Asking Questions on Apple's iPhone

7. Will competitors sit still? I expect that in the fullness of time, Apple's handset competitors will strike back with advanced features and lower selling prices. Indeed, yesterday T-Mobile announced the release of a white version of the BlackBery Pearl smartphone. The Pearl is a more broadly distributed device than the iPhone, and its price has been slashed from $199 to $149 per unit. There will be other compelling competitors as well, such as the LG KE850. Unquestionably, many other innovative smartphones will follow in these footsteps.

Putting a Price on Science

In summary, notwithstanding the previous successes of the Mac and iPod, there seem to be enough questions regarding the iPhone (is it really differentiated from products already on the market that have advanced features, strong operating systems, have penetrated enterprise and rely on email as their killer application?) -- especially in light of the market's starry-eyed reaction and Apple's surge in value.

Over the course of history, the stock market has often developed a false trust in science. The intertwining of innovation and beauty is a complex exercise, and it often comes with flaws, as was the case in Nathaniel Hawthorne's The Birthmark. Hawthorne writes about a young scientist who kills his wife in the pursuit of a "perfect future." Like Steve Jobs, the scientist (Alymer) was smart, diligent and "an eminent proficient" in natural science. Georgiana was pretty, but she had one fatal flaw: nature provided her with an unsightly birthmark on her face in order to keep balance. Any attempt to remove it should and would result in disaster.

Handsets, as with science, love and beauty, will advance, step by step. But no one will never reach a "perfect science." In The Birthmark, Alymer's pursuit of "perfect science" can often lead to disaster, because people live "once for all in eternity to find the perfect future in the present." So it could be with Apple's iPhone. Any single, significant flaw could be problematic.

Finally, if this is indeed a new "platform" and if it is broadly adopted, there are several milestones that might be in the path in order to justify the sharp rise in the company's market value. First, the selling price must come down, while EBIT (earnings before interest and taxes) margins need to stay high.

Second, the product probably has to penetrate the corporate enterprise market and be a good power email tool (and then might folks be very wrong with respect to Research In Motion?) and the device might need a keyboard to do this (how different is this product from everything else once a keyboard is added)?

Third, Apple needs to broaden channels of distribution and air interface standards (but this currently seems not possible, given Cingular's exclusive agreement, its high sales price and given that this expensive device is only 2.5g to begin with!).

Fourth, over time, the iPhone might need to be part of an open community of devices, something Apple has clearly rejected in the past. Fifth, one must assume that Nokia, Motorola, Samsung, RIMM and a host of other competitors have learned very little over the last two decades and pose a limited threat to Apple's iPhone.

In summary and over time, small, dependable, innovative, cheap and with a broad distribution seem to be the ingredients for success (and profits) in the handset market. Despite its innovations and design choices, it might be premature to take the leap of faith that the iPhone embodies all these strengths which seem to be reflected in the $15 to $20 billion rise in Apple's common shares.

As the Wall Street Journal's Mossberg writes "The Apple entry is so full of promise that anyone buying a smartphone in 2007 should at least wait for the full reviews and a chance to try it out. ... Only then will potential customers be able to judge whether the relatively slow data speeds are offset by the other attractive features of the iPhone."