Apple's iPhone Takes a Toll

With the debut of the new iPhone 3G, rival phonemakers and wireless operators—and possibly Apple—will feel the impact

by Olga Kharif

Last year, when Apple (AAPL) unveiled its iPhone and made it available in the U.S. exclusively from AT&T, the debut sent ripples throughout the cell-phone industry. Handset maker Palm suffered as consumers swooned for Apple's phone, according to surveys by consultancy NPD. AT&T benefited by pulling subscribers from rival carriers Alltel (AT) and T-Mobile USA (DT).

So will Apple's new phone, the iPhone 3G, have a similar effect? Early evidence since the new device's July 11 debut suggests it will have even broader impact, in part because the entry-level model sells for $199, compared with $499 for the original version. As a rough measure, take last year's impact and double it. In the first 12 days since the iPhone 3G hit the market, the device sold at twice the rate of its predecessor, according to AT&T (T), which hasn't made more recent data available yet. And analysts expect this quick pace to continue for at least a few months: The iPhone 3G likely sold up to 700,000 units in the few weeks of July alone, estimates Trip Chowdhry, an analyst at Global Equities Research. Apple sold about 1.1 million iPhones in all of the third calendar quarter of last year (BusinessWeek.com, 7/22/08).

Raw sales numbers don't tell the whole story, however. So far, many of the new model's purchasers have been existing AT&T subscribers who already own an iPhone. In a survey of more than 100 iPhone 3G buyers conducted in the past two weeks, Chowdhry found that "most of the users are people who are upgrading." A survey of 328 users that UBS conducted on the iPhone 3G's launch day in the U.S. and Britain revealed that nearly 37% of the new device's buyers were current iPhone users. The fact that users are replacing their phones after holding them for less than a year is testament to Apple's marketing and improvements to the device, including global positioning system (GPS) capabilities and access to software from independent developers. Typically in the U.S. market, users replace their handsets, on average, only once every 17.7 months, according to consultancy J.D. Power & Associates.

Second-Hand iPhone Fallout

As these customers discard their old iPhones by putting them up for sale on eBay (EBAY) or giving them to relatives and friends, the wave of second-hand iPhone users will likely prove to be an equal loss for all device manufacturers, including Apple. And rival carriers can take comfort in the fact that these users won't necessarily go to AT&T. On Aug. 5, of the hundreds of original iPhone listings on eBay, only about 10% were advertised as connected to AT&T's network. Most other used iPhones, offered at $50 to $300, depending on condition, were unlocked—that is, not tied to a particular carrier. People buying them can elect to sign up for service with AT&T or T-Mobile USA, or simply use the device at free Wi-Fi hotspots.