iPhone Business Analysis

iPhone Business Analysis

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Apple's iPhone is it's latest entry into a field that lightly touches computers but has more of an otherworldly feel. Below I will delineate the iPhone's chances of success/survival in the phone game based upon Porter's Five Forces Model.

iPhone combines three products — a revolutionary mobile phone, a wide screen iPod with touch controls, and a breakthrough Internet communications device with desktop-class email, web browsing, maps, and searching — into one small and lightweight handheld device. iPhone also introduces an entirely new user interface based on a large multi-touch display and pioneering new software, letting you control everything with just your fingers.. – Apple iPhone Website.

Like any new product it won't be known for about 2 years whether or not it is successful. There will be those who rush out to get the iPhone as soon as it's available (early adopters) but most people will hold off for a few months to see if the hoopla is really is backed up with a solid product. What makes this product introduction so interesting is the fact that iPhone simultaneously enters into three markets at one time; the cell phone market, the PDA/mobile communications market, and the iPod/mobile music market. So when looking at Porter's Five Forces, you have to analyze each the iPhone's chances in each market.

Buyer Power-
While most consumers expect to pay a reasonable to high-end price for a fully equipped iPod and PDA device, most consumers are used to getting their phones for free. In fact "Free is the price many consumers expect in the United States. Carrier offers say it all. Out of Cingular's 82 offered phones, 10 are free, and another 22 sell for less than $40. During the holidays, some phone and consumer electronics stores offered Motorola Razrs two for the price of one. There is expectation that phones will be free with service, or at least cheap. The iPhone will sell for $499 or $599, depending on model, according to Jobs.

In my view this is going to be one of two large hurdles the iPhone is going to have to clear in order to be successful. As the saying goes, nothing beats free. In addition to the high price, Apple will also have to offer something extremely compelling to get consumers to switch.

As it stands most Americans already have a cell phone and many have a blackberry like device that allows for e-mail transmission coupled with cell phone capabilities.

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Without some form of incredible incentive (i.e. pay consumers to switch plans to Cingular) most people will not have the ability to use the phone even if they so desired. Marketed as a PDA/mobile e-mail device, the iPhone may make light head way in relation to sales, but again, consumers hold the cards in this matter. If you already have a product you are happy with or that your company provides, you won't see the need to switch or add a second device considering the steep price.

Supplier Power-
From a hardware and software standpoint the iPhone is on solid ground. If there is one thing the iPhone does not have to worry about it's an overzealous supplier fouling up production. From what I have been able to research, every thing included in the iPhone is made in-house. According to Andy Ihnatko of the Chicago Times "Apple will keep a very tight rein on software development. I asked point-blank if third parties would be able to write and distribute iPhone apps and was told, point-blank, no. However, it appears that there'll be some third-party opportunities. I'm going to take a guess that iPhone software will be distributed the same way as iPod games: no "unsigned" apps will install, but apps will start appearing on the iTunes Store after successfully passing through a mysterious process of Apple certification -- one that ensures that they meet a certain standard of quality and won't, you know, secretly send your credit-card info to Nigeria. (1/8/2007)

Threat of New Entry + Threat of Substitute

Again, being that the iPhone is a new entrant into three fields simultaneously, it will be hard to judge how other companies plan to react/combat iPhone's presence. It would stand to reason, that most companies (Nokia, Motorola, and Blackberry Subsidiaries) would stand pat during the iPhone's introduction. If the product takes off, then the free-for-all will commence as each sector puts into effect their plans for counteracting the iPhone.

In my opinion, iPhone's partnership with Cingular will initially help shield iPhone from competitors who may have developed similar products but lack a promotional vehicle (i.e., a cell phone carrier willing to partner with and sell their product). All the other major cell phone carriers will not be able to "cash-in" on the iPhone craze if there is indeed a craze at all. The initial cost for interested parties to switch from their current phone carrier to Cingular and the iPhone is extremely cost prohibitive. Most cell phone companies have large fees associated with contract terminations and then you must add to that cost the fees associated with signing up with Cingular and buying an iPhone at $400.00 +. After iPhone's exclusive deal with Cingular ends, and provided that iPhone has proven to be a viable product, you will see other phone companies attempting to plug their services as iPhone compatible.

Form a mobile music standpoint; I definitely believe that the success of iPhone could eventually lead to the cannibalization of the iPod. In my estimation, there would be little reason to have an iPod if your cell phone does all the same functions plus keeps you connected to the world at large. What I am not sure is if this is actually part of Apple's plan. After all, it is always better to be the company that makes your own products obsolete than for a competitor to do so and effectively squeeze you out of the business.

Competitive Rivalry between Existing Players

The cell phone, and PDA/mobile internet-email markets are extremely competitive. Due to this competition, the margins on cell phone have practically disappeared as cellular companies treat the hardware as a throw in unless the model is brand new. Even then, new models can be had for virtually nothing as rebates for expensive phones have become the industry norm. The same can said for the PDA sector, although a majority of their audience is business related and thus the end user has little more than a vague idea of the cost of the hardware (company pays for hardware for employee plus maintenance). While other companies will have products that may be comparable in scope and functionality, the iPhone's fully touch screen process and commitment to convergence will be hard to over take by rivals in the cellular and PDA market for some time. The issue of consistent innovation (upgrades) will be the factor that keeps the iPhone in front of the competitive curve.

In the mobile music field, the iPod is the industry standard so, Apple would be competing with itself in this industry, a good luxury to have. Apple can simply sit back and look at sales of both products and decide to discontinue the iPod if it looks like the iPhone is going to sweep the nation. Again, the iPod is the industry standard for MP3 players, so provided that the iPhone lives up to these current standards (this includes usability and synchronization with desktop library already a massed via iTunes) the iPod may become superfluous or may evolve into something completely different (possible iTV?).

Chance for survival

Overall, I think the iPhone is a solid product. Apple's commitment to marketing the product along with their business agreement with Cingular (who indecently has one the best customer service records) is great insulation from competitors. The major stumbling product I foresee is the price of the iPhone in relation to other PDA and cellular phones available to consumers. With a steep price tag, and at this time, little incentive for consumer to switch to their product, iPhones could become a novelty item for the rich and business people who don't have to cover the price of their phones out of their own pockets. As time moves forward the price of the iPhone will come down somewhat but it's impossible to say if Apple can afford to wait for that to happen.
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