Handsets: How do you like them Apples?

It's almost a year to the day since the original iPhone launched, and with a second generation version expected to be unveiled, the iconic device is still one of the biggest stories in the handset sector. The reactions of the traditional players to the phenomenal hype created by the launch of the iconic Apple product have been wide-ranging.

The story of Apple's first and, so far, only mobile terminal is extremely well documented - in all likelihood it is the most written and talked about cell phone in history. It's difficult to imagine another firm coming to market so late in the game and having such an impact.

Few would argue against the premise that the handset landscape has changed noticeably over the last year. Time magazine named the iPhone the invention of 2007, which while stretching the definition of the word 'invention' to its limits, demonstrates ably how much the media cottoned on to the notion that readers everywhere were eager for stories relating to the device. Barely a month passes when the iPhone doesn't put at least one appearance in MCI.

The silver lining, of sorts, for the 'traditional' top five handset OEMs is that the ratio of column inches generated versus units sold is massively one-sided. As of Q108, Apple had 0.6 per cent global handset market share according to Strategy Analytics. Granted, its availability has been restricted to only a handful of countries during its debut year, and only one operator per country, which has kept the total units shipped number down - although plenty of iPhone hungry consumers have unlocked the device for GSM networks in non-Apple sanctioned territories.

Though, in the markets in which it was launched, it did well. "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," points out Tammy Parker, North American wireless analyst, Informa Telecoms & Media. "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."

Sales are slowing for a number of reasons, some state the lack of 3G, others state price and availability are the root cause. According to Parker the vendor expects to sell at least 4.6 million iPhones over the next three quarters in order to meet its stated goal of selling ten million total units by the end of calendar year 2008.

Sales may have slowed from an early stellar showing, but ARPU generated (and shared) in conjunction with the relatively high retail price has, no doubt, helped keep margins up for the Cupertino firm and its operator partners. According to UK-based market watcher Mediacells, ARPU for the iPhone in Britain is reportedly 30 per cent higher than average contract customers, but with tariffs starting from £35 upwards, the revenue is not necessarily driven by people using the device for more data-centric tasks.

"I've never witnessed anything so hysterical in the history of the mobile phone industry as the launch of the iPhone in the States on May 28 2007. It was wild," says Brad Rees, managing director of Mediacells. "We had, normally composed, international news agencies ringing us up to ask if we could 'outforecast' the likes of Goldman Sachs and Piper Jaffray, who were quoting 700,000 - 500,000, respectively . the fact of the matter was that there were little more than 250,000 units shipped to the US pre-May 28th. We were the bears in a bulls market and felt like terrible party poopers. The reality was that within the first 48 hours of its product lifecycle, the iPhone sold 270,000 units, according to Apple's half year interim results for 2007."

"As with all these hype devices, they're never as successful as the evangelists say, but they are also never quite the damp squib that the sceptics claim. I think the first generation iPhone is very much in that category," says David Stansell, managing consultant, PA Consulting's communications, media and entertainment division. "It has been a catalyst. People are already calling it the 'iPhone effect'. We've already started to see non-SMS data ARPU increasing quite rapidly . That general education of the market has begun already."

For all its coverage, though, the iPhone's arrival hardly constitutes a revolution in mobile devices. There are higher spec, more affordable terminals, on the market, but none with quite the integration of services, intuitive UI or-arguably-style. It has been well received by consumers and, in most parts, by the press. However, sales are slowing and a growing number of cynics believe that the impressive early momentum will not carry forward into new markets or onto a second-although third in terms of network access technology-generation device.

Undoubtedly, though, there has been a lot of activity in the handset space over the last year. Some will claim that the evolution of multimedia devices was inevitable, but a raft of 'me too' look-a-like terminals including such notables as Samsung's F700 and F490, HTC's Touch series including the much vaunted Diamond, Sony Ericsson's Xperia X1 (built by HTC), LG's Viewty KU990 and Prada KE850, OpenMoko's Linux OS FreeRunner and the Philips Xenium X800 out soon, all boasting "touchscreen" technology, demonstrates that plenty of OEMs have been looking to emulate Apple's success by imitating its iPhone. The industry is awash with phones dubbed by some as 'iPhone killers', but the Apple terminal has yet to be terminated.

