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Even Apple's Rivals May Benefit From the iPhone Frenzy

CNBC.com

Apple’s iPhone could change everything in the handheld market, but even competitors are likely to ride the tidal wave of enthusiasm for the device.

Lines of customers clamored to buy the iPhone on Friday, but Kevin O’Marah, an analyst at AMR Research, predicted that Apple’s rivals will respond quickly -- which could reinvigorate the telecommunications industry.

Nokia, Motorola and Samsung have some phenomenal devices,” O’Marah told CNBC. “How quickly do alternative providers show up with a competitive alternative after the initial (iPhone) buzz wears off? We think it’s quite quick.”

AT&T, the exclusive carrier for Apple’s new multimedia device, is clearly the big winner among wireless services. But if other handheld makers do come up with competing devices quickly, then Verizon, T-Mobile and other carriers will benefit as well.

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The only real potential loser is Apple's arch-rival, Microsoft. The company's Windows Mobile might be crowded out of the market because it can’t match Apple’ OS X operating system, especially for mobile applications, analysts say.

“Windows Mobile will be confined to a niche based on price,” says Jagdish Rebello, an analyst at iSuppli, a market research firm.

Blackberrys Not Threatened

Even Research in Motion's Blackberry may not be hit as badly some might think. Blackberrys are so widely used in corporate America that most companies aren't likely to spend the money and effort to switch to the iPhone anytime soon. So the Apple device, which initially will cost $499 for four gigabytes of memory and $599 for eight gigabytes, will be primarily a consumer--not business--item.

The iPhone also is likely to spark a cottage industry of accessories, much like the iPod. It's not difficult to imagine a docking station that would play music through quality speakers and offer a larger screen and keyboard for Web surfing while re-charging the device.

Despite all the hype, Apple’s sales goals for the iPhone are relatively modest--10 million units over 18 months, or 1% of the annual one-billion-unit handheld market.

“The iPhone isn’t going to take over the world,” Rebello said. “It’s a revolutionary product, but it’s important to put it in context. It’s generating hype in an extremely small niche market.”

Even so, the buzz surrounding the iPhone makes it a game-changer for the entire handheld industry.

Arnie Berman, an analyst at Cowen & Co., thinks the immediate selling point of the iPhone is its ability to make the owner’s friend envious.

“I think the news flow over the next several weeks will be good, athough there’s a big question whether it will be good enough to continue to power Apple’s stock,” Berman says. “The ‘halo effect’ with the iPod was other Apple products. The ‘halo effect’ with iPhone is about other cell phone makers and their higher price-point products.”

Far From Perfect

The iPhone is far from perfect. For one thing, it will use a slower 2.5-generation network rather than the more robust 3-G network. This could result in slower data transfers or Web access. Analysts say bandwidth isn’t necessarily the key element if the handset’s software makes the best use of available bandwidth--and Apple’s operating system is highly efficient.

Apple also is expected to make improvements in the coming months, which may prompt people to hold off buying one. Future models are likely to be zippier and offer additional features, extended battery life, a faster network and easy connection with your office e-mail. And the price is likely to come down.

AT&T will certainly get a big boost with Friday's launch. Chris Larsen, an analyst at Credit Suisse, tells CNBC that as many as two million subscribers will drop Verizon for AT&T by 2009. That’s a big number, but only about 4% of Verizon’s wireless customers.

The U.S. cellular market is now saturated and carriers can significantly increase their customer base by snatching customers from their competition. The iPhone could give AT&T a significant edge in the endless grind for new customers.

“(The iPhone) could have a material impact on the value created per share at AT&T, on the order of $1.50 to $3 per share if things play out the way we think they will,” Larsen says.

“AT&T is riding the coattails of an original equipment manufacturer (OEM),” says iSuppli's Rebello. “Over the last five years, the balance of power had shifted to the carriers from the OEMs on who dictated what was on the handset. With iPhone, people choose the carrier based on the device--Apple is driving customers to AT&T, reversing the prior trend.”

Competitors Still Strong

Still, bloggers’ predictions of a crushing death for Motorola, Nokia, Sony Ericsson Mobile, Samsung and other phone makers are greatly overstated.

Motorola’s Razr, a thin, clamshell handset, sold about 50 million units from 2004 to 2006, making it the most popular cell phone on the market. In Europe, HTC is rolling out a device similar to the iPhone and can ride Apple’s wave of publicity with impunity because the iPhone won’t be available in Europe for at least six months.

If large numbers of cell phone users want more than phone calls and a sleek look, expect Apple’s competitors to quickly mimic the iPhone’s features while adding something new. For now, the iPhone has a clear edge in ease-of-use.

Many joke that a genius IQ is required to get the most out of existing cell phones and the owner’s manual is 20 or 25 times as thick as the device. That’s a far cry from iPhone’s quick access to Google’s online maps and driving directions. The iPhone also offers easy scrolling through a contact list, quick photo album searches and fast callbacks for missed calls and recently dialed numbers.

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