No Sophomore Curse for Apple’s iPhone

By Fedor Smith (fsmith@atlantic-acm.com)

Background:
It was hard to imagine Apple could duplicate the hype that surrounded the launch of the first-generation iPhone when it launched the new iPhone 3G, so it was all the more impressive when the recent launch surpassed the hype and sales of the original model.

Analysis:
The hype over the launch of the first-generation iPhone was truly spectacular. With lines out the door of every Apple and AT&T store, and endless news coverage of the fiasco, it seemed like everyone and his cousin was going to have an iPhone within days. However, the first generation iPhone took two-and-a-half months to sell one million units—a milestone the iPhone 3G achieved in only three days. The sales numbers were helped by the expanded, 21-country 3G market (the first generation was available only in the US), but Apple’s ability to duplicate release-day excitement for the second version of the iPhone speaks loudly to the device’s popularity.

Apple forecasts sales of 10 million 3G iPhones by the end of 2009, and based on the growth of the first-generation device, this is not an unrealistic projection. While it took Apple nine months to sell only five million first-generation iPhones, the iPhone 3G has a much larger addressable market and, since the launch of the first generation, the number of consumers considering touch-screen/data-rich devices has grown substantially. While other handset producers were quick to put out competitive devices, the simplicity of the Apple interface, and the trust of the 140 million consumers who have bought iPods, will make the iPhone a natural choice of new entrants to the palm-top/touch-screen market, just like the iPod was in MP3 evolution.

Besides the hype, the launch of the iPod 3G also has replicated the reports of user complaints and device shortcomings. User complaints about the iPhone 3G’s battery life, network coverage, software glitches and screen failures already have littered blogs, news reports and reviews. The high level of excitement over a launch often comes with extremely high expectations, and those expecting perfection are easily, and almost always, disappointed. The iPhone 3G is certainly not perfect (the most significant of its weaknesses being its limited battery life when using 3G) but reviewers who acknowledge the shortcomings still tend give the device high marks.

Despite its stellar launch, and all of its potential, the iPhone does not pose an immediate threat to BlackBerry’s dominance of the enterprise mobile email market. A limited study of US and UK customers showed that only 4.7 percent and 3.6 percent, respectively, were replacing BlackBerry devices with iPhones. BlackBerry has established itself as the corporate email device of choice, and for heavy users the full keyboard appears to be preferable. While the iPhone 3G is clearly aiming to be more corporate friendly, wary IT managers will be slow to fully integrate the device into a world that is currently dominated by BlackBerry devices and Windows Mobile devices, but this is not to say that its presence in the corporate world will not grow steadily with time, and that RIM and Microsoft must innovate to stay competitive. On the flip side, BlackBerry has made great headway in the consumer market over the last two years, and will likely continue to build devices that will compete with the iPhone in that segment.

The Bottom Line:
The iPhone 3G has proven a success, and the device currently being out of stock at most Apple and AT&T stores will likely increase demand rather than diminish it. However, it will not dominate the market overnight. Consumers who favor Apple's style of interface, and see value in the iPhone 3G features, will certainly tolerate the limited battery life and higher plan costs associated with the device. Those who want to mitigate their recurring costs, and business email users, will continue to favor other options. However, with an explosive growth in iPhone applications, the iPhone could replicate the industry standard success of the iPod if it is the exclusive platform for features and applications upon
which users become dependent.

07/23/08