Apple (AAPL) has been the talk of the mobile Internet space since early 2007, when the Silicon Valley giant’s enigmatic leader, Steve Jobs, introduced the original iPhone. The revolutionary handheld device, with its sleek design, multi-touch screen, and vast computing and Wi-Fi connectivity capabilities, started a virtual frenzy among tech-savvy consumers and journalists. And it delivered for the company in a big dollars-and-cents way, generating unit sales of 1.12 million in its first full quarter. (The first iPhone officially went on sale in the United States on June 29, 2007; it debuted in Europe in the fall of that year, and was later launched in other international markets.)
Now Apple, roughly three years and two product refreshes later, hopes to maintain its market dominance and fend off rivals with the franchise’s latest installment, the iPhone 4. But competition, mainly from Research In Motion’s (RIMM) BlackBerry line and mobile phones powered by Google’s (GOOG) Android operating system, appears to be intensifying. And a minor (but widely reported) design flaw in the new iPhone may be just the opening that Apple’s detractors have been waiting for.
The iPhone 4, released in late June, represents a large technological leap over its predecessors. While thinner and lighter than ever, the device features improved sound quality, a faster processor, a sharper display (it has four times as many pixels as the iPhone 3GS), and a more powerful battery. It can also, importantly, record 720p high-definition video. And it’s capable of making video calls (the function is dubbed “FaceTime” in Apple-speak) with the help of a front-facing camera.
The latest iPhone has a notable flaw, however – a poorly designed antenna that sometimes results in dropped calls. The company initially attributed the higher incidence of dropped calls to a software problem that, on occasion, overstated the phone’s signal strength. But, after more user complaints and an unfavorable product review from Consumer Reports magazine, Apple acknowledged that the reception glitches, which occurred only when the phone was held a certain way (the so-called “death grip”), was the result of the antenna’s placement outside of the device. (In previous iPhone models, the antenna was situated internally.)
To remedy the design flaw, the company is offering customers free bumper cases that wrap around the phone and protect the antenna from mishandling. CEO Jobs, at a news conference at the company’s headquarters that was meant to defuse the media storm, also promised iPhone 4 buyers a full refund if they were still unhappy.
The antenna drama seems to have had little effect on sales of the iPhone 4. Apple has sold more than three million units so far, making the device another blockbuster hit. Still, the rare case of bad publicity for the company may turn off some would-be customers. And rivals are sure to seize on the antenna misstep in order to gain the upper hand and win market share in the booming smartphone segment. This, we think, is the biggest concern for Apple in the long run.
A few OEMs, tired of living in Apple’s long shadow, are already touting new, “iPhone killer” smartphones. Research In Motion, for one, is set to debut its own touch-screen handset, the BlackBerry Slider 9800, which, like the iPhone, will be an AT&T (T) exclusive here in the U.S. And Motorola (MOT) has been aggressively pushing its popular Droid X phone, which is said to be the most powerful Android smartphone currently on the market. In fact, new advertisements for the Droid X come with the tagline “No Jacket Required,” a direct attack on Apple’s plan to solve the iPhone 4’s antenna problems with a free case. (The Droid X, notably, has a highly functional dual antenna design.)
Just how successful these new products will be at dethroning the iPhone 4 is unclear. The competitive environment is certainly heating up, however. And Apple will need to keep innovating and enhancing the iPhone franchise if it wants to maintain its status as the market leader.
One way for the company to do this is to keep increasing the number of useful, downloadable applications available for the iPhone. (Google, in an effort to better compete on the critical apps front, is actively encouraging developers to build applications for the Android platform.) Another way is for Apple to make the iPhone available to other service providers – not just to AT&T subscribers. Such a move, which is rumored to be in the works (some reports suggest that Verizon (VZ) will start carrying the handset in January), would enable Apple to maximize market penetration. And a multi-carrier strategy would probably help the company woo consumers that are unsure about AT&T’s wireless network, which has been criticized for a lack of backhaul bandwidth, especially in major metropolitan markets like New York and San Francisco.
All in all, while the iPhone 4 appears to be another winner, we expect Apple’s status as king of the smartphone hill to be seriously challenged in the months and years ahead. Investors drawn to the mobile Internet space are advised to stay tuned for developments (there are apt to be many), so as to know where best to put their money to work.