"They have been a bit myopic in the way that they understand the success of the iPhone," points out Carolina Milanesi, research director, mobile devices, Gartner. "While both the LG Prada and the HTC Touch have been fairly successful. It is not just because the iPhone has a touchscreen that it has achieved the popularity that it has. The UI goes way beyond just the touchscreen," she says.

Informa Telecoms & Media analyst Malik Saadi: "Even though these phones provide similar look and feel and comparable industrial design to the iPhone, the majority of them have failed to reproduce similar user experience. In fact the real value and differentiation of the iPhone is delivered by software and ease of use that can not be easily matched by any competitor so far."

According to Stansell, the iPhone has been a market educator for how to deliver on the promise of data services providing new revenue streams for the operators. "I think the iPhone was the first device that showed the market that a lot of these concepts were possible. I think a lot of people had lost faith in that vision. But Apple has done its usual trick of pulling everything together and producing a beautifully finished package which shows that these things can work, can be nice to use, can be easy to do and people might want to use those services."

One firm that has yet to release an 'iPhone killer' is Nokia. The Finn might argue that killing the iPhone is not its business - it would be like smashing an acorn with a mighty oak. The Espoo giant, which dominates the handset market with 40.9 per cent of the market share Q108 according to Strategy Analytics (only 1.7 per cent less than the combined sales of the other 'big' four), has, however, been more active than most. Not only has it, among other things, been pushing its services offering Ovi, plus a revamped N-Gage platform and Comes with Music, it will later this year launch a new S60 platform featuring . you got it . touchscreen capabilities.

"I think [Nokia CEO] Olli-Pekka Kallasvuo has been quite vocal about this," suggests Gartner's Milanesi. "If Apple has come in from not being a device vendor and were able to do something like this, then what the hell are we doing wrong that we're number one in the space and we've not come up with something that has that ease of use? In terms of integrating the services with the device and the brand power, I think that is what the traditional vendors are worried about and what they are now trying to match up with."

Informa's Saadi thinks the new Nokia S60 devices are going to cause Apple a major headache since it will be the first generation of S60 to support touchscreen and multi-touch capabilities in similar fashion to that of iPhone. This version will also be equipped with: Sensorial User Interface, to enhance the look and feel of the UI; ScreenPlay functionality, which will enable multi-frame exposure on the display; and enhanced graphical acceleration for multi-service support and better user experience for video streaming and telephony. Existing S60 3rd Edition applications will run on the new edition and Nokia will provide tools to its developers to further optimise their applications to support the newly added features.

According to Saadi, the addition of these capabilities to the already feature rich S60 portfolio, the openness of this platform enabling the creation of more content and applications for enabled phones - combined with Nokia's strong brand, its manufacturing and production scale capacity, its widespread distribution channels and its advanced understanding of mobile handset segmentation - will enable Nokia to take the touchscreen capabilities to the mass market. "Mobile phones powered by this version are likely to be used to support open internet and Nokia's Ovi service. These phones are expected to compete strongly with the iPhone if Nokia manages to avoid any potential patent conflict with Apple," says Saadi.

Nokia is dependable and by sheer dint of consumer familiarity - and despite various forays into fashion phone territory - many view the firm's handsets as conservative, boring almost. But Nokia, along with its traditional handset rivals, is nothing like the sleeping giant that Steve Jobs was hoping to come up against. Unfortunately for Jobs, the iPhone may have served only to stir up a hornets' nest.

"In fairness to the OEMs, they've done a good job of responding. They've upped their game. The capabilities and user interfaces of the best OEM vendors have improved dramatically over the last 18 months and I think that is because they've seen the iPhone come in," says Stansell. "It was an open secret that something was coming along and they thought 'we've got a real fight on our hands, now we're going to have to really compete with some guys that know what they're doing in terms of user interfaces'. I think that has had a positive impact on the market."

