iPhone - 3G has to come!

Thursday, June 21, 2007

While the world awaits June 29th to see if iPhone can live up to all the hype and expectations around it, there is another question that looms large: What next for iPhone?

Apple apparently has set a goal to obtain 1% of the US hand-set market share and analyst reports suggest that it may well be a reality. On the other hand, in order to extract maximum value from the wireless industry and also establish pervasive presence, Apple will have to
- expand presence in the U.S.
- enter other markets

Expansion of U.S. presence: iPhone is entering the U.S. market with GSM, a standard that Cingular A.T.&T supports. Cingular also has an exclusive iPhone license for a couple of years. Thus in the U.S., Apple's market share increase depends, to a large extent, on its charm influencing customers to migrate from other carriers to Cingular. While the iPhone perhaps has that attractiveness, it is a very costly proposition to do so. Apart from the high-price of the phone, the cost of breaking existing phone contracts is a likely deterrent to any major migration. The lowest someone is looking at to switch is $650, an amount the average phone-user is unlikely to pay up. The initial sales are likely to come from the business population (that too only for people who look at a highly integrated device) and the gadget-crazy youngster for whom owning an iPhone may be a 'cool thing'. This said, unless the phone performs or if Apple comes up with improved future versions, the 1% figure for sales can stagnate.

Performance implies good voice quality and reasonable data speeds apart from all the innovative features in the phone. These in turn depend on a) the base-band chip-set currently in use and b) the data rates supported by the standard itself. The Infineon GSM chip-sets in the iPhone probably have a good and cheap design, something imperative to keep the overall cost as low as possible. On the other hand, GSM is limited in its data-speeds. And that is also the reason why 3G has gained prominence. HSPA systems can offer higher nominal rates. But the point is, in the U.S., among the non-CDMA providers, only GSM is prevalent. WCDMA networks are being built only now and that too in major cities alone. As I have mentioned in a previous article, the economics of the iPhone would be prohibitive if 3G support were provided because the chip-set will have to be dual-mode: one that supports GSM and WCDMA. This also has an impact on the power management side. Secondly, the data-using population is miniscule. To optimize the phone for a small fraction of the population which is data-savvy may not have been a good strategy for the first version. Granted that this very segment of population also has the highest probability of owning an iPhone but there needs to be a balance. To provide for the needs of that cross-section however, iPhone has Wi-Fi capabilities coming from the Marvell chip-set. To me, it is a great move since Wi-Fi speeds are way higher than the cellular speeds. Besides, it is important in the context of all cellular manufacturers migrating towards an integrated Wi-Fi/cellular chip-set. In other words, while the cellular chip-set companies are slowly recognizing the importance of Wi-Fi integration with cell-phones, Apple is already one-up on them with Wi-Fi being touted as the answer to high-speed data despite the limited coverage options. The notion at Apple is that for their current market penetration strategy and their pricing, 3G is unattractive. Also, if the phone does live up to the hype and more people feel at home parting with around $600, then Cingular would gain a lot of customers and Apple does not have to worry as much about expanding their US presence to other service providers.

Now when would the market call iPhone a failure? I would not doubt the user-interface or the iPod aspects of the new gadget.My doubts would be on one or more of the following-
-the base-band modem features have multiple issues with voice-call processing, interoperability etc.
-user-data experience in the GSM network is below expectations both with respect to speed of connection and services
-interoperability of multiple features like data, voice and music is not as good as anticipated.
The bottom-line: people could get the feeling that they are not getting their money's worth and if that happens, then all the talk of iPhone changing the way people think of cell-phones may not hold water.

If the first version does fail, then Apple will have to scamper for the next revision. It appears that with further advances on the power management side and more integrated features, Apple might be able to meet the demand for higher data-speeds with 3G for the same costs easily. That apart, Apple will have to strike a balance between a)getting more pervasive through other service providers and b) maintaining an aura of exclusivity and snob value. It looks like 3G may hold the key for the next version, more so in case of failed expectations.

Expansion into other markets: The primary target for the iPhone expansion would be Europe where high-end phones are more likely to be sold. Apple would love to get into a market like India, but there is a basic lack of synergy between the Indian model and the Apple strategy, at least by the looks of it. India pretty much thrives on low and medium-end phones and the profits and operating margins are fairly low. With its prohibitive costs, the iPhone is unlikely to cause a huge frenzy in India and the likes. Europe thus becomes a natural next step. With UMTS networks widely deployed by Vodafone, Orange and 3, it is obvious that the iPhone in Europe will invariably have to be 3G ready. If a European iPhone were to come out in the next few months, it is likely to be costlier than its American version given the economics of having the dual-mode phone. The business population of the rest of the world however may have to make do with the GSM version if and when Apple decides to look beyond Europe.

In summary, even for iPhone to survive into the future, leave alone dominate it, Apple will need to go 3G. Many in the industry understand this and are positioning themselves to win the big prize: a place in the iPhone. In fact, it seems that the survival of some of the chip-set vendors may in turn depend on an Apple acceptance. In the sequel, we will examine the various options Apple has in front of it and the factors it may have to consider before it picks chip-sets and vendors.

Posted by Vijay Nagarajan at 9:28 PM  


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