Technology

The iPhone 3G Unveiled


Apple's new mobile device features improvements galore, not the least of which is a more attractive price tag that will likely ignite demand

Almost a year after upending the mobile-phone world with its first wireless handset, the iPhone, Apple unveiled a souped-up second version of the device, the iPhone 3G.

Introduced by Apple (AAPL) CEO Steve Jobs in a June 9 keynote address in San Francisco, the iPhone 3G will sell for $199 for an 8GB version and $299 for a 16GB version. The new prices represent a departure from a year ago when the first devices sold for $599 on the upper end. The iPhone 3G will be available in 22 countries beginning July 11, and will eventually be sold in 70 countries in all.

The new phone derives its name from the faster Internet downloads available on advanced, or third-generation (3G), wireless networks. Jobs told the audience the new iPhone downloads Web pages as much as 36% faster than comparable phones from Nokia (NOK) and Palm (PALM). The new phone also sports a feature that lets users know their location using GPS satellites. Phones that run GPS technology are able to access an array of location-aware applications, including mapping within address books. Other improvements over the original device include improved audio quality on phone calls.

Juicing Demand

Improvements to the first version of the iPhone—the lower price in particular—will likely generate greater demand for one of Apple's most successful products to date. "If anyone needed proof that Apple was ready, willing, and able to go after lots of mobile-phone users, they got it today," says Gartner (IT) analyst Mike McGuire. "Apple is showing itself to be really serious about the phone market." Apple has sold 6 million units since the iPhone was introduced at the end of June, 2007. "More people desired to buy it, but they couldn't afford it," Apple Chief Operating Officer Tim Cook says.

Demand for the iPhone also stands to benefit the wireless carriers on whose networks the device runs—although Cook says the lower price reflects a subsidy that will be absorbed by the service providers. The official iPhone provider in the U.S. is AT&T (T). "The launch of 3G iPhone will be another opportunity for [Apple's] exclusive providers to boost [revenue per user] and market share gains, continuing what 2G iPhone started," UBS (UBS) analyst John Hodulik wrote in a research report.

Apple's stock dropped during the keynote, falling as much as $7.25, or nearly 4%, by 2 p.m. Eastern time, though it later recouped losses. Apple shares had slipped $4.03, or 2.2%, to 181.61 by the close of trading.

Apple also added features designed to make this version of the iPhone more attractive to business users. These include the ability to read documents from Microsoft Office (MSFT), including documents in Word, spreadsheets in Excel, and PowerPoint presentations. "We sort of checked the boxes on everything the enterprise wanted," Cook says.

Several New Features

Another new feature is a service called MobileMe, an expansion of Apple's existing .Mac Web service, which offers hosted e-mail, online storage, and other services for users of Apple's Macintosh computers. During the presentation, Apple Senior Vice-President Phil Schiller described the service as "Exchange for the rest of us," referring to Microsoft's widely used corporate e-mail, calendar, and contact-list tools. E-mail messages, calendar updates, and contacts are updated live via a wireless Internet connection, and data are synchronized between the iPhone and a Macintosh or Windows PC.

Google's (GOOG) map application has been integrated into contact lists. The service also lets users update their online photo albums directly from iPhones. Users will also be able to store up to 20GB of data from both their computers or their iPhones via an application called iDisk. The service will be available for $99 a year, and also available for a free 60-day trial starting in July.

Apple is able to make such a large price cut because wireless carriers including AT&T will subsidize about half the price of the new phone. Under existing arrangements, Apple takes a cut of the revenue collected by carriers for iPhone service plans. Analysts have speculated that Apple's share is as high as 30%, though precise deal terms have not been disclosed.

Under arrangements for the new iPhone, Apple is relinquishing the revenue-sharing arrangements in exchange for subsidies it hopes will move more phones off shelves. "Higher unit volumes will offset removal of carrier revenue share payments," Piper Jaffray (PJC) analyst Gene Munster wrote in a June 9 research note. AT&T said in a regulatory filing that its bottom line will take a hit as a result of the subsidies. Earnings will be cut 10¢ to 12¢ through the end of 2009, the company said. Owners of iPhones tend to generate double the monthly service revenue as owners of other devices, AT&T added.

Apple also introduced several new software applications created by third-party developers. Earlier this year, Apple made available a kit that makes it easier for software writers to create applications for the iPhone (BusinessWeek.com, 3/6/08).

New applications include an auction program from eBay (EBAY), a series of games from Sega and Pangea Software, a friend locator from wireless startup Loopt, and a pair of medical programs from Modality. The Associated Press, the global news organization, also demonstrated a service called the Mobile News Network, which gathers news content based on the phone's location, but also gives iPhone owners the ability to send photos and text to the AP when they see news happening. The blogging service TypePad also debuted an application for blogging directly from the iPhone.

Widespread Apps

Jobs said applications will be available from Apple's iTunes store and will be available in 62 countries. Small applications that require 10MB of memory or less will be downloadable over the air, while larger ones will require either a Wi-Fi connection or installation directly from iTunes. Developers who sell their software through iTunes will set the prices and will be allowed to keep 70% of the revenue from sales.

Corporate customers will be able to distribute applications to employees. Corporate technology managers will have the ability to authorize phones on their networks, and then create an approved list of applications that can run on those phones.


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