"So what next for Apple?" asks Milanesi, "Will it build a portfolio, will the 3G version have a different look and feel, if it comes in with WCDMA it will still be behind the curve, but HSDPA impacts on battery life more than WCDMA. So will we have to wait another year for HSDPA when everyone else is on HSUPA?"

The challenges for Apple are daunting. Thanks to a strong response for the OEMs, there is a possibility that the iPhone will become sidelined by this time next year - even with a 3G upgrade. The industry is littered with devices that ignited the public's imagination on release then dated within a year. With endless iterations of the RAZR, Motorola found out the hard way that the public get tired of samey devices. Danger's Hiptop terminal - arguably the first attempt by a vendor to deliver a device that focused on consumer friendly mobile web services - was well received by T-Mobile customers in America, but did precious little elsewhere.

Operators everywhere are now being presented with an ever-growing selection of slick, more technically advanced and more affordable alternatives to the iPhone, and so it is unlikely Apple will secure the exclusive deals and revenue share models to which it has grown accustomed. Indeed, the firm is, sensibly, now moving away from the exclusive deal model.

"Exclusivity tends to last, for these kinds of devices, for a period of time, but then falls away because the vendor realises after a while that they can sell more devices by being non-exclusive," points out Stansell. "But Apple must balance that with not upsetting the operators which it has already got exclusive deals with."

There will come a time, as people tend to unlock these phones, where exclusivity doesn't really make any difference. "Many people will buy pre-pay phone and have them unlocked. Eventually, there will be no choice but to offer these devices across all operators. But the ultimate time for that to happen will be quite a long way down the road. When that will happen is unclear," says Stansell.

In order to gain a permanent presence among the top five, one alternative could see Apple partnering with an existing player. Motorola would be the obvious contender. The two firms collaborated in the past, albeit with the poorly received ROKR, but that in isolation is no reason to discount a future venture between the two US firms. Moto would offer Apple some advantages that it currently struggles with in terms of experience, manufacturing scale, established distribution channels and good understanding of market segmentation.

PA Consulting's David Stansell questions the likelihood of any imminent partnership: "I think it would need a very good reason to partner. Because I'd think Apple would say its brand is strong enough that it didn't need to partner. So I guess it would only be if an OEM could offer them something which Apple didn't have that it would think it was worth its while, and I'm not sure what that would be."

There can be little doubt that the operators are loosening their grip on the customer value chain. Web giant Google made its own handset play last year, of course, launching the open Linux OS Android. At the time, the blogosphere and elements of the media were a little crestfallen, having expected a gadget to rival that of Apple's. Google chairman and CEO, Eric Schmidt, said: "Today's announcement is more ambitious than any single 'Google Phone' that the press has been speculating about over the past few weeks. Our vision is that the powerful platform we're unveiling will power thousands of different phone models."

The possibilities of the Android play seem to offer Google a greater chance than Apple has of achieving reach and longevity in the mobile space. Rich Milner, group manager for mobile operations at Google (and one of Android's founders) told MCI, "Our goal with Android was to create, not just for us, but for everybody, a great open platform to enable the developments of applications."

Gartner's Milanesi thinks Android mirrors Ovi: "Google has services but needs to find a platform that will get those services into the hands of the consumer, and that's where Android comes in. So in a way you have Nokia moving from hardware to services, and Google moving from services to hardware, then you have Apple coming with the whole package, coming from a different industry."

Interestingly, Milner co-founded Android in 2003 (it was bought by Google in 2005 for an undisclosed sum) with Andy Rubin, founder of Danger. In further developments Apple's rival from the PC world Microsoft announced the acquisition of Danger earlier this year. Apple has a fight on its hands with major software and web players like Microsoft and Google furthering their mobile handset ambitions.

The dynamic that exists between OEMs and operators continues to be fascinating. The carriers, as customers, hold all the cards, but the balance of power can swing from one extreme to the other, and back again just as quickly, which is something that Apple could find out soon. Like all great icons, the iPhone has spawned a plethora of imitators. The thing about icons though, is that they tend to die young. The big question Nokia and gang need to ask is will the iPhone go the way of the also iconic but ultimately short lived RAZR or will it do what the iPod did to the media player market?

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