iPhone sets tone

Gadget looks to change mobile biz

By TERENCE KEEGAN

Time was when iPods and mobile phones occupied separate jacket pockets.

Back in 2003, as Apple CEO Steve Jobs toasted 1 million songs sold in five days through his brand-new iTunes Music Store, "mobile content" still translated to a poor polyphonic ringtone of U2's "With or Without You."

Four years later, however, mobile carriers and iTunes both lay claim to billion-dollar music markets worldwide -- and U.S. network operators, like Apple, have branched out to offer paid downloads of feature films such as Buena Vista's "Eight Below."

Enter the iPhone, Jobs' first major salvo in a turf war with mobile network operators, and a potential kickstart to an advanced, global mobile content market.

Apple's forthcoming "it" gadget promises to function as a widescreen video iPod, cell phone and Internet communications device all in one, while upholding Apple's design simplicity and style (qualities that to date have proven elusive for competing mobile device vendors).

Confidence is key

Cingular Wireless -- the U.S.' largest mobile network, with 60 million subscribers -- has snagged exclusive domestic rights to the iPhone, which debuts in June at a stiff $499. The carrier -- which has begun to rebrand itself under the name of its parent, AT&T -- is mum on how much it paid for its iPhone privileges, but Cingular CEO Stan Sigman clearly has converted to Apple's worldview.

"Every time I see (the iPhone), it's just, wow," Sigman gushed onstage alongside Jobs during the product's unveiling at the Macworld conference in San Francisco Jan. 9. The executive admitted that Cingular signed its multiyear iPhone agreement with Apple "without ever even seeing the device, because of the confidence I have in Steve to deliver on his vision."

Rarely have such statements and concessions come from U.S. operators, who historically have lorded over device manufacturers in certifying handset models for use on their networks. (The two parties continually fight "legendary battles," says IDC analyst Randy Giusto, over everything from menu interfaces to phone colors --and in the U.S. at least, it's the hardware guy that usually caves.)

Never mind that Apple enters the mobile space primarily as a device vendor. Jobs' aim to become a top entertainment purveyor clashes with the views of Sprint and Verizon, both of whom are spending big bucks to keep subscribers within the walls of their respective content gardens.

Sprint, which boasts 1 million mobile-video-capable subscribers, launched pay-per-view movies from Disney, Lionsgate, Sony and Universal in September, and has gone so far as to create its own broadcast network for sports and entertainment news.

European invasion

Things are somewhat different in Europe, where folks can buy "unlocked" phones that they can program to work with a variety of competing services. Still, analysts say European operators (among them O2, Orange, T-Mobile and Vodaphone) all are jockeying for an iPhone exclusive.

Apple -- which plans a Europe market bow later this year, followed by an Asia intro -- looks to sell 10 million iPhones worldwide through 2008, roughly 1% of the world's projected cell phone population.

Haters have chided Apple for not making its new device compatible with third-generation (3G) cell networks, which boost mobile content download speeds. But they make a moot point, for iPhone users presumably will load most of their songs and videos from their computer, rather than over an operator's network.

What's more, 3G comprises a fraction of the U.S. mobile subscriber base -- just 6.6% of an estimated 239.5 million users in 2007, according to IDC. Stateside subscribers "don't know whether they have 3G or 2.5G; it's only us in the industry that know," says Giusto, who adds he nevertheless "wouldn't be surprised" to see the iPhone support 3G out of the gate in Europe and Asia.

That could keep firms like Hutchison -- a mobile content leader in the U.K., whose popular "3" service is exclusively 3G -- in the running for iPhone rights.

In every major wireless market, Apple's move likely will spur responses from device makers and operators alike. It remains anyone's guess as to whether any of these new products -- the iPhone among them -- will in turn help songs, TV episodes and movies to supplant ringtones and screensavers as mobile content revenue leaders.

Worldwide, analyst Giusto says, operators tend to usher in their mobile content add-ons "with a lot of marketing buzz;" the new services gain a following "in the first couple of months, or maybe over a quarter or two, and then they kind of peak. There's always that cream-of-the-crop subscriber who will continue to use (mobile content extras), but a large percentage of the subscriber base -- over 50%, sometimes (as high as) 80% -- just don't go there."