An Apple Rumor That Makes Sense.

No, not the ever present commentary about Jobs's health, this is a new iPhone rumor that seems more plausible than the shrunken Nano's that has been bandied about. iPhone Alley is claiming that a new iPhone is being worked on that is in the form of the iPod Touch and may or may not include 3G. A cost reduced version of the current iPhone that still includes the current screen size would make sense. The key would be to reduce the cost of the data plan as well as the upfront price. If AT&T is willing to sell a $99 EDGE version of the handset that only requires a $25 a month data plan, that would significantly reduce the barriers of entry to owning the iPhone.

Doubts on the iPhone Nano

While the iPhone Nano rumors continue to swirl, I think it is worthwhile for investors and gadget freaks to go back to this quote from Steve Jobs during the October conference call about the likelihood of expanding the handset lineup.

http://seekingalpha.com/article/100980-apple-f4q08-qtr-end-9-27-08-earnings-call-transcript?page=-1&qa=true

Steven P. Jobs

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that -- I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

This is about as straight forward a quote as you can get from Jobs. The iPhone Nano may have been a possibility prior to the gigantic popularity of the app store, but it would now represent a step backwards in Apple's quest to own the dominant platform within the smartphone space. Apple has seen first hand that applications define the winners and losers in computing and I don't see them taking the risks that fragmenting their handset lineup would entail.

Of course, this doesn't mean that Apple wont have a $99 iPhone fairly soon. A price cut in the first few months of the year shouldn't drastically impact margins and would spur sales ahead of the introduction of the iPhone 3.0. I actually believe that it would be in Apple's interest to keep producing this version of the iPhone and use it as their price driver in Christmas '09. A high-end 3.0 version of the iPhone and the current version given away for free with a contract would be a compelling combination covering the range of price points. It would suck the oxygen out of the smartphone space for the competition and deliver most of the benefits of the iPhone Nano without the drawbacks.

Nuvifone delayed

Not much of a surprise, the Nuvifone has been delayed into the first half of next year. This is going to be a real problem for Garmin as this Christmas is going to see an explosion of interest in GPS enabled functionality on handsets. The 2.1 version of the iPhone software looks set to support turn by turn directions and with Apple, you know that there will be a PR related blitz when it is introduced. While the capabilities have been available on handsets like the N95 for quite a while, the iPhone is likely to push it into the mainstream.

The complication for Garmin is that delays in handset introduction are an absolute killer. What looks like a well-spec'd handset for Christmas '08 may be an outdated dinosaur by June '09. Garmin has obviously seen the fact that stand-alone GPS units are going to become more and more of a niche as time goes on....unfortunately, the solution of attempting to compete in the mobile handset market is one that is easier said than done. Garmin is going to have a very tough road to travel in 2009.

Sony Ericsson going to abandon UIQ?

There are some rumors floating around that SE is preparing an announcement about the future of their UIQ platform. If the hints are to be believed, they are going to seriously scale back their commitment and perhaps even abandon the Symbian derivative all together. This would square with the various reports that the new high-end Symbian handsets scheduled for the 2nd half have been cancelled (Paris and BeiBei).

The implications of such a move depend on which direction Sony Ericsson chooses to go. If they plan to move towards a derivative of Linux, it will be a blow to Symbian, but the winners will be harder to figure. OTOH, if this move is a prelude to a strong commitment to Windows Mobile, Microsoft and Qualcomm should be in the catbird's seat. This would be the kind of tier-one handset support that Microsoft has longed for and Qualcomm's long work with Softie on the platform should pay off with future opportunities at Sony Ericsson. The Xperia X1 could just be the first of a whole new portfolio of devices based on Quaclomm's chipsts.

Supposedly we should hear something this week....

iPhone Subsidies

Apple delivered a mixed bag in terms of features upgrades but delivered a solid win with the revamp of their business model and distribution. While a June US launch would have been nice, the 22 country launch on July 11th delivers a broad rollout much more quickly than most had expected.

The key point here is the subsidies that are going to be provided around the world by the handset providers. AT&T is going to sell the 8GB model at an upfront price of $199 but has raised the plan prices by $15 a month. That works out to $360 more over the two year contract.

So what does the customer get in return? Subsidies....and comments from SK Telecom (500,000 to 600,000 Won wholesale price) as well as the Vodafone Italy prepay pricing ($644 for 8GB model) indicate that they will be in the $350-$400 range in the US. The figure is even higher in Europe where they are using their standard practice of varying upfront pricing based on the monthly spend. However, the numbers involved arent particularly unusual considering the fact that the N95 was available for free shortly after its launch a year ago (unsubidized price of $750).

