news analysis Last year, when Apple unveiled its iPhone and made it available in the United States exclusively from AT&T, the debut sent ripples throughout the cell phone industry.
Handset maker Palm suffered as consumers swooned for Apple's phone, according to surveys by consultancy NPD. AT&T benefited by pulling subscribers from rival carriers Alltel and T-Mobile USA.
So will Apple's new phone, the iPhone 3G, have a similar effect? Early evidence since the new device's July 11 debut suggests it will have even broader impact, in part because the entry-level model sells for US$199, compared with US$499 for the original version.
As a rough measure, take last year's impact and double it. In the first 12 days since the iPhone 3G hit the market, the device sold at twice the rate of its predecessor, according to AT&T, which has not made more recent data available yet. And analysts expect this quick pace to continue for at least a few months: The iPhone 3G likely sold up to 700,000 units in the few weeks of July alone, estimates Trip Chowdhry, an analyst at Global Equities Research. Apple sold about 1.1 million iPhones in all of the third calendar quarter of last year.
Raw sales numbers do not tell the whole story, however. So far, many of the new model's purchasers have been existing AT&T subscribers who already own an iPhone. In a survey of more than 100 iPhone 3G buyers conducted in the past two weeks, Chowdhry found that "most of the users are people who are upgrading". A survey of 328 users that UBS conducted on the iPhone 3G's launch day in the United States and Britain revealed that nearly 37 percent of the new device's buyers were current iPhone users.
The fact that users are replacing their phones after holding them for less than a year is testament to Apple's marketing and improvements to the device, including global positioning system (GPS) capabilities and access to software from independent developers. Typically in the U.S. market, users replace their handsets, on average, only once every 17.7 months, according to consultancy J.D. Power & Associates.
Second-hand iPhone fallout
As these customers discard their old iPhones by putting them up for sale on eBay or giving them to relatives and friends, the wave of second-hand iPhone users will likely prove to be an equal loss for all device manufacturers, including Apple. And rival carriers can take comfort in the fact that these users will not necessarily go to AT&T.
On Aug. 5, of the hundreds of original iPhone listings on eBay, only about 10 percent were advertised as connected to AT&T's network. Most other used iPhones, offered at US$50 to US$300, depending on condition, were unlocked--that is, not tied to a particular carrier. People buying them can elect to sign up for service with AT&T or T-Mobile USA, or simply use the device at free Wi-Fi hotspots.
The iPhone does not always completely replace other phones, either. A greater chunk of iPhone 3G buyers are carrying the device instead of a notebook computer and keeping a second cell phone for calling (a third of original iPhone users carried a second phone, according to a March survey of 460 U.S. users conducted by Rubicon Consulting). Here is why: Chowdhry's latest survey shows that iPhone 3G users spend 80 percent of their time browsing the Web and only 20 percent of their time making calls. That is in sharp contrast to a typical smartphone, whose users spend 60 percent of the time making calls. "They should change [iPhone's] name to an iTablet," says Chowdhry. "The usage scenario is evolving. People use the iPhone as a PC in your pocket. It's slightly mispositioned in the market."
Rival phone makers may still be affected, however. Though first-month data are not conclusive, Samsung so far appears to be the worst hit, according to a July 25 survey of 100 carrier store reps conducted by Avian Securities. From June to July, Samsung's "share of responses"--essentially, instances when store reps said a Samsung phone was a best seller in their stores--fell from 18 percent to 14 percent. At AT&T stores, Samsung's share of responses fell from 15 percent to 10 percent, with the drop directly attributable to the iPhone 3G, says Matt Thornton, an analyst at Avian. While share of responses of Palm devices slipped slightly, too, that was due to competition from best-seller Samsung Instinct at Sprint Nextel rather than to competition from Apple, he says.
Clones making headway
Many other handset makers are actually riding the iPhone wave. Their iPhone clones are gaining traction, as many subscribers to other carriers' services are loath to pay the high price of breaking their contracts to switch to AT&T. In July, Samsung Instinct actually garnered a higher share of responses than the iPhone, according to Avian. And LG has gained share, thanks to such best-selling devices as Voyager and Dare, which is being heavily promoted by Verizon Wireless. In fact, Apple's share of touch-screen phones in the United States could drop to 35 percent this year, from 40 percent last year, as the market expands from 7 million to 18.1 million devices, according to consultancy Strategy Analytics.
Exactly how the iPhone 3G's introduction has hurt AT&T's rivals remains difficult to quantify. Much of the data are still being gathered. Just like last year, about 40 percent of new iPhone buyers are switching from other carriers, according to AT&T. But Ross Rubin, an analyst at NPD Group, which conducts monthly wireless industry studies, says preliminary data indicate "T-Mobile is still quite vulnerable". While Sprint and Verizon Wireless have, in the past year, bulked up their defense by introducing iPhone clones, T-Mobile USA still does not offer a product that is competitive enough, Rubin says. T-Mobile USA did not return a request for comment.
There is another reason for concern: Because the iPhone 3G is so much cheaper than its predecessor, the new device should tap into a new market--youth--says Charles Wolf, an analyst at Needham & Co. who has been observing crowds standing in line at Apple's New York stores. "At Christmas, every teenager in America is going to want one," he says. That is the sort of demographics that, until now, flocked to prepaid services, such as Virgin Mobile, such boutique firms as Helio (recently acquired by Virgin), and lower-cost carriers, such as T-Mobile USA.
Many of these new users are buying the phone to replace their old iPods. The device "will kill off a piece of the iPod market", says Wolf. He points out that with prices comparable for the iPhone and iPod, as much as 30 percent of the music player's sales will be absorbed by the Apple phone. Wolf believes Apple will dramatically revamp its music player's design this fall to address the issue.
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