Research Notes

iPhone the mobile equilevant to Paris Hilton

Everyone’s talking about the iPhone. That’s hardly surprising when Apple, with the help of its many loyal disciples, has created a level of hype never seen before in the mobile industry.

There’s no doubt Apple is a unique company. But over the years, it has developed a fan base that at times resembles a new religious movement. Many of those fans have the attitude that everything Apple creates is fantastic, and that if you can’t see this, or disagree, you’re either the devil himself or need serious psychological attention.

The fact that Apple launched a mobile phone comes as no surprise, partly because the rumor has been around for years. The company has no doubt spent much time studying how mobile phones have evolved from a simple voice device into a multifeature terminal supporting cameras, email clients, pocket PCs and, not least, music players.

Apple probably realised years ago that the mobile industry would emerge as its biggest competitor. It didn’t take Nokia any more than a year to become the world’s biggest manufacturer of digital cameras, and Kodak and many others in the camera industry know all about the consequences of mobile terminal manufacturers’ crusade into their market.

But what about the iPhone? As longtime analysts of the mobile industry, we’ve observed that Apple’s latest product has a lot in common with Paris Hilton. Both are beautiful products of their time, and both are to a large extent creatures of media hype. But looking beyond the beautiful shell, a lot of reasonable people are asking: what is actually inside Paris Hilton? Where is the substance, so to speak?

The same is being asked by professionals within the mobile industry. The iPhone looks great, but where is the substance? Is all the media attention given to it actually justified? We believe it’s healthy to take a step back from the media frenzy around the iPhone and contemplate, instead, the very considerable challenges that Apple faces in its bold move into mobile market.

In our report Mega Trends in the mobile industry, we analyse the mobile market’s development and consider the challenges that all players – not least terminal manufacturers such as Apple – are up against. Looking beyond technological evaluations of the iPhone, which recently hit shops in the US, a lot of other things need to be taken into account if we’re to properly assess Apple’s longterm prospects in the tough mobile industry.

1. Terminal supply: Years back, every terminal manufacturer had only few terminals to sell and the lifespan of each was very long – sometimes 3 years. Often, the manufacturer had only had five to eight competitors in the same category. Today, the terminal market is very different. The number of terminals has exploded and competition has grown significantly. We’ve moved from a world where few terminals competed for customers to one where terminals target increasingly narrow segments. In this universe, a growing number of customers also have more than one terminal, which means more and more people are buying terminals from a usage point of view? That means iPhone isn’t one of 10 terminals out there, but one of 300. Moreover, with its design, form factor, price and user interface, the iPhone is targeted at a relatively narrow customer segment.

2. Distribution strategy: Music players go through a process where the price of the item increases as the product moves along the value chain from manufacturer to consumer. Simply put, each part of the value chain makes money in moving the terminal, and the end user is the one who pays the highest price. In the mobile world, things are very different. Here the terminal’s price decreases as it goes along the value chain, and the retailer selling the terminal doesn’t actually make money on the terminal itself. It does so by winning a client relationship for the mobile operator that lasts 6, 12, 18 or 24 months. In some markets, operators have such a big influence on which terminals receive subsidies that with aggressive marketing and high subsidies they can be of enormous help to a terminal manufacturer. In the mobile world, you can find many examples of operators doing exclusive deals with terminal manufacturers. The operator signs up to a large amount of terminals but often ends up not selling the volumes it expected. In a number of cases, this has meant that the product has been ‘tattooed’ to such a degree that the interest of other operators in the product is significantly reduced. For a player like Apple, close cooperation with AT&T in the US could end up with those two companies becoming synonymous to the extent that the other operators will show less interest in Apple and its products in the future.

3. Segmentation: What’s the guarantee that people interested in the idea of having an iPod with a mobile phone will have consumption patterns that would make them interesting to mobile operators? The fact that it’s impossible to send a MMS from an iPhone is no secret; and anyone who’s held an iPhone knows how difficult it is to send an SMS. We’d like to ask operators betting on the iPhone: what kind of ARPU do you think people attracted to the iPhone will deliver? What if 50% to 60% of your customers’ ARPU is less than the minimum consumption? Where is the business case? And which alternative segments/terminals will the operator then spend its resources on? However beautiful the iPhone is, there is no guarantee operators will discover in it a healthy link between SACs and lifetime ARPU.