These subsidies are going to drive sales substantially higher. While the total amount paid over the life of the contract wont change much compared to the 2G iPhone, the fact that the upfront price is now below $200 removes a key barrier to entry for customers. That is the price point that has consistently been shown to move consumer electronics products from cutting edge into the mass market. The DVD player is the classic example.

A WWDC Checklist

As usual, rumors are flying on what exactly Jobs will reveal at the latest keynote at WWDC. With the stock trading around 190, I think it would be useful to set out a checklist of what Apple absolutely NEEDS to announce and what would simply be a bonus for investors. A miss on these expectations might not impact the long-term performance of Apple, but I think you could see a significant pullback if the market is disappointed.

The Minimum.

Features
Obviously a 3G version of the iPhone is a lock, but beyond that the specs absolutely matter. An upgrade to the camera to 3 megapixels and video camera functionality plus GPS is a baseline for the new specs. Miss on either of those specs and the 2nd half projections will be risky.

Pricing.
The rumors of subsidies have become so strong that this is now in the minimum camp. Apple might not even announce pricing outside the US, but the minimum price for an iPhone has to move below $300...and even $299 might not be enough to satisfy the market. Pricing outside the US might not even be announce by Apple as this may be completely up to the operators.

Timing.
Commercial availability in the US by the end of June with rapid successive launches in Europe by the end of July. Asia can wait until the fall.

I see the above data points as the absolute minimum that Apple needs to announce to keep the stock from cratering following WWDC. Luckily, I do believe they will hit all of those marks.

Bonuses

Apple doesnt need to hit all of these, but likely they need a few to satisfy both the market and consumers.

The latest rumor that is gaining steam is one of Apple launching multiple iPhone models on Monday. This nicely dovetails the various sources saying that the new iPhone will both be thicker (3G, larger capacity) and thinner (new EDGE version). If true, this would be a clear indication that Apple is looking to grab substantial share in the near-term.

There are rumors of support for iChat, multiple colors and a bump in the maximum capacity to 32GB. All would be nice to have, but unlikely to be a real sales drivers.

Perhaps the most interesting announcements will revolve around the new Apple store. How compelling will the new apps be? This will be the hardest to judge, but if Apple pulls this off, they will be able to generate a whole new revenue stream for many years to come.

Longshots

One analyst is predicting a 50% chance of an Apple MID (4-7" screen) being announced. While I think these devices are in development, I think that this fall would be the natural time for such an announcement. Apple's reference to the Touch as a WiFi enabled mobile computing platform basically revealed their future product direction. The iPod is going upmarket....but I very much doubt it would be today.

Likewise revised Macs/Macbooks are more likely to be introduced later this summer.

The key to Apple's trading today is going to lie in the pricing and timing. A $199 pricepoint with availability next Tuesday in the US and in Europe by the end of June and I think we should see a nice multiweek run. The 10 million unit estimates would all be getting revised upwards as analysts realized that Apple was serious about grabbing share.

Dont forget the Feature Phones!

Lost in the building fervor over the raft of new smartphone devices expected over the next six months (3G iPhone, Blackbery Bold, HTC Diamond, etc) has been the absolute onslaught of new high-end non-smartphones (or "feature phones")from LG and Samsung. This is a definite mistake as the unit volumes of these handsets are likely to be absolutely huge and have as much impact on marketshare for both the semi and handset players as the upcoming smartphones. The Samsung Soul has hit the market to rave reviews and the LG Secret is getting similar early press before its launch at the end of the month. Both these devices, as well as others such as the Samsung F480, pack in 5 megapixel cameras, touchscreens, user friendly interfaces and top of the line display technologies into some very hot form factors. It is these devices that are driving Samsung and LG's share gains as well as the continuing momemtum in Qualcomm's chipset business.

The question is when Nokia/SE/Motorola will manage to respond. The current announced products from those vendors for the 2nd half of the year simply dont measure up to what LG and Samsung are putting on the market right now. The combination of these feature phones and the newcomers to the smartphone segment present a serious challenge to the high-end shares of the current market leaders. Both TXN and Nokia are bouncing today on an upgrade from SSB, but I must say I'm not optimistic about their prospects in the 2nd half.