Apple Storms Cellphone Field

Cingular to Offer Service
For High-End iPhone;
Obstacles: Price, Rivals

By LI YUAN and PUI-WING TAM
January 10, 2007; Page A3

The long-awaited announcement that Apple Inc. would offer a media-playing cellphone -- dubbed the iPhone -- sent ripples through the telecom industry and pushed Apple's stock to a high, but it also raised questions about the company's strategy to parlay its successful iPod music player as an entry in the cutthroat handset market.

The device, priced up to $599 in addition to a two-year cellular service contract, allows users to download and play iTunes music, browse the Web, send email and make calls. Equipped with a wide screen and a two-megapixel camera it can also link wirelessly to music headsets, stereo systems and Wi-Fi networks.

The iPhone, scheduled for release in June, could be a boost for AT&T Inc., the world's largest telecom operator, and its Cingular Wireless unit, which has an exclusive multiyear deal for the U.S. market to provide cellphone service for the device. The phone will be sold at Apple and Cingular stores, as well as on each company's Web site. Cingular hopes the phone will attract high-end customers and give it an advantage over rival Verizon Communications Inc., which also is trying to reposition itself as multimedia service provider.

The iPhone is the latest example of how lines between the entertainment and telecom industries are blurring. Verizon Wireless recently began offering YouTube videos on cellphones, while Sprint Nextel Corp. produces its own TV shows for cellphone screens. Comcast Corp. and other cable companies, are offering Internet calling services and have partnered with Sprint to offer wireless service and television for cellphones.

Entering the cellphone market also carries risks that have left other large tech companies bloodied. Microsoft Corp., for instance, had a tough time breaking into the market with its cellphone software platform and still hasn't made significant inroads into the market.

Apple also is wading into a market with very different dynamics from the consumer-electronics market in which it plays. While Apple is used to connecting directly with customers through its stores and its Web site, access to consumers in the cellphone market is largely controlled by wireless carriers.

Apple's historical model -- relying on sales of hardware -- would also be tough to replicate in the cellphone industry, where carriers typically lure customers by discounting handsets and earn most of their profit from the service. It also will be dealing with intense competition: Many sub-$100 phones already offer music-playing capabilities. "Wireless is hard," says Mike Abramsky, an analyst at RBC Capital Markets. "Success in this industry has confounded other companies like Microsoft and even Motorola at times."

Apple's iPhone will compete in an increasingly crowded field of high-end smartphones that include Motorola's Q, Research in Motion Ltd.'s BlackBerry Pearl and Palm Inc.'s Treo 750, all released in the past year and are targeted at the consumer market.

Of course, Apple has a trump card: a loyal following in the downloadable music world. Apple introduced its iPod player five years ago, and bolstered the device by creating an iTunes music store where consumers can download songs for 99 cents. In recent years, Apple has added other content onto iTunes, including network TV shows such as "Desperate Housewives," movies and music videos.

Adding to the drama of the iPhone's unveiling, which was shrouded in secrecy through the course of two and a half years of development, the debut took place at the same time that the giant Consumer Electronics Show -- where Apple rivals such as Microsoft typically put on a big show -- was unfolding in Las Vegas, dividing the attention of the tech world. And to reflect its new role in the tech world, Apple changed its corporate name from Apple Computer Inc. to Apple Inc.

As the iPhone announcement sparked fears that Apple, Cupertino, Calif., would steal market share, the stocks of competitors dropped. Shares of RIM dropped 7.9%, while those of Palm dropped 5.7%. Shares of some larger telecom equipment makers dropped as well, though not drastically. After the news, Apple's stock rose $7.10, or 8.3%, to $92.57 in 4 p.m. composite Nasdaq Stock Market trading.