4. Reverse logistics: Marketing and selling products like mobile terminals is exciting. However, the moment of truth comes on the day the terminal breaks, and the customer has to go to the shop carrying a defective terminal in his hands. Many iPod users have experienced having to live without their device for weeks, and it’s no secret that Apple has a reputation for keeping its customers waiting weeks, or even months, to get their defective iPod repaired. We wonder how easily Apple will be able to handle the reverse logistics essential in the mobile market. Can they get the right processes in place, and how would their customers react if they needed to wait weeks to get their mobile terminals repaired, or if Apple retracts its guarantee responsibilities? Believe us, people may be able to live a few weeks without their iPods, but without their mobiles it can be like hell on earth, and you can expect customers to get very irate. We also believe a customer with a defective iPhone could be a lot noisier than the average mobile customer.

5. Market share: Apple is moving into the mobile market with trumpets blowing. It says its ambition is to sell 10 million terminals in the first year, which would amount to a global market share of 1%. To a lot of people this doesn’t sound very ambitious. But it has to be seen in the context of: the number of terminals in the iPhone’s price segment; the number of devices with the same form factor; the number of markets the terminal is available in; and the number of operators offering the device. Considering the number of Apple fans in the world, 10 million is not an unrealistic goal. But how satisfied will its customers be, or the operators that it is cooperating with? And what about the next 10 million terminals – how easy will it be to sell those in a market where the likes of Nokia launch 30 to 50 new terminals each year.

6. Competitors’ response: It’s obvious that rivals in the mobile market will target Apple aggressively. When they launch new products, they will probably benchmark them against the iPhone. The big question, however, is how the press will react as the number of products in this category explodes. Could Apple face massive negative press if the iPhone begins to stand out as a lowtech product compared with the others? Could it be seen as failing to evolve adequately in a world where the competition is throwing lots of new products out into the market? We strongly believe Apple is not as yet a serious competitor to the others. However, it is perhaps the gate opener for a new category of products. Its entry also enables terminal manufacturers to charge more for their products than they are doing today. In the same way that Paris Hilton faces competition for the spotlight, Apple faces a fierce struggle with its rivals for attention.

7. Software: The difficulty, if not impossibility, of installing thirdparty software on an iPhone is hardly a secret. We don’t think that’s a huge problem because it can easily be remedied by Apple changing its approach. The problem occurs when application developers evaluate which platforms to focus their attention on. Are there enough iPhones on the market, and will there be a business case for application developers to create applications for such a niche platform? We don’t doubt that the iPhone will quickly develop into a music player with a builtin phone and browser capability. But is this what consumers want? And will the market segment buying iPhones want access to thirdparty applications and the freedom to install them? It’s an issue that Apple’s Mac device has already confronted.

8. The media: The media has played a major role in launching the iPhone. The number of articles and news stories about the device has contributed to the enormous hype. The media likes to be invited for a christening, a confirmation or a wedding. But remember that the same media absolutely loves divorce stories, and would relish an iPhone funeral even more. We’re sure Apple will get more than its fair share of media coverage if problems start pilling up for the company – a scenario that Paris Hilton herself is all too familiar with.

9. Joy and disappointment: No one doubts that Apple has plenty of loyal customers ready to preach about iPhone’s qualities. They’ll use any opportunity to spread the word that the iPhone is the best device a mobile user could wish for. Today, a large number of blogs already exists where fans wax lyrical about the terminal, hoping to keep the legend alive. This near-religious support is of course very visible, but unhappy customers could create just as much, if not more, noise. In fact, the iPhone could very easily end up exactly like Paris Hilton – either loved or hated.

10. The historical facts: Being a serious player in the mobile industry is demanding. The number of dead players who once had a dream to dominate the industry is long – look at Phillips, Siemens, Dancall, Sendo and BenQ. It’s not just a tricky industry to crack; it is monumentally difficult. Just look at the resources Microsoft has put in and the number of partners they have helping them – and then look at its global market share. It has taken Microsoft four to five years to reach the market share level that Apple hopes to reach in the first year.

To be fair, it’s hard to know how Apple’s brave venture into the mobile industry will turn out. However, as our Mega Trends in the mobile industry also shows, the industry is set to undergo big changes in the coming years. The trouble is, Apple’s strategy appears to resemble one that many players believed in five or six years ago. In fact, it isn’t much different from Microsoft’s when it first entered the market. The question for Apple is whether its beautiful “Paris Hilton” phone can help give it the market share it dreams of, and whether it can keep up the momentum of its glitzy launch in a world where 300 new terminals are launched every year. At Strand Consult, we believe Apple faces a much bigger challenge than it is prepared to let on, and that very soon it will run into fierce resistance that will be all too visible.

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