Cingular Cedes iPhone Market Plans To Apple

By Joseph Palenchar -- TWICE, 1/22/2007

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Analysts Give Accolades

LAS VEGAS— The launch of Apple's iPhone marks a major change in the way cellular carriers bring phones to market.

Until the combination iPod-smartphone came along, carriers controlled the pricing and distribution of their phones and played a major role in designing their phones' user interfaces. With the Cingular-network iPhone, however, Apple is calling the distribution and pricing shots, said Glen Lurie, Cingular Wireless national distribution president.

The widescreen iPhone, he continued, "is an iPod" whose touch-screen-controlled user interface was developed solely by Apple with the exception of a "visual voice mail," which displays a list of voice mails received and lets users select the voice mails that they want to hear, Lurie continued.

In return for ceding big decisions to Apple, Cingular will win new subscribers attracted to the iPod experience and boost data service revenues and average revenue per customer because the phone "makes SMS, e-mail and Web browsing easy," Lurie said. Cingular already has more subscribers than any other carrier, but "we expect to grow our business" with the iPhone, he continued.

The iPhone, whose name is contested by Cisco as a trademark infringement, is "locked and optimized to our network," but "distribution is owned by Apple," Lurie explained during a Q&A session with reporters here at CES, where the iPhone was not among the products displayed by the carrier in the booth of parent AT&T.

When it ships in June, the phone will be available only through Apple's 150 company-owned stores, Apple's Web site, 2,100 Cingular-branded stores, Cingular's Web site and the carrier's direct-mail operation, Lurie said. After that, it will be up to Apple to expand distribution to major consumer electronics retailers, he continued.

In addition, Lurie continued, "it's an iPod, so Apple sets the price."

Because "it's an iPod," he continued, only the Apple name will appear on the iPhone's case. The Cingular, AT&T or joint Cingular/AT&T brand names, however, will appear on the device's display when the phone is turned on and perhaps at all times when the phone's radio is on, he added.

Lurie described the distribution deal as "unique" in the cellular industry and stressed that it is not an MVNO (mobile virtual network operator) arrangement in which Apple buys airtime wholesale and sells phones and service to end users, thus owning the customer. Cingular customer service reps will be cross-trained in answering Apple and Cingular questions, but when questions get "too detailed," customers will be handed off to Apple customer service, "and vice versa," he noted.

The distribution/product deal is a "multi-year exclusive" covering any future iPhone models in the United States and for any U.S. carrier. Apple is free to strike distribution deals with carriers outside the United States, he said.

The phone's $499 price for a 4GB version and $599 for the 8GB version are with a two-year contract. Existing Cingular subscribers would have to extend their contract by two years to get the phone, Lurie said, without revealing whether the prices are subsidized by the carrier. Some amount of subsidization seems likely, however, given that Cingular's highest priced phone with two-year contract is the recently unveiled Palm Treo 750 at $399.

Despite the high end-user prices, Lurie said he's not concerned that the prices are too high. The iPhone will combine three devices that many people already carry: a cellular phone, an e-mail-oriented smartphone and an MP3 player. A 4GB iPod Nano is $199, he pointed out, and a smartphone with capabilities less than the iPhone sell for $150-$200, so $499 for a 4GB iPhone is "absolutely priced right," he said.

At launch, the quadband worldphone will be equipped with 802.11b/g Wi-Fi and high-speed EDGE cellular data service, but the phone will not access the iTunes music store to download songs or video over the air. That capability, however, is technically feasible, Lurie noted.

Analysts Give Accolades

SAN FRANCISCO — A lot of carriers sell smartphones and music phones. In fact, Cingular already sells the industry's only two phones to store and play iTunes-downloaded music, although their embedded memory is limited and not expandable.

Still, the new Apple iPhone drew rave reviews from analysts despite several drawbacks. Jupiter Research VP Michael Gartenberg, for example, called the device "the most anticipated telephone since that of Alexander Graham Bell" and claimed that "Apple fulfilled the expectations of what people are looking for." Frost & Sullivan analyst Gerry Purdy called it the "best cellphone ever created." And Mobile Devices analyst Avi Greengart called the iPhone's user interface "innovative, visually stunning and incredibly responsive."

M:Metrics VP John Jackson said the decision "to design the iPhone with a smartphone orientation" was a wise, yet unexpected move that puts Apple squarely against Microsoft and the Nokia N-series." The expected profusion of music-centric cellphones "would dilute the value of an iPod-like phone, [but] the demand for smartphones is steadily growing," he noted.

In October, sales of smartphones climbed 230 percent from January of this year, NPD said.

Apple said it hopes to win 1 percent of the worldwide cellphone market by 2008, potentially amounting to 10 million phones out of a total market of 1 billion. The phone will be available in Europe later this year and in Asia in 2008.

Advanced features that could help Apple achieve its goal include a 3.5-inch touch screen that controls all functions, including dialing, without using a stylus. The rectangular phone can be held vertically for use as a phone, but the phone can be rotated horizontally to view video, photos and Web pages in landscape mode. The iPhone's accelerometer detects when the user rotates the phone into landscape mode and alters the displayed content to match.

The phone, which runs on Apple's Mac OS X, also features a virtual QWERTY keyboard with predictive text entry. The phone also stores and plays music and video downloaded from the copyright-protected iTunes Web site. It is Apple's first iPod that lets users browse through their music library by cover art.

The iPhone also uses a modified version of Apple's own Safari Web browser to display Web pages as they would appear on a PC screen.

Other advanced features include the ability to automatically fetch POP3 and IMAP4 e-mail in the background. Google Maps service lets users view maps and satellite images and get directions and traffic information. The device's contact list syncs with a user's PC, Mac and Internet service contact lists.

On the downside, some analysts lamented the phone's inclusion of Cingular's slower-speed EDGE cellular data service, whose maximum average download speeds range up to 130kbps, compared with Cingular's W-CDMA network, which delivers up to 400kbps to 700kbps download speeds on average.

Other factors tending to limit sales include the phone's high price and the need for some consumers to switch cellular networks to use the phone. The phone's OS is also locked down, preventing consumers from adding new applications.

Yankee Group VP Mike Goodman avowed that 10 million iPhones is an achievable target by 2008, but he noted that "it assumes they get this manufactured, and there are no hiccups." The goal "depends also on Cingular and the collaboration between the two companies."

In other Apple news, the company set a February delivery date for its $299-suggested set-top box, now called Apple TV. Apple also announced that more than 2 billion songs, 50 million TV episodes and over 1.3 million feature-length films have been purchased and downloaded from the iTunes Store.

Apple TV streams movies and other media to a TV from a Mac or PC using high-speed Airport 802.11n wireless networking.