iPHONE ECONOMICS


Greetings,

This has been a busy week. Meetings, birthday coming up on Saturday, getting ready for a weekend away, lots on – still, there’s a lot of tech news going on this week.

iPHONE: The blogosphere has been going nuts over this gadget and probably with good reason – Apple’s got a potential winner here. Albeit a potential winner. Unlike the iPod (which is still going strong), the iPhone (although it might not be the iPhone after Cisco takes Apple on in court) has some significant potential drawbacks that could make it harder for non-gadget freaks and early adopters to splurge.

First off, it’s obvious what Apple’s strategy is here. While it’s a bit counter-intuitive for Apple, a very youth-oriented company, to put out a fixed mobile convergence product that few young people need or can afford ($599 for the 8 GB model is borderline highway robbery guys, even for Apple’s higher-than-average prices – superior quality of product notwithstanding), the logic goes that only three groups of people will bother to buy this product when it debuts in June in the U.S.: Apple fetishists gadget freaks that can’t bear not to be with latest shiny toy from Apple, the early adopters along the same lines as those who bought the iPod when it debuted in 2001, and the obscenely rich, wealthy sometimes-and-often celebrities who can afford these devices as if they were nothing but merely a drop in the proverbial trust fund/picture deal bucket.

Now, Steve Jobs is a very smart dude. He and Apple’s marketing mafia are smart enough to know that by pushing this product as a status symbol (and really, did anyone who reads this blog and owns an iPod buy an overpriced MP3 player like it just because it plays music well?) and using the blogosphere, celebrity gossip rags and trickle-down buzz from payouts celebrity gift bags at major award shows, the marketing writes itself – who needs to launch a major advertising blitz when you’ve got legions of true believers doing the marketing for you?

With a very old economic model in play, Jobs and Apple have to be banking on these factors to make the iPhone work:

1) Get the iPhone into the media with rich celebrities as an object of envy, which gets some of the younger set and hipster set on board;

2) Push the product via the “cool, young and hip” factor onto the next obvious target, the business class, which will in turn employ all the iPhone’s data transmission capabilities, thus eventually bringing the prices of data transfers like web pages or email down to the price of voice so behold: Apple has cornered the market on not just Smart Phones, but cheaper Smart Phones;

3) All the while this is happening, as more people adopt newer and better versions of the iPhone (guaranteed it will be a few generations of the iPhone before it “miraculously” reaches the storage capacity of the 80 GB iPod) it becomes cheaper, has better battery life and voice-and-data plans go down across the board in an effort to compete with Apple’s sudden dominance of the Smart Phone market;

4) Finally, the price reaches a sweet spot where it becomes both reasonable and even desirable for the average man on the street to have an iPhone because, at, say, $459, you get the product Apple has released now, but with a better battery life, more memory and minor tweaks the company can already do now in 2007: they just don’t want to because it will harm their profit margins. Also, cell phone carriers will offer voice-and-data plans at much cheaper rates than today because it powers forward market adoption and they have no choice left.

Voila. Apple controls the Smart Phone market. Can you imagine how nervous these guys must be feeling today?

NEW COLUMN: Here’s my latest column from the Toronto Business Times. Do check it out.

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