Apple breaks the rules

And although Cingular gets to sell the phone and the accompanying voice and data service, beyond that it has little control of the devices themselves. Apple's smartphone operating system is based on its proprietary Mac OS 10, and it has indicated that no third-party applications will be available on the phone. That opens up a world of games and features developed for iPod and scaled-down versions of Mac applications; however, it remains to be seen whether Cingular's vast library of content and data services will be available for network download onto the iPhone. Cingular will have one of the most sophisticated consumer data devices on its network but may not be able to sell data services beyond basic network access to people who buy it.

Perhaps the most puzzling characteristic of the iPhone, however, is its network access capabilities — or lack thereof. Cingular is currently building out one of the fastest mobile data networks in the U.S., using UMTS/high-speed downlink packet access (HSDPA) technology, but the phone supports neither HSDPA or basic UMTS. Instead, it has a much slower GPRS/EDGE chip, which would have extreme difficulty supporting over-the-air downloads of the heavyweight music and video files the iPhone was designed to play.

Cingular brought its high-speed network, which would only enhance the tech-savvy allure of the iPhone, but Apple has opted not to use it, said Linda Barabee, senior analyst with the Yankee Group. “People who buy these devices expect them to be the fastest, most advanced devices out there,” Barabee said. “Apple is setting up a scenario in which you synch [with the PC] and go, leaving the wireless network to the wayside.”

Part of the reason for leaving out UMTS and HSDPA is cost — adding another radio chip increases the billable cost of materials. McAteer pointed out that despite the high price of the phones, Apple is using fairly standard components in the device, from its camera to its flash memory. “This all about the cost of goods,” McAteer said. “Apple wants to maintain its margins.” Adding UMTS/HSDPA would not only shrink those margins, but it would also regionalize the phone. Cingular uses 1.9 MHz and 800 MHz for its 3G services, while Europe and other regions are using 2.1 GHz. In its current 2.5G quad-band configuration, Apple can sell it anywhere.

Cost reasons aside, Apple seems to be taking active steps to separate out the network and phone functions from the iPod functions of the device. Instead of 3G, it added Wi-Fi and Bluetooth to the device, a data channel that bypasses the carrier network entirely. And even with those multiple options for wireless connectivity, Apple has isolated entirely from the network the most important application of the device. iTunes, the engine that manages and plays the phone's music files, can only be accessed through a USB cable linked directly to a consumer's PC — just like an iPod.

Jobs' goal of 10 million units sold will certainly depend on international sales. In Europe, where carriers have much less control over phone distribution, Apple will have more flexibility in its sales channels and deal with a population more accustomed to paying full retail prices for phones. But in the U.S., even with high cost of the phone and the single-carrier exclusivity, Apple stands to make a killing on iPhone sales. With a quarter of all U.S. wireless subscribers, Cingular has the largest customer base in North America. For customers not on the Cingular network, there is certainly precedence for consumers actively switching service providers — and paying top dollar — to get the hottest new device, said David Steinberg, CEO of online wireless retailer InPhonic.

“The reality is that when the RAZR came out, people went over to Cingular to get it,“ Steinberg said. “The RAZR was selling at $299 to $399. It wasn't cheap when it first launched, but people were buying it like crazy for $299.”

Sprint, T-Mobile, Verizon Wireless and dozens of smaller carriers will, of course, be locked out by Apple, but they are likely to push their own mobile music offerings more aggressively, pointing out in the process that their music phones are a hell of a lot cheaper yet hold the same capacity as the iPhone while not requiring them to switch providers. Those carriers, however, are sure to see some customers flee to Cingular to get the iPhone — the power of the iPod brand is that powerful, McAteer said. Ironically, though, when the dust clears, Cingular's competitors might find they've benefited from the iPhone launch even if they aren't cut in on the device itself, McAteer added.

“Apple has carved out a position that is kind of unique — a cozy safe place in computing,” McAteer said. “Their technology is not intimidating; it draws you in. The problem with wireless data is that it's intimidating. The iPhone is good for the industry because it will make wireless data somehow less intimidating.”

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