Apple revealed the new iphone 3g a new subsidized pricing model and a host of new software services

iPhone 3G: Detail by Detail

Seth Gilbert, 06-9-2008

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iphone 3g For a short while the headline was all set to read “Software Stuns, Hardware Stunningly Absent” but Apple saved the biggest (and most expected) news for last. After spending an hour talking about software and services, Steve Jobs reassured an anxious audience of Apple fans and press with exactly the news they were anticipating: the birth if the second iPhone, iPhone 3G.

THE HARDWARE UPGRADES
The new iPhone will hit retailers July 11. As widely expected, the phone was built to operate on faster third generation or 3G mobile networks (UMTS, HSDPA, GSM). With this upgrade, the phone will be able to download data and Internet content at average rates of about three to five times faster than the first generation EDGE powered iPhone. (And for those outside of a 3G area, the new phone is backwards compatible and will still support the intermediate speed EDGE service).

Satisfying another rumor, adding to the feature set and complimenting a slightly thinner new case, the new phone will also boast global positioning (GPS) services too. The chipset will be capable of triangulating position via WiFi and Cellular towers. Users of the GPS functionality will be able to track their travel via Google maps including satellite, map and hybrid views. They’ll be able to plan trips, set directions and even monitor position relative to traffic data.

Battery life has not been compromised by the new chips needed to power the GPS and 3G services. According to Apple, the iPhone 3G will have an estimated standby time of 300 hours and a talk time of 5 hours. For alternate functionality, the battery will power up to 7 hours of video watching, last through 5 to 6 hours suited of web browsing and allow 24 hours or music listening.

THE PRICING
The more surprising news, news that seemed to scare some traders on Wall Street and anchor Apple’s stock price, was a new pricing plan Apple will roll out for the phone’s official launch. Under these new terms, the two models of iPhones will be priced affordably at $199 and $299. The lower pricing will be made possible by way of carrier subsidies offered to customers in exchange for two year service agreements.

“We have changed the nature of the agreement [with Apple] to a more traditional wireless model,” Ralph de la Vega, head of AT&T Mobility explained.

Under the prior agreement, carrier partners like AT&T paid a share of monthly subscription fees back to Apple in exchange for exclusive rights to sell the phone. In the U.S. these carrier fees have been estimated to be between $12 and $15 per month, per iPhone subscriber, over the two year phone contract. For Apple this has meant hundreds of millions in deferred revenue: $12 to $15 a month amounts to fees of $288 to $360 per iPhone subscriber over the two year period. That’s $288m to $360m in revenue for every million phones bought and activated via AT&T.

Under the new plan, Apple will forego that lucrative recurring revenue stream. Instead, partners like AT&T will use the previously allocated “kickback money” to subsidize consumer pricing. As noted by Mr. de la Vega, this is a more typical arrangement.

Typical or not, the change of practice is seen by some as a risky but aggressive gamble. In their view, it is a decision to forego short term revenue in exchange for longer term market share gains (and higher volume sales). If it works, however, it could lead to substantial rewards.

Routinely Apple-optimistic analyst Gene Munster from Piper Jaffray thinks the benefits outweigh the costs. “It’s more important that they sell more phones,” he said. The reduced price, along with an increased global market opportunity, could triple demand, Munster believes.

And despite the lost near-term revenue opportunity, Munster might be quick to point out, Apple isn’t suffering with iPhone sales. Under the new agreement, Apple will still receive the wholesale price for the phone and maintain a solid margin. (While the carrier price for the phone is not known, it is speculated to be as much as $450 a phone. Apple’s cost, estimated in July by iSuppli for the first iPhone, was pegged at $265 (8GB phone))

Will the lower price triple demand? That may be a little too optimistic but the new pricing does address what has been one of the most substantial issues with the iPhone to date: cost. In fact, according to data Apple provided, 56% of potential iPhone customers who wanted the phone but opted not to buy it cited price as the basis for their holdout.

By the numbers, smart phone sales were up 106% year over year in the first quarter of this year according to a recent report from Gartner. Worldwide, sales were up 29%. Lower cost iPhones should, in theory, help Apple gain a larger share of that growing market.

The results of Apple’s pricing gamble aren’t going to be apparent at least until their October earnings announcement. For U.S. partner AT&T, the squeeze will begin as soon as the phones go on sale in July. The carrier’s earnings will likely take a 10 to 12 cent per share hit for each of the next two years to account for the new subsidies (based on sales of 3million phones per year).

SOFTWARE
If the announcement of the new phone was the meaty news people were expecting, and the pricing plan was the unusual and slightly sour new ingredient they are still contemplating, than the software news was the substance on the plate.

Appropriate for a development conference, Apple took full advantage of the opportunity to announce a number of initiatives and new deliverables:

• Enterprise Business – Microsoft Exchange services will be supported out of the box on the new phone (and software upgrades). This will include support for push email, synchronization, calendaring, contacts and other services. IT departments will also have the ability to remotely “wipe” data off of lost phones. (Reportedly, 35% of Fortune 500 companies participated in the beta to get the enterprise level service working properly).

mobile me

•MobileME – for personal users who don’t have access to enterprise-class exchange servers, advanced push email, contact and calendaring synchronization services will still be possible thanks to a new subscription service Apple is calling MobileMe. It will work for PC’s and Macs. Apple is calling it “Exchange for the Rest of Us” and touting the “Cloud Computing-like” ability to have your “desktop everywhere.” (More on MobileMe can be found at me.com)

•Browsing and Buying – For the auction addicted, retailer eBay will now be accessible in a customized iPhone application. For the news hungry, the Associated Press will offer a native application for exploring the news.

• Misc. Software – A wide slate of other applications will be featured in the upcoming iPhone “App Store.” Some of the demonstrated examples included a Cat Scan viewer for doctors, a voice recorder (called “Plum Record”), a place shifting TV viewer from SlingMedia and even a special baseball game replay service from Major League Baseball.

THE GLOBAL MARKET
Apple’s global footprint has been recently chronicled in detail on Metue but during the keynote, Steve Jobs added more detail to the existing public information on carrier partnerships. Now, over the next few months, a total of 70 countries will be home to iPhone carriers. The following chart details which country, and when. Clicking country names will link to the country-specific website (and related carrier) information Apple is currently providing.

Available July 11, 2008

	Australia	Japan
	Austria	Mexico
	Belgium (French)	Netherlands
	Belgium (Dutch)	New Zealand
	Canada (English)	Norway
	Canada (French)	Portugal
	Denmark	Spain
	Finland	Sweden
	France	Switzerland (French)
	Germany	Switzerland (German)
	Hong Kong	UK
	Ireland	USA
	Italy