Carriers Should Hail the iPhone Shakeup

Apple (AAPL) has never been a company to shy away from risk, and the iPhone, which finally became available in the U.S. on June 29 (but won't hit Europe until this fall), could be its next important milestone. If the integrated phone-and-media device is a hit, Apple will revolutionize the mobile industry and cement its reputation for creating gadgets with chic designs that are so compelling, consumers will gladly pay a premium.

But if the iPhone does not justify the hype, Apple's ambition to become one of the few companies to bridge the technology and entertainment worlds could collapse, damaging its aura of invincibility.

To avoid that outcome, Apple will need to work with the mobile industry. Given the company's track record, carriers ought to welcome it with open arms. A successful iPhone could be the catalyst in evolving a new telecommunications business model.

Apple does face challenges. It's entering a maturing telecommunications market that's already highly saturated. With more than a billion handsets likely to be sold worldwide this year, consumers have and will continue to get lots of choice. Hyped as it is, the iPhone is just one of many devices out there.
The Power of Cool

Still, Apple's risk is well calculated. It has a strong pedigree in delivering the best combination of desirable devices and user experience. It has a robust user base from which to negotiate—IDC estimates that iTunes has nearly 80% of the worldwide music download market—and, above all, Apple is cool. Though the Nokias (NOK) and Vodafones (VOD) of the world have a cachet of their own, there isn't a mobile brand out there that comes close to Apple's buzz-creating ability.

By generating buzz in its traditional fashion—eschewing first-mover advantage to create market-leading products based on a killer blend of ease-of-use, design, and desirability—Apple has been able to make demands of the mobile industry.
The Internet Model

First among them is that the carriers must apply the Internet model. Until now, they have recognized the need for this change but, in a cozy alliance with handset makers, have largely managed to resist it. No more. Since iPhone users will want to connect their devices to iTunes and access third-party applications via the Safari Web browser, avoiding the Internet model is no longer plausible (see BusinessWeek.com, 6/5/07, "Why Vodafone Should Welcome Googlefone").

Whether or not they worry about losing control, operators are savvy enough to know that they need to get this device into their portfolios. They are aware that their high-spending customers are not highly brand-loyal and will go elsewhere to get an iPhone, if need be. Since Apple's application model may also deliver a more dynamic and innovative route to increasing average revenue per user (ARPU), operators will be willing to make concessions.

That said, Apple won't get everything it wants without making some adjustments of its own. Once Apple gets past the 10 million-unit milestone—the target it must hit to recoup its investment—it will start to erode the main handset makers' market share. Handset makers are already reacting by pointing out the device's shortcomings and, in some cases, offering competing products.
Weaknesses: iPhone Does Have Them

And indeed, there are drawbacks to the iPhone. First, it doesn't support 3G (third-generation) mobile networks. To get high-speed downloads, the consumer will have to find Wi-Fi hotspots to connect to some services.

Also, the iPhone is not a business device. Large organizations may not advocate incorporating iPhones into their systems, given that the Internet model Apple is offering may present too many IT challenges. Big business likely will stay with its tried and trusted PDAs—BlackBerrys (RIMM), Palm Treos (PALM), and Nokia Enterprise devices—which are designed for corporations and already deliver features similar to the iPhone's.

Apple will have to keep abreast of the market it is trying to change and have an upgrade path to ensure it stays ahead of its competitors, including those who have already introduced iPhone-like devices, such as the Prada from LG Electronics and HTC's Touch. In the future, Apple will have to incorporate 3G and applications such as GPS, which rivals such as the Nokia N95 already offer.
Pressure Will Be Felt

What's more, carriers won't change their business models overnight. If Apple doesn't keep the iPhone cool and cutting-edge, operators will happily go with another vendor to get a device that will. In releasing its RAZR, Motorola (MOT) (and, by extension, other major wireless players) learned the hard way that while a handset's design can grab market share, not following up quickly with continued innovations can lead to rapid erosion.

Its track record suggests Apple will do just fine. With the iMac and the iPod, Apple proved it can innovate in established markets and carve out a place for itself. Right now, the mobile-phone market is fickle and highly competitive, but Apple's blend of design and cool may make it three-for-three. Regardless, it seems bound to energize the market—and that means good things for consumers.
Source :http://www.businessweek.com