The iPhone's Wary New Rivals

By cutting prices on some iPhones, Apple is moving its iconic handset onto turf held by low-end smartphones and full-featured cell phones

By Olga Kharif

New iPhone products and price changes are never cause for celebration among Apple's rivals in the wireless industry. The latest additions to the iPhone family are no exception. This time around, Apple (AAPL) has lowered the handset's price, moving the iPhone onto turf now occupied by low-end smartphones and full-featured cell phones.

On June 8, AT&T (T) began selling an iPhone for as little as $99 with a two-year contract. The new price should help Apple reach new, more budget-conscious buyers—people who have never purchased smartphones before. According to research recently released by Yankee Group, 41% of 1,500 Americans surveyed in February said they are likely to buy a smartphone, vs. a regular-featured phone, for their next mobile device. The price cut alone may increase demand for the iPhone by an extra 10%, estimates wireless expert Chetan Sharma.

Lowering the price moves Apple into new realms. "The phones that are most vulnerable are the less-advanced smartphones in the $100 range," says Ross Rubin, director of industry analysis at consultant NPD Group. Samsung, LG, Sony Ericsson, and Pantech are in danger of losing some ground within AT&T stores, says Matt Thornton, an analyst at Avian Securities.

Apple: Doubling Global Handset Share

These handset makers' margins might erode as well. In the first quarter of 2009, the average smartphone sold for $155 after carrier subsidies, down from $204 in the year-ago quarter, according to NPD. Now smartphone makers must be prepared for another $50 price drop. "That sets the bar higher for the competition to undercut or match Apple," Sharma says. "[Manufacturers] will have to cut their margins and carriers will have to match what AT&T offers."

As it cuts prices on the existing generation of iPhones, Apple is also releasing a new device, the iPhone 3G S, which it says will have faster data transmission speeds. Apple says the new model can surf the Web twice as fast as the older iPhone 3G, offering video recording capabilities and longer battery life. RBC Capital Markets analyst Mike Abramsky expects Apple to have 2.4% of global handset market share by the fall of 2010, up from 1.1% last year.

Rivals may take some solace from analysts who say that while this iPhone is better than older iterations, its improvements are not as earth-shattering as those of earlier models. This "is not a huge, dramatic change for what people want it for," says Michael Mace, principal at Rubicon Consulting. Arguably, prior-generation iPhones offered more drastic improvements. Introduced in 2008, the iPhone 3G came with a built-in Global Positioning System and an applications store, in addition to offering twice the speed of the original iPhone. The year before, the original iPhone was the first best-selling device to boast a touchscreen.

Would-Be 3G S Upgraders Are Furious

Indeed, rivals are also better prepared to meet the iPhone's challenge head-on with their own best-selling products. "There's a change now," says NPD's Rubin. All major U.S. carriers boast strong iPhone alternatives: Sprint Nextel (S) offers the Palm (PALM) Pre; T-Mobile USA sells the T-Mobile G1 smartphone, which runs the Android operating system put together by a Google (GOOG)-led coalition; and Verizon Wireless and Sprint, like AT&T, continue to sell versions of Research In Motion's (RIMM) BlackBerry.

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