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WWDC 2008: Will The IPhone 3G Kill The IPhone?


Opinion - We have had nearly 24 hours to jump out Steve Jobs’ reality distortion field and put common sense behind the announcements made yesterday - especially the company’s iPhone 3G. The software and hardware behind the device has more potential than what was announced and we have to admit that we are underwhelmed. There is now a clear lack of features, including a video camera that is still not part of the device. So we wonder: Could it really be that Apple just killed the iPhone with the iPhone 3G?

It is almost impossible to be happily jumping up and down over the announcements made in Jobs’ WWDC keynote, especially if you’re a tech journalist. There was a certain expectation, which was fueled in part by speculations preceding WWDC, but also by Apple’s blurry pre-show notes. There was no trademark "one more thing" announcement - and no trademark surprises no one had counted on. So, the eyes were clearly on the iPhone upgrade. "This is the phone that has changed phones forever."

But, among the few new features announced, strangely absent was an additional front-facing video camera for videoconferencing applications. We are still convinced that VoIP and videoconferencing are the most promising new killer features of the iPhone and we were surprised when Jobs actually revealed the upgraded handset lacking this functionality.

As it appears now, the iPhone 3G is not a revolutionary device, but an evolution with very focused upgrades. It uses the same platform as the first generation, but concentrates at alleviating major complaints people had about this device: Lack of 3G, pricing, battery life and limited international availability.

During the keynote, Steve Jobs singled out pricing as the single most important factor that convinced 56% of people who wanted an iPhone not to purchase the device. So the price was cut in half. Other complaints were slow network speed, which is fixed with 3G; not enough battery life, which is also improved substantially as well as international availability with the phone now launching in 22 countries and 48 following in the next months. Apple summed the key complaints up in a new marketing pitch: "Twice the speed at half the price". The question is, however, would you trade an extended feature set video camera over 3G/GPS features and a $199 price point?

When you think about it, the sense of disappointment stems largely from the fact that the iPhone 3G is evolutionary and not revolutionary, as most expected it to be. Industry watchers noted that this product strategy typical way for the California-based gadget maker to tackle problems. The company singles out a few concerns that affect most users, sorts them out and moves on to other issues. When Apple rolls out a completely new product such as the iPhone, it revises the product over time, bringing incremental improvements in the process to perfect functionality over time.

For the iPhone 3G, the company changed its existing carrier business model, giving up carrier services revenue share in order to accelerate international roll-out. "Under the revised agreement, which is consistent with traditional equipment manufacturer-carrier arrangements, there is no revenue sharing and both
iPhone 3G models will be offered at attractive prices to broaden the market potential and accelerate subscriber volumes," the company said.

It appears to be illogical for Apple to cut itself of service revenues and cut into its own margin with handset price cut. But analysts generally think these moves will secure sales. Independent consultant Chetan Sharma told the New York Times that "given the feature set, ecosystem partners, launch countries and the pricing of the iPhone, they are likely to hit the 10 million mark by September-October." Apple is already the world’s #3 smartphone maker and #2 in the US.

For Apple, iPhone could become the vehicle to stimulate further Mac market share gains. "It’s not about the iPhone. There’s a trade-off that Apple is making. The iPhone halo effect will be far more powerful than the iPod halo effect was. It’s going to stimulate Mac sales among iPhone users," said Needham & Company financial analyst Charles Wolf.

However, it is interesting to note that the price of the iPhone never was the decisive factor that determined whether you could afford an iPhone or not. At least for U.S. customers a price change from $399 to $199 is a more of a psychological move rather than real help to make the device more affordable. Somehow we feel that both Apple and AT&T want to get those dollars back and one could assume that will be the case with increased data service revenues. Yes, you may save $200 when you buy that phone, but most iPhone users spend about $100 on their iPhone in monthly service fees and some users much more than that. We have to remind ourselves that the iPhone remains a $2000 phone over the service period even with that $200 price drop.

All eyes are now on AT&T. there is no indication yet what AT&T will charge for 3G access, but since Steve Jobs did not mention any service plan fees yesterday it appears that negotiations are still active or that this is simply not an attractive topic to talk about.

To us, AT&T may remain the most critical drawback of the iPhone in the U.S.