The iPhone 2.0—Cheaper, Faster, Better; but is it Enough?

Apple has finally unveiled the latest version of its iPhone, ending months of anticipation and uncertainty about the future of the iconic device. Speaking at Apple's Worldwide Developers Conference in San Francisco on Monday (9 June), Apple chief executive, Steve Jobs said the new iPhone will run on the faster 3G network and would cost less. In a complete abandonment of its "premium brand" strategy, Apple said it will sell the 3G iPhone with 8GB for US$199 compared to the US$399 price for the older model. A 16GB model would cost US$299. Surprisingly for Apple fans who expected to grab the devices immediately, Apple said the new iPhone will go on sale on 11 July; the new 3G iPhone will go on sale in 22 countries with Apple planning to expand the country list to 70 by the end of the year.

Outlook and Implications

• The Price for Cheapness: Although Apple's new 3G iPhone is undoubtedly cheaper than the previous model, the price cut has effectively removed the premium effect on the device. The price differential, from US$600 a year ago to US$200, is a massive attraction for consumers and may entice more customers to seek the iPhone. Apple still has grand designs for the device, with plans to ship about 10 million units by the end of 2008; the price cuts are a direct strategy aimed at removing that initial barrier to joining the iPhone family. Importantly too, the price cuts could have a two-front benefit in reducing the black market for unlocked devices and in encouraging greater sales in developing markets. Apple now wants operators to subsidise the devices—just like they do with other manufacturers—and would have to forego some of the high-handed revenue sharing deals it reportedly struck with the select few operators in 2007. Indeed, by adopting the operator-subsidised handset sales model, the sale of the iPhone has now become just like any other high-end smartphone in the market. Apple is not yet keen on giving the device away for free but the reduced price means cost will no longer be the key determinant of market entry for the device.

• Faster Speeds Opens New Opportunities: Although the price changes opens up the 3G iPhone to a whole new customer base, the upgrade to a 3G version puts the device on par with rival devices in Europe and Asia. The United States still remains Apple's core market, but if the company harbours hopes of challenging the rest of the world, the 3G version removes the disincentive for customers to embrace the device. Apple had gambled that EDGE was enough to woo customers. But it soon became clear that customers in Europe and Asia, regions with a particularly high availability of 3G networks and high usage of 3G devices, were less inclined to embrace the EDGE-based iPhone. The 3G version now includes faster internet and multimedia services, push email, GPS systems and loads of new software; cameras remain the same though between the new and old models. Apple is now pushing its MobileMe platform which includes Web-based e-mail, contacts, calendar, and push e-mail which would enable users to access, say, a corporate Microsoft Outlook e-mail account from the device. However, despite the reduced price, the faster speed, and a scattering of new services, the device is still essentially the same as its older version.

• Being Better is not Enough: Now that Apple has removed the two constraints of price and speed, the iPhone is entering into a new marketplace where it will face new uncertainties. For a start, being better than its previous model is certainly not enough to make the 3G iPhone a resounding success. The iPhone remains a niche product and unlike the BlackBerry, has not established a reputation as the best handset model for a particular service. That effectively leaves it open to severe competition from Nokia and others, and the next 12 months will see intense competition in the markets. Although a subsidised sales model would go down well in the United States, Germany, France, and the United Kingdom, the strategy comes unstuck in predominantly prepaid markets such as Italy, China, and India. "Who then pays for the subsidy" or "how does Apple force customers to sign a two-year contract" becomes the key question. China and India are the holy grail in the handset market and Apple will be tweaking its business model to gain entry into those markets. But there again lies the bait. These markets will continue to have a high prevalence of unblocked iPhones from the black market and will generally ignore attempts to conform to the notion of a monopoly vendor. Apple has attempted to change that via multiple sales deals in different countries, but Global Insight believes that the ultimate and most secure default position for the iPhone is in the BlackBerry model. Just like the BlackBerry with its email capabilities, Apple will have to identify a unique service which will help it gravitate towards that model. Otherwise the iPhone risks disappearing in the pond of the Nokias, LGs, Samsungs and the like.

Find out more about Same-day Analysis