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Who's Most Likely To Buy The New Model

By John Moore,|Special to CNBC.com
Thursday, 5 Jun 2008 | 12:28 PM ET

With each new release of the iPod, Apple's loyal, often fanatical, customer base was quick to abandon their perfectly good music players for the one with the latest and greatest features. But will a freshly updated iPhone inspire the same kind of upgrade frenzy? Probably not.

Apple iPhone
Manuel Balce Ceneta
Apple iPhone

The new feature most Apple watchers expect is support forAT&T’shigh-speed 3G network. If that’s the case when the device is unveiled at the Apple Developers Conference June 9-13, it will be a welcome addition for users who’ve complained about slow Web browsing speeds.

Analysts and industry observers, however, aren’t betting that 3G connectivity will be enough to persuade current customers to chuck their year-old iPhones in favor of a new one.

Nonetheless, though major changes to the iPhone aren’t expected for at least another year, the smart money says a modestly updated new model will still be enough to attract enough new users to exceed Apple’s sales goals for the year.

3G Or Not 3G

A large part of the iPhone’s appeal is its Web-browsing capabilities, which provides an experience far superior to rival smart phones. That’s why the lack of 3G connectivity was such a puzzling omission.

Some 20 percent of current owners "will see this version as enough to upgrade,” says Gene Munster, managing director and senior research analyst at Piper Jaffray. “The phone is very similar [to the previous version]. It’s an evolutionary phone, not a revolutionary one."

Customers who purchased the first-generation iPhone primarily for Web connectivity will likely upgrade to an updated version, says Rob Enderle, principal analyst at Enderle Group. But for people who use it primarily as a combination cell phone/iPod, Enderle recommends passing on the new model.

“With any new version, there will be issues we don’t know about,” he says. “It’s Apple’s first 3G phone. The battery life will probably be an issue—3G phones typically have a fraction of the battery life of the same-sized 2.5G phone."

Enderle adds that users currently in the middle of a two-year contract with AT&T will probably have to pay a penalty to upgrade their phones, and 3G alone wouldn’t make that cost worthwhile to most users.

“AT&T might subsidize some of that cost, but you’ll still probably have to pay at least $100 surcharge ,” he says.

Of course, Apple could make that worth while, if enough new features are added.

Munster says there’s a 30 percent chance the second-generation iPhone will include built-in GPS navigation, and a 5 percent chance that it will feature live video chat. “If it includes a keyboard, that could be a game changer,” he says.

Surprises aside, analysts say the 3G iPhone may have the greatest appeal to consumers who didn't buy the first-generation device when was lauched in June 2007.

A price cut would help in both cases and there have been rumors of one.

At $399 and $499, depending on device's memory capacity , the iPhone is considered a luxury item compared with the lower-priced devices of core competitors such as Research In Motion and Palm Inc.

“If Apple wants to move beyond early adopters, the magic price point is $199,” says Michael Mace, principal at Rubicon Consulting. “They’ll be opening the door to a whole wave of new customers.”

Laying the Groundwork

In the end, analysts expect the upgrade will attract more than enough new customers to push sales beyond Apple’s goal of 10 million units in calendar year 2008. The company sold 1.7 million devices in the first quarter.

Apple shares have rebounded from a deep slump in the first quarter and are now 7 percent below their record high of December 2007, a year when the stock price more than doubled.

Munster, who maintains a $250 price target on Apple’s stock, says Wall Street probably won’t be impressed with the initial up-tick in sales, but he believes upcoming developments will boost the stock in the long term.

"Apple is laying the groundwork for the iPhone this year,” says Munster. “The sizzle comes by the end of next year when they get the [international] carriers lined up and running, and they get a family of phones. And subsidies—you’ll probably get a subsidized $200 iPhone by the end of the year.”

Munster forecasts sales of 45 million by the end of 2009, following 12 million in 2008.

RBC Capital Markets Managing Director Michael Abramsky also expects the iPhone to beat Wall Street sales estimates and is forecasting 20 million to 24 million units for 2008-2009. (He notes that because Apple recognizes iPhone revenue over a 24-month period, the impact on the company’s bottom line won’t be apparent until 2010.)

Abramsky has a $220 price target on Apple shares.

“The impact on the stock will be positive by showing they are able to penetrate a market that’s 10 times the size of the PC market. And as with the iPod, indirect sales of the Mac are expected to rise, which will drive the bottom line down the road," says Abramsky,

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