Celebrated iPhone: successful gamble could change industry

[20 June 2007]

By Troy Wolverton

San Jose Mercury News (MCT)

SAN JOSE, Calif. - Even for Apple, which has thrived on taking risks, the iPhone represents an audacious bet - possibly its biggest ever.

When the new smart phone hits store shelves June 29, the company will have a lot more on the line than the success or failure of one product.

With a hit, Apple will revolutionize the mobile phone industry. It will cement its reputation for creating gadgets whose chic designs and ease of use are so compelling that consumers will pay more for them. Oh, and by the way, it will create a third, profitable and fast-growing business to add to the Mac and the iPod.

A miss, however, could be catastrophic. Apple’s ambition to become one of the few companies in the world to bridge the technology and entertainment worlds would be dealt a huge setback. The 30 percent gain Apple’s shares have posted in the last three months on iPhone hype would probably evaporate. And its aura of invincibility would be punctured.

“As much as any bet they’ve ever made, this is a `bet the company’ risk,” said Cody Willard, a New York-based hedge fund manager who has owned Apple’s stock for about five years. “If the iPhone is the next Newton,” he added, referring to a handheld device the company released in the early 1990s that famously failed, “it would have far-reaching ramifications for the company’s other product lines ... and in its dealings with Hollywood.”

Even a bona fide success for the iPhone could be seen as a failure, given the extraordinary expectations for what is, after all, Apple’s first foray into the brutally competitive cell-phone industry.

“It’s a little frightening,” said Jay Somaney, a hedge fund manager with TSG Capital in Plano, Texas, who owns Apple’s stock but plans to sell it before the iPhone’s launch. “There’s no way they can meet the hype.”

In keeping with Apple’s traditional secrecy, company representatives would not talk about the iPhone.

CEO Steve Jobs, of course, is no stranger to hoopla - or to risk-taking. From the original Macintosh to the company’s recent switch to Intel chips, Apple has repeatedly gambled its future on high-risk, high-reward bets.

But for a product that few have seen in person, much less touched, the buzz surrounding the iPhone is extraordinary. Already, more than a million people have expressed interest in buying one.

“Everybody’s so excited because it’s so beautiful,” said San Jose resident Faith Nguyen, 27. “I’m definitely going to go take a look at it” when it comes out.

Others are intrigued by the phone’s large touch-screen interface and its ostensible ease of use.

“It’s definitely caught my attention,” said San Jose resident Daniel Dominguez, 33.

Buyers aren’t the only ones excited. Wall Street analysts expect big things from Apple’s stock, based on soaring expectations of how many iPhones Apple will sell in coming years. One analyst, Piper Jaffray’s Gene Munster, predicts 45 million total worldwide by the end of 2009.

At the same time, the iPhone has become a pop culture phenomenon, the subject of jokes on “Saturday Night Live” and by talk show hosts Conan O’Brien and Stephen Colbert.

“This is the most anticipated telephone since Alexander Graham Bell’s,” said Michael Gartenberg, an analyst who covers personal technology for Jupiter Research in New York.

In some ways Apple is a victim of its own success. A string of hits during the last six years has cemented Apple’s reputation for hipness, clever design and easy-to-use technology.

Not coincidentally, they’ve also transformed the company from an after-thought in the technology industry to the leading firm at the intersection of technology and entertainment with a market value of more than $100 billion.

As much as any time in the past, what Apple does matters - to investors, to consumers, to the technology and telecommunications industries, to record producers and Hollywood movie-makers.

But it’s not just those high expectations that make this such a tremendous risk for Apple. Even without them, the company might have a tough time as a new entrant into a market that consists of giant, entrenched competitors who together sell 1 billion phones a year. That’s much different than the MP3 player industry, and when Apple introduced the iPod.

Apple’s decisions about the iPhone’s design have also increased its risks.

For instance, the iPhone will work only on AT&T’s network at first, potentially limiting its appeal. Its high price - $500 or $600 depending on features - comes at a time when consumers can buy smart phones for hundreds of dollars less, or get a multifunction phone for free with a contract.

Its lack of a keyboard could turn off potential business customers who have grown used to typing away on their BlackBerries. And even though Apple is touting the iPhone’s Internet capabilities, it won’t be able to access the Web via AT&T’s highest-speed data network.

Renee Loquiao, 57, a Santa Clara, Calif., resident and territory manager for a watch company, said she’s considering buying an iPhone for her daughter, but she has no plans to replace her BlackBerry with one.

“I like my BlackBerry,” she said. The iPhone “is more of a kid’s thing.”

Despite all this, few doubt that initial sales of the iPhone will be stellar. But Apple could have trouble keeping that momentum going, analysts say.

“There are so many unknowns,” said Chris Hazelton, a senior analyst with market research firm IDC in Framingham, Mass. Much of the iPhone’s success “really, really relies on the user experience.”

Some think that given the hype, the iPhone will almost certainly prove disappointing.

“They’re way overhyping this,” said Rob Enderle, principal analyst at the Enderle Group, a San Jose-based research firm. “The phone isn’t that good.”

But many analysts disagree and think Apple has a hit on its hands. Indeed, many believe it will change the cell-phone industry and Apple permanently.

Thanks to the iPhone, full-screen touch screens and full-featured Web browsers will become standard on cell phones, they say. More broadly, if Apple can persuade consumers to pay full fare for the iPhone, it might change the industry’s business model, putting an emphasis on design and features, rather than low prices or free phones.

That would play to Apple’s strengths. The company’s Macintosh computers are widely considered to be more secure and easier to use than Windows PCs. But their higher prices have often dissuaded otherwise interested customers.

The iPhone offers the company the opportunity to put its technology in front of millions of new users and convince them it’s worth a premium price.

Revolutionizing industries and consumer behavior may be a lot to expect, but if any company is up to the job, it’s Apple, analysts say.

“I don’t know how” the iPhone “is going to live up to the `god’ device it’s being billed as,” Willard said. “But when we look back in two years, it’s going to be a success.”

Published at: http://www.popmatters.com/pm/article/celebrated-iphone-successful-gamble-could-change-industry/