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Apple Unleashes Product Too Good To Be True

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Anyone who regularly reads this blog knows me to be a big fan of Microsoft, but even I’m not stupid enough to say that Apple didn’t drop a bombshell today.

At a MacWorld keynote lasting most of the last two hours, Steve Jobs unveiled the next big product for Apple: The iPhone. The iPhone features everything rumored about it and more:

  • 480320 widescreen covering most of the face, 3.5-inches
  • Touch screen interface
  • full iPod features, with addition of many iTunes graphics-intensive features, like Coverflow
  • $500 with 4-gigabyte flash memory through Cingular, $600 with 8-gigs
  • Many PDA contact features, including free push email from Yahoo
  • Thin: 1.16 centimeters
  • Wifi

I’ll come right out and say it: Nearly everyone will want an iPhone. Without a doubt, Apple has thrown in so many features that the device is a great addition to any pocket. Still, there’s another thing I can say with little doubt:

At the current price, the iPhone will never sell.

The iPod sold, before the holiday season, 67 million units. Apple continues to release various versions of the iPod, cheaper and more accessible versions like the Nano, that have made it a breakout consumer electronics device. Apple’s goal is obvious: To get everyone to own an iPod. Not only is that not likely with the iPhone, it isnt even in the plans. From Engadget:

957m phones 1% market share is 10 million phones. “Exactly what we’re trying to do, 1% market share in 2008, 10 million units and we’ll go from there.”

That’s what Steve Jobs said, that they’re goal is 1% market share, or ten million units, over the next two year. Even to do that, Apple would have to sell over 1 million units a quarter, something that took the iPod over two years to reach (and it took the cheaper iPod Mini to reach that level). Apple should have known from experience that products beyond certain price ranges are a hard sell, which is why the $200 Nano is their best seller, not any of the video iPods.

The price of the iPhone is going to work against it. It is such an ambitious product that Apple may have overshot itself here, releasing something that’ll take years of engineering refinement to get down to a level consumers will actually adopt. Million-unit sellers are hard, and $500 million unit sellers are damn near impossible. As good as the iPhone is, it can be easilly replaced with a free (with contract) Windows Mobile PDA phone and two MiniSD cards, for a total of about $80. While the iPhone is more elegant, has a better interface, is sexy and popularly branded, few people will pay $420 for elegance and UI.

In fact, I know people who pay a $400 premium for elegance and UI: They’re called Mac users. Actually, some Mac users pay that much for elegance and UI, others pay it for the graphics editing potential of the Mac, which leaves the market of people who would actually buy an iPhone at a percentage of those who would buy Macs. In their best quarters, Apple ships just over a million Macs, leaving them with not a lot of reason to think people are willing to pay that much extra for Mac over Windows.

That’s what it comes down to, again, after all this time: Regular phone buyers are Windows users, trying to get value for their buck, not caring about looks or that their UI is behind Apple, while Apple phone buyers are Apple computer users, paying a premium for looks, slick UI, and the name on the back of the phone. History has proven that while some people will pay extra for various reasons, most people will not. What is the most popular phone on the market? The RAZR, which is free with a new contract.

I want an iPhone, and I want it bad. But I don’t have the money for it, and neither do you.

Apple is going to steal market share from other companies. It is going to steal a lot of consumer smart phone buyers, but not business users (who buy PDAs based on the email server their company uses). It will steal the early adopter phone market, a good segment that pays a premium for phones and makes companies like Nokia and Motorola a lot of money. But they will not sell 10 million iPhones by the end of next year, not at $500.

There are also two other problems: The first is the classic Mac affinity for choice, or lack thereof. Once again, Apple screws you by forcing you to use Cingular. Now, everyone has a preference of cell phone provider, but does Apple know that there are people in New York who refuse to use a phone not sold by Verizon? That’s right, Verizon has such a reputation in New York that many people use them exclusively, paying as much as $40 more per month than they would with competing premium and family plans. Apple leaves users with Cingular or forget it, and a lot of people are going to do just that.

There’s one more thing I don’t like: Why is it just a phone? Couldn’t Apple have release a touch-screen iPod? Ipod owners cannot be happy that there is no upgrade to the traditional iPod that uses the same form factor as the iPhone, minus the cellular radio. With a claim of 16 hours of battery life, the iPhone is the best iPod to date, but you can’t buy it, even without a contract!

The reason is probably a simple one: Without the contract, the iPhone would cost about $200 more, or $700-800. No one would buy an iPod at that price, even a crazy person, and removing the radio wouldn’t knock it down enough. 4-8 gigs for $600, $700, or $800 is too much for even the biggest iPod fan.

I’m hoping the iPhone gets a revision after a year or two, something that slashes the cost (for gods sake! No more features!) and extends its capabilities to the regular iPods. The price of the iPhone gives you an idea how much a touchscreen iPod would cost, and the picture isn’t pretty, but costs do come down.

What does this mean for Microsoft? Well, in terms of market share, probably nothing. Windows Mobile is still going to overtake much of its competitors in the next few years, as long as partners keep pumping out cheap (and sometimes free) devices, and Apple will hurt Microsoft’s competitors in the premium space more than it hurts Microsoft. However, Apple has set a new standard for UI on a mobile device, and Microsoft has no choice but to follow suit. I’d give Microsoft three years to release a UI that can stand up to the iPhone, or it is going to have some problems.

Otherwise, wait for iPhone V2. Version 1 will probably have a few bugs (like a scratchy screen), making the wait worth it for many reasons.

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Nathan Weinberg writes the popular InsideGoogle blog, offering the latest news and insights about Google and search engines.

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