Apple faces uphill battle with iPhone

Apple faces uphill battle with iPhone
By Troy Wolverton
Mercury News

Apple's iPhone has been hailed as a revolutionary product for its touch-screen interface, large screen and multiple features. But revolutions tend to be messy, and so it could be with Apple, which faces a whole host of obstacles, not least of which are its expensive price and disputed name.
``My perspective since I first learned about it is, `Wow, this is really cool.' But `really cool' doesn't mean success right away,'' said Neil Strother, an analyst who covers the mobile phone business for NPD Group, a research firm.
How the iPhone fares could go a long way toward determining Apple's future. Not only has the company spent more than two years developing the product, but the phone is one of the key parts of the company's broader effort to transform itself into a consumer electronics company.
Many analysts and investors -- who sent Apple's stock soaring after the iPhone's unveiling -- have seen it as one of the important potential growth areas for the company, particularly as sales of Apple's popular iPod music players inevitably slow.
Apple has predicted a big future for the device. At Macworld, Jobs called it the best cell phone in the world and predicted the company will sell 10 million in 2008, equivalent to about 1 percent of the total global cell phone market.
But predicting sales and actually making those targets are two different things. Apple didn't sell 10 million or more iPods in a year until 2005, four years after its introduction. Meanwhile, in the first 11 months of last year U.S. consumers bought a total of just 3.6 million smartphones, devices like the iPhone that typically allow users to surf the Internet and check their work email in addition to placing voice calls.
The biggest challenge could be the iPhone's price. At $500 for the low-end model and $600 for the premium one, the device will be more expensive than most phones on the market, at least in the United States.
In the first 11 months of last year, consumers paid an average of about $63 for a new cell phone, according to survey data from NPD. They paid more for smartphones, but the average price for those phones, which will likely be the iPhone's main competition, was still only $200, according to NPD.
Phone manufacturer often release potentially hit products at high prices before cutting them to broaden their appeal. And Apple has certainly been adept at reducing prices with its iPods. But its ability to take similar tacks with the iPhone could be limited.
One big problem the company could face is with component prices, analysts say. The 3.5-inch screen on the iPhone sets it apart from the competition, but it likely won't come cheap. And the device likely will use a lot of unique parts whose price may not decline particularly quickly, analysts say.
And Apple might not be able to drop the price too far before iPhone sales start affecting sales of its hard drive-based iPods, the top model of which sells for $350, analysts say.
``My understanding is they don't want really to cannibalize iPod sales,'' said Randy Giusto, an analyst with research firm IDC.
But price isn't the only issue. Perhaps just as important, Apple is entering a fiercely competitive and difficult market that it has no experience in. Success could take time and repeated efforts and could be subject to substantial delays. Palm, which has been competing in the smartphone market for years, recently saw its revenue crash because of troubles in rolling out its newest product in Europe.
Another issue could be the strict quality controls that carriers place on mobile phone manufacturers. Reaching the level of quality demanded by carriers could prove tricky for Apple, whose original iPod and iPod nano products were plagued by complaints about issues ranging from batteries or hard drives that died soon after warranties expired to easily scratched screens.
``This is as innovative as the iPod was. It's as splashy as the iPod was. But if it's the same quality, it will be an unmitigated disaster,'' said Edward Snyder, an analyst with Charter Equity Research.
And then there's Apple's name problem. On Wednesday, Cisco sued Apple over the iPhone name, charging the company with trademark infringement. Suits like these typically settle out of court, but there's the chance -- if Apple allows the case to go too far -- that a judge could bar the company from using the iPhone moniker.
Still, many investors and analysts have high hopes. They see a hit product in the hands of a remarkablely adept and market savvy company.
``They've made this quantum leap ... beyond what anyone expected. It's that quauntum leap that has everyone excited,'' said Scott Rothbort, president of LakeView Asset Management, an investment adviser in Millburn, N.J., that owns Apple shares. ``There will be people lined up for this thing when hits shelves.''
Contact Troy Wolverton at (408) 920-5021 or twolverton@mercurynews.com