only Cingular in America first – this is a tall order, but it can be done. I would suggest history will find that this is a much bigger drain on Apple’s marketing and sales support resources than they can have imagined, but the writing is honestly on the wall. The reign of the iPod came to an end last year, and this is in reality a “defensive move” by Apple to remain relevant in the MP3 player market. They have to do it. In reality they should have done it a year ago.

With the launch and aim of 10 million sales comes a certain corporate-wide commitment by Apple to make it happen

I would say they will do it. But it will come at a serious cost to profitability. Note that this expands Apple’s portfolio and helps a PC maker move into the mobile Internet – the future, so this is also a clever move by Macintosh, to gain a foothold into the mobile computer market of the next decade.”

So, if I were an analyst, I’d go over both Ahonen articles on the iPhone with a fine tooth comb.


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