The iPhone Playbook Is Obsolete By Tero Kuittinen RealMoney.com Contributor 2/5/2008 11:16 AM EST

Apple's (AAPL) introduction of a 16 GB iPhone with a stiff price tag is weirdly out of touch -- something the company planned on the basis of rosy demand assumptions of last summer. It looks like the upgrade the company really needs now -- a 3G version with GPS -- is slipping into autumn.

There have been two major price cuts involving the iPhone that signaled a relatively fast fade of early iPhone demand in the U.S. and Europe. Last September, the price of the 8 GB iPhone was cut from $599 to $399 in order to help AT&T deliver a great third-quarter iPhone activation number. That 33% cut, coming little more than two months after the launch, was the first concrete signal that the original iPhone strategy was going off the rails.

AT&T activated just 900,000 iPhones during the fourth quarter of 2007 -- notably below earlier projections. There is no momentum here, and by now, consumers have started anticipating the 3G version of the iPhone that might include embedded GPS.

Last week, O2 in the U.K. tripled the minutes of the cheapest monthly plan it sells with the iPhone, from 200 minutes to 600 minutes. This amounts to a relatively radical price cut, as it moves consumers from more expensive price plans to the cheapest option. O2's price revision came after the operator was unable to hit the 200,000-iPhone-user threshold during the fourth quarter of 2007 -- some experts had anticipated as many as 400,000 iPhone subs for O2 during the Christmas quarter. The German iPhone partner T-Mobile recently announced that it had sold just 70,000 iPhones by the third week of January.

Today's announcement of the launch of a 16 GB iPhone at a hair-raising $499 does not fit with what we know about the iPhone demand in the U.S. and Europe. It's a move that seems to have been planned much earlier, when Apple assumed that the first-generation iPhone has legs that can carry it for four or five quarters beyond the June 2007 launch.

Consumers are highly unlikely to pay top dollar for a mere memory upgrade of a model that lacks 3G, GPS and a high-end camera. At this very moment, Samsung is rolling out the F490 in Europe -- a 12mm thick, 5-megapixel camera phone with a 240x432 touch display. It is going to retail below the price of the old iPhone, let alone the new 16 GB version.

The "new" is a stunningly confident move from Apple. It presumes that consumers who are waiting for the 3G version with a decent camera would be willing to pay a huge premium for a model that offers the smallest possible feature upgrade of a model that, apart from its display and UI, was outdated six months ago.

This looks like a sign that the 3G upgrade is going to launch in the third quarter at the earliest, and it implies that Apple has miscalculated the feverish pace of feature evolution in the handset market in a very fundamental way. I believe this 16 GB model is going to flop at launch in Europe and will not save AT&T (T) from a steep sequential decline in iPhone activations between the fourth quarter of 2007 and the first quarter of 2008.

In coming weeks we'll get a bundle of major new spring phone announcements by most big vendors, featuring large touch displays, 5-megapixel cameras, GPS and ultra-low weights. Substantial iPhone price cuts are now in the cards by March.

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At time of publication, Kuittinen had no positions in stocks mentioned, although holdings can change at any time.

Tero Kuittinen is managing director and senior analyst for Avian Securities, a brokerage firm specializing in technology companies. Although Kuittinen is an employee of Avian Securities the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Avian Securities, nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback; click here to send an email.

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