iPhone - How expensive is too expensive?

Posted by Mark Raby

Columbus (OH) - With a newly minted FCC certification under its belt, the iPhone is beginning its path to retail, but its barrier-setting price could prevent it from meeting Apple's 1% market share goal.


Apple's iPhone in pictures ...

Assuming Apple meets its previously announced release date, the iPhone will be hitting the streets by the end of next month.  The iPod company said it is aiming for only 1% of the cell phone market, which seems to be an achievable goal at first sight.  It sure doesn't sound like much, but with mobile phones recently becoming a billion units per year industry, that's a goal of 10 million iPhones.

Breaking down the market even more, smartphones, or "convergence phones", only accounted for about 72 million handsets last year, according to Gartner Research.  Depending on how much that grows in 2007, Apple is looking for a smartphone market share of 10% - 14%.  That's awfully high for a new device that costs $500 - $600.  Even Research in Motion didn't quite ship 10 million units of the highly popular Blackberrys in 2006.  According to Gartner, total Blackberry shipments for the year came in between six and seven million.

Is it too pretentious, then, for Apple to expect to sell 10 million iPhones, effectively vaulting over Blackberry, in the near future?  What the question really amounts to is how much people are willing to spend for an iPod device.  This isn't a music player for phone aficionados; it's a phone for music player enthusiasts.  Yes, there 's a nice screen and a web browser, but  in the end, this device really comes down to being an iPod with a phone in it.

Apple has been able to draw people to the iPod even though there are less expensive, more sophisticated players available.  However, there must be some price level where even some of the most die-hard iPod fans will draw the line.  Compared to iPod Nano prices, the 4 GB iPhone adds $300 and the 8 GB model tacks on $250 for video and phone functionality.  It's a similar situation to what Sony has with the Playstation 3.  The unquestioned leader in video game hardware in the early 2000s, it's now in last place because it was too optimistic about brand loyalty and consumer price elasticity.

The competition from other, more deeply rooted phone makers is also a huge factor.  Motorola, for example, will offer the iPhone a run for its money with its new Razr 2 device that was announced this week.  Moreover, Nokia alone accounted for 48% of all smartphone sales in 2006, according to IDC.  If Apple really wants to push itself into the market, it'll need to grab a lot of sales away from Nokia. With its revered Symbian operating system and enormous library of proprietary applications, it'll be hard for conscientious phone buyers to move away from Nokia to a company that has no experience in the field.

However, the iPhone has an "it" factor the likes of which have never been seen in the mobile phone market before.  It is designed to be the kind of phone that consumers will want to show off when they're walking down the street, kind of like a $250 Neiman Marcus T-shirt that offers the same functionality as something you found at a garage sale for 50 cents.

In that regard, there's certainly a place for the iPhone.  Still, Apple needs to become more realistic about its place in the world of consumer electronics.  The Apple TV, for example, got hammered by critical reviews, mainly because there was really nothing new about it.  The iPhone could suffer the same fate, considering the number of iPod devotees who are probably already locked into service contracts on their existing high-end phones. Only 17% of potential iPhone buyers were found to be likely to switch to Cingular and the iPhone before their current contract expires.

 

Share your comments with us:

What do you think about the iPhone and Apple's goal of reaching 1% market share in the near future?  What will make you buy the phone - and what not?