Mac Musings

Why Apple Is Limiting the iPhone Market

Dan Knight - 2007.07.20; updated 2007.07.23 - Tip Jar

There's been a lot written about the iPhone, pro and con.

On the plus side, it's a typical Apple product. It doesn't do much to develop new technologies. Instead, it takes a lot of existing technology, integrates it, and makes it far easier to access than ever before. It's created an incredible amount of hype and free publicity for Apple. And the first batch sold out within a week, making it a runaway sales success.

On the minus side, it's expensive, it's tied to AT&T's phone and data service, and it's first-generation hardware.

We're huge fans of the iPhone at Low End Mac, and we think it's going to do wonders for Apple's bottom line and brand image. We hope it will sell 10 million plus units in its first year on the market.

So far most iPhone users are raving about it. It's not perfect, some have already switched to another brand of smartphone, but for the most part iPhone owners are very happy with their new device. (I hesitate to call it a smartphone, since it goes so far beyond other phones with that label.)

Our biggest complaint about the iPhone is that we wish Apple had made it more widely available and that Apple had allowed the iPhone buyer to receive a kickback (er, rebate) from AT&t rather than insisting that money line Apple's pockets.

I'm happy with Alltel, and I know a lot of people who are happy with Verizon, Sprint-Nextel, and even T-Mobile. Whether because of our contracts or simply because we are content with the service, we don't want to change carriers. (I love Alltel's My Circle.)

"No iPhone for you," Apple says.

Much as it pains me to admit it, Apple had good reasons for doing things the way they did. The iPhone is a first generation product, and if Apple had sold five times as many, there would be five times as many support headaches. Apple had to be sure it could support the number of iPhones sold the first week and that it had enough to satisfy the market.

From everything I've read, Apple came close to supplying enough iPhones for the market. Most stores had enough to last at least 4 days, and most seem to have run out within a week or so. New supplies are reaching stores, so Apple's sales projections were on the money.

But there are support headaches. Even though it's summer and most students are not on campus, there are enough iPhones on the Duke University campus to wreak havoc with its WiFi network. Imagine how this problem would be multiplied across the US had Apple sold five times as many iPhones.

Activation is another issue. From what I've read, some people had a hard time activating their iPhones because the servers (whether at Apple or AT&T) were temporarily overwhelmed. Had Apple sold twice as many iPhones, that would have turned into a disaster.

Looking at it this way, it made a lot of sense for Apple to limit the number of iPhones being sold the first week. By keeping the price high, not allowing AT&T to offer a contract rebate, and limiting availability to one of the "Big 3" carriers, Apple was able to sell out the first shipment, manage the activation and support load, and get a second shipment to dealers not long after inventories sold out.

And places like Duke University have time to figure out what the iPhone's WiFi issues are, share that with Apple, and come up with a fix before school begins.

Apple is milking the iPhone for all it's worth, just as it did with the iPod. Over time, the iPod gained capacity, lost price, and added features. Then came the smaller iPods - the mini, the shuffle, and the nano. Next up we'll probably see a touchscreen iPod that looks a lot like the iPhone and runs the same operating system.

Over time, the iPhone will become more affordable. It will be available with more storage capacity as flash memory continues to drop in price. And we may even see a high-end hard drive iPhone for those who are already using 30-80 GB iPods.

Will we see an iPhone mini? Not likely, as the iPhone interface can only be shrunk so much. We're more likely to see a low-end iPhone - perhaps a 1 GB or 2 GB model for US$399 before the holidays, one that would have to de-emphasize the iPod side of things for people who just want a "brilliant phone". Maybe we'll even see the iPod become an iPhone without the phone by concentrating on WiFi networking.

The iPhone will continue to improve as Apple updates the firmware and develops new models. For other markets, the fact that the iPhone isn't a 3G model will be a big drawback, as that's the norm in Europe and Japan. (Someday it will be here as well.)

AT&T's Edge network won't win any awards for speed, but it seems to be a good value. And AT&T boosted Edge speed fivefold (from 40 kbps to as high as 200 kbps, which is better than Verizon or Sprint-Nextel offer; 3G promises 384 kbps for mobile use) when the iPhone shipped. I think the basic 450 minute plan with unlimited Internet access is a decent value at US$60, especially as all calls to and from AT&T wireless users (62 million) are free.

I'd like to see the iPhone offer much better data speeds and function as a modem for my MacBook. If it did that, maybe I could kiss Comcast good-bye - but their service is up to 40x as fast as AT&T's Edge network. Better yet would be using a wireless broadband service such as Azulstar (the first wireless carrier to service an entire city). Some of these offer speeds up to 3 Mbps - 15x what Edge offers and 8x what 3G is capable of in the field. (3G can reach 2 Mbps for a stationery setup.)

Anyhow, the iPhone is a runaway success, and I suspect Apple will just be able to keep up with demand until they can ramp up production. However, if the next generation iPod uses the same technology, the two product lines will be fighting for components. It's quite conceivable that Apple could delay a touchscreen iPod until it's assured of keeping up with iPhone demand.

I don't know the ins and outs of Apple's exclusivity contract with AT&T, but it apparently give AT&T a two year lock on the line. After that, Apple could create another surge in demand by allowing other carriers to support and sell the iPhone. And if demand sags, Apple can trim price and/or allow the carriers to offer contract rebates - as they already do with other phones.

It's still frustrating for early adopters and technophiles who can't or don't want to change carriers. The iPhone appears to be a marvel, but it's going to be some time before a lot of us can make that switch.

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Dan Knight has been using Macs since 1986, sold Macs for several years, supported them for many more years, and has been publishing Low End Mac since April 1997. If you find Dan's articles helpful, please consider making a donation to his tip jar.

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