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Why the Apple phone will fail, and fail badly

It's the Pippin all over again

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Who will pay for the Apple phone?

A new player coming into the market is either going to have to offer the phone unsubsidised, at its true retail cost, subsidise it itself, or find a way to convince network operators they can gain from subsidising the handset.

A few companies have tried to offer phones without subsidy; relying on stylish design and branding to off-set the high cost and lack of features. Most notable was Xelibri, a range of good-looking phones which Siemens tried to sell direct to the public before giving up in 2004. It is possible for very high end handsets such as the Vertu range from Nokia, but when your handsets start at $4,500 a couple of hundred quid subsidy is neither here nor there.

The Apple phone will be able to charge a premium for style, but put a £330 iPod phone on the shelf next to a Sony Walkman handset with similar capabilities which is free and it will be a tough sell for anyone.

Some have suggested that Apple will simply set up their own Mobile Virtual Network Operator (MVNO) and just fund the subsidy; making the money back on calls and use of the iTunes service. However, iTunes has always existed to sell hardware, not subsidise its production. The service isn't supposed to make money, and while it might or might not lose a great deal of money it certainly can't be called upon to cover the cost of a stylish handset any more than it could cover the cost of handing out iPods for free.

So we are left with Apple trying to sell its phone to existing network operators using the same tactics as its competitors. It might make play of its simple interface, and easy access to operator services, but far more likely Apple will use network exclusivity to sell the idea to a single operator in each territory.

The iPod is now a valuable brand, and one associated with the youth market operators are so keen to attract. This alone could make the Apple phone attractive, especially if only one operator has such an association.

By limiting the distribution of the handset in this way Apple will be spared the need to negotiate with dozens of different operators, and can share the promotional costs with the operator of choice - who will be hoping customers will switch networks just to get one. Such a deal would reduce the number of handsets Apple would be able to sell, but that might be no bad thing as it would reduce Apple's exposure while (hopefully) demonstrating its ability in the market.

But it would also make Apple dependent on that operator, and on that operator's commitment to the project; particularly when the first flush of publicity is past.

It's business, not pleasure

Apple will launch a mobile phone in January, and it will become available during 2007. It will be a lovely bit of kit, a pleasure to behold, and its limited functionality will be easy to access and use.

The Apple phone will be exclusive to one of the major networks in each territory and some customers will switch networks just to get it, but not as many as had been hoped.

As customers start to realise that the competition offers better functionality at a lower price, by negotiating a better subsidy, sales will stagnate. After a year a new version will be launched, but it will lack the innovation of the first and quickly vanish.

The only question remaining is if, when the iPod phone fails, it will take the iPod with it. ®

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