Global Economics

The Devil Dials Prada on LG's New Phone


Co-branded designer phones are the rage. The Korean outfit hopes the luxury fashion name will make a splash in the high-end handset arena

When Apple (AAPL) unveiled its long-anticipated iPhone at the annual Macworld trade show in San Francisco in early January, few received the news with more apprehension than Cha Kang Heui. Cha, the chief mobile phone designer at LG Electronics, has high expectations for a new co-branded handset due out next month that was designed with a team from Italian fashion house Prada.

The iPhone has certainly generated industry-wide buzz. However, opinion is divided about what sort of sales impact the wireless phone, music and video player, and mobile Internet browsing device will make in a very crowded field already dominated by Nokia (NOK), Motorola (MOT), Samsung Electronics (SSNHY), Sony Ericsson, and LG when it's launched in June (see BusinessWeek.com, 1/10/07, "The Future of Apple").

Even so, LG execs believe the Prada Phone, which will go head-to-head with Apple's iPhone in the high-end multimedia handset arena, is a game-changer. It boasts an elegant shape and design, graphic interface, and, of course, the Prada brand name that oozes high-fashion and luxury. "With or without the iPhone, our Prada phone and other models will give consumers a new experience," declares Cha. "Users will come back to us as long as we give them emotional satisfaction with easy-to-use software interface or intuitive look and feel."

Prada Price Tag

In a world awash with mobile phones, global manufacturers have now started to reach out to luxury brand purveyors to develop fashion phones that offer a way to charge more for a little panache—but also stand out. For instance, Motorola has teamed with the (RED) group, co-founded by U2 front man and activist Bono, to develop the Red Motorazr. Plus, Samsung and high-end Danish consumer-electronics firm, Bang & Olufsen jointly developed a high-end handset called the Serene (see BusinessWeek.com, 1/22/07, "Making the Serene Scene with B&O").

LG will see what kind of fashion instincts it has when the Prada Phone goes on sale in Europe in February. The design may be minimalist, but not the functions—or the price.

The multimedia phone, which will fetch €600 ($780), is not so different from other high-tech handsets. You can play and download music, surf the Internet, deliver voice mail, and read Microsoft's document files. It also doubles as an FM radio and comes with a 2-megapixel still and video camera. (Sales in Asia will begin in March, but LG is still negotiating with U.S. carriers for its U.S. debut)

Shift to Design Emphasis

The main difference from other phones is its radically simple appearance. Like Apple's iPhone, it removed clustered buttons and the keypad to rely on graphic icons on a big touch screen. And when not in use, the glowing icons disappear to reveal the pure black face that highlights the Italian fashion house's ubiquitous Prada logo.

LG is betting that the touch interface and the sleek design and status symbol allure will differentiate the handset from other ultra-slim, function-backed devices. That may not be easy. The thin-is-beautiful fad has been in motion since 2004, when Motorola scored big with its Razr lineup in 2004. "Phones have become a powerful accessory of consumers, and they seek expression of their personality with their accessories," says Cha.

Still, LG has shown some design panache in the past, what with the incredible success of its "Chocolate" phone. The Korean company, the world's No. 5 handset maker after Nokia, Motorola, Samsung Electronics, and Sony Ericsson, has sold some 7.5 million Chocolate phones since its global debut last May. The phone also marked the company's shift in emphasis—to design and user interface—from leading-edge features (see BusinessWeek.com, 7/19/06, "LG's Chocolate: Will This Cell Phone Hit the Sweet Spot?").

"Digital Workhorse"

The Chocolate, the best-selling model LG has ever introduced, has turned LG's money-losing cell phone business around. The handset unit posted an operating profit of $148.2 million in the second half of 2006, against a loss of $36.5 million in the first six months. The phone, which was first offered at a retail price of about $400, has also boosted LG's average selling price for its phones in Europe to $160 from below $110 at the beginning of last year.

Like the Prada phone, the Chocolate was designed to look like a black rectangular bar, not a phone. Its LCD screen, which sleeps when not in use, suddenly lights up when it slides open. "Customers are amused when a simple personal accessory item turns into a powerful digital workhorse with a gentle touch," says Cha, who first introduced touch-sensitive navigation buttons for the Chocolate.

Now LG is poised to ship the Prada and another new phone overseas, capitalizing on the playful interaction with its phone users. "We are creating a new market," says Chang Ma, a vice-president with LG's mobile communications unit. "Design has become a good enough factor for consumers to choose their phones."

User Experience?

Ma reckons the design similarity between the iPhone and the Prada underscores how rapidly the Korean company has made strides in dreaming up innovative products on par with the kind of branding and design smarts Apple lends to its products. "We are pretty confident that [our] consumer-focused design capability has reached Apple's class," he says.

Already, the Prada phone won Europe's prestigious IF award in December for its excellence in design. The ultra-thin phone, the outcome of an eight-month joint effort between LG and Prada designers, will be sold in phone dealerships and Prada stores in Britain, France, Germany, and Italy starting in February. That's four months before Apple will start offering the iPhone in the U.S.

LG is also launching another fashion phone in Europe—called the "Shine" phone. As the name suggests, its face and the back are finished with shiny stainless steel. The face of the slider phone is a glittering silver mirror which turns into an LCD screen when it slides open. The back is a clean stainless sheet housing only the lens of a 2-megapixel camera. The phone, which will be sold globally this year, will have a price tag similar to that of the Chocolate phone.

The shiny, rectangular phone has all the ingredients for becoming a head-turner, at least as far as its hardware appeal is concerned. The big question is if users will appreciate their experience with its software as well. That issue looms large particularly because Apple is moving into the business, with Jobs pledging to "reinvent the phone (see BusinessWeek.com, 1/12/07, "The Real Genius of Apple's iPhone")."

The Candy vs. the Apple

Korean electronics companies had learned a lesson with Apple's iPod music player earlier this decade. The Koreans were years ahead in rolling out a MP3 music player only to be outgunned by Apple with its beautifully designed iPod and the software magic of iTunes. "We admire Apple's excellence in user interface and software," says Brian Sohn, head of LG's investor relations. "We are watching Apple carefully, but Apple also has some catching up to do in its telecom network technologies."

Analysts agree that although Apple has the potential to shake up the industry, it won't pose a major threat to large phone makers in the short term. Apple hopes to garner 1% of the global handset market by 2008, a goal that would mean sales of 10 million phones. That's a number LG is expected to achieve with its Chocolate phone alone from one year of its global sales. LG, which sold 64 million handsets in 2006, aims to ship 78 million units this year.

With the success of its Chocolate phone, LG is no longer an obscure name among carriers, dealerships, or consumers in global markets. "The chances of LG hitting the sweet spot have certainly improved," says Kevin Lee, telecom device analyst at Woori Investment & Securities in Seoul. If the Shine or Prada phone proves a hit model, LG could charge ahead in its campaign to move up in the fiercely competitive industry's pecking order.


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