3G iPhone to arrive amid slacking demand and falling prices

By Tammy Parker

Will the sophomore version of Apple’s iPhone turn around softening demand for the iconic device?

The iPhone is now about 10 months old. The handset grabbed an impressive 17.4 per cent market share in the US during its first six months of existence and has so far sold 5.4 million units. But during the first three months of 2008, Apple sold only 1.7 million iPhones, a drop from the 2.3 million units sold in the last quarter of the 2007 calendar year. Yet the vendor still expects to sell at least 4.6 million iPhones over the next three quarters in order to meet its stated goal of selling 10 million total units by the end of calendar year 2008.

For a year, I’ve held onto a column by PC industry pundit John C. Dvorak that was dated March 28, 2007, three months before the iPhone’s introduction. At that time, he wrote, “There is no likelihood” that Apple could be successful in a business as competitive as the mobile phone industry. Dvorak suggested that if Apple were “smart it will call the iPhone a ‘reference design’ and pass it to some suckers to build with someone else’s marketing budget.”

Those were harsh words indeed, and they failed to sway Apple, which is now working to extend the reach of its fabled iPhone worldwide. Rumors are that the device will be introduced during coming months in countries as varied as Italy, Belgium, Australia, India, Singapore and perhaps even China. Many of those countries already have iPhones, albeit units that were bought in the US and illegally unlocked to run elsewhere. “Our view continues to be that this is a proxy for the worldwide demand of the iPhone,” said Apple COO Tim Cook, during an earnings conference call with analysts.

Nonetheless, iPhone sales outside of the US have so far failed to generate massive excitement, with some saying legal European sales have amounted to only 300,000-350,000 in each of the past two quarters. And demand is reportedly softening. The iPhone still has a tiny global footprint at around .06 per cent. In the UK, O2 and Carphone Warehouse recently tried to stimulate sales by reducing the price of the standard 8GB iPhone by £100 ($199) to £169 ($337), though they maintained the price of the 16GB model at £329. T-Mobile in Germany earlier cut the 8GB model’s price from Eur399 ($625) to as little as Eur99 with a two-year data plan.

Such price reductions play into Dvorak’s prediction, where he wrote that Apple would learn that good margins “cannot exist in the mobile handset business for more than 15 minutes.”

But falling prices may just reflect the fact that many potential iPhone buyers are holding back on making purchases as they await the arrival of the 3G version, which is expected to be released in the US on June 27, the anniversary of the iPhone’s initial introduction. Word of ongoing iPhone shortages in the US, Germany and the UK lend credence to the idea that the 2G version is on its way out. But will the 3G iPhone arrive with high-tier pricing (and high margins) as well as the same kind of buyer frenzy that accompanied the device’s introduction last year?

Though the iPhone is certainly a curiosity worldwide, legal international sales of the device have paled in comparison to sales in the US. At the recent CTIA Wireless 2008 convention, I had a prominent top executive of a well-known European firm ask me if I perceived a nationalistic bias on the part of US consumers who gave the Apple iPhone almost a hero’s welcome when it was unveiled last year.

Indeed, Apple has an almost cult-like following in the US, but its following elsewhere in the world is far less worshipful. So, it’s no surprise that iPhone sales in the US have been dramatically higher than in other parts of the world. What did surprise me about initial iPhone sales is how many US consumers were suddenly willing to buy an unsubsidized handset.

It will be interesting to see if US consumers, in particular, will jump as quickly for the new breed of touch-screen iPhone-wannabe devices hitting the market. The Samsung Instinct, unveiled by Sprint Nextel, will arrive in June at a less expensive price than the iPhone, and it already features 3G access over Sprint’s EV-DO Rev. A network.

Further, Nokia is developing its first touch-screen handset, codenamed Tube. Though Nokia has struggled to compete in the US, the firm’s strong positioning in Europe means the Tube could significantly outpace a 3G iPhone there.

Nonetheless, the iPhone appears to have a strong outlook, at least for the short term in its US stronghold. In the 15th semi-annual Taking Stock With Teens research survey, recently published by Piper Jaffray, 6 per cent of the US students surveyed reported that they own an Apple iPhone. That’s double the market share conveyed in Piper Jaffray’s fall 2007 survey. In addition, 9 per cent of the students said they intend to buy an iPhone in the next six months.