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Here Comes the iPhone

Apple Computer has seen the future--and it's on your cell phone 

Michael Stroud
9.6.05

Nearly 800 million.

That's the number of cell phones Gartner Group expects to be sold worldwide this year. And it explains why Apple is expected to announce this week that Cingular will begin selling Motorola phones playing iTunes software and connecting to the iTunes store.

Nearly 800 million cell phones is orders of magnitude greater than the total number of iPods ever sold—and several times the number of PCs in the world today. Nearly 800 million cell phones is about half the total number of mobile phones in the world.

And since many of those nearly 800 million phones will play streamed or downloaded music, Apple must join the fray. (In fairness, Apple hasn't announced anything yet; the Wall Street Journal and other media outlets are reporting that Apple will announce the new phones this week when it hosts reporters at a music-related event.)

So, here's the well-over-$800 million question: Is Apple's decision to move into cell phones the death knell for MP3 players ? Will consumers dump them over the next few years for super-phones that serve all their music and video needs?

It's certainly a possibility. As cell phone makers love to say, when people dash out of their homes on a whim, they take three things: keys, wallet, and cell phone. Not the iPod.

Apple would have a much tougher time making money in a world dominated by cell phones. Its iTunes service exists largely to fuel sales of its iPods, which generate the profits. Try making those kinds of margins in cell phones—especially when you're splitting revenue with partners.

And the next generation of cell phones will give iPods a good run for their money: Nokia and Samsung both have cell phones slated for release early next year; these devices will come with built-in multi-gig hard drives and high-fidelity audio.

In a straight-out battle between souped-up phones and today's MP3 players, the phone wins every time.

To survive that battle, I believe iPods and other MP3 players will morph over the next two years. They will need to offer features no phone can offer: larger, high-quality screens; hard drives capable of storing an entire music, photo, and video collection; sophisticated, console-level game play—the first PSPs are a step in that direction. "The (MP3) devices don't go away," says analyst Ben Bajarin of Creative Strategies. "But they become much more media-centric."

Apple has some time to figure things out. The first MP3 phones will be $500 playthings coveted by early adopters. Bajarin figures it will be 2007 or so before hard drives in phones become common.

Carriers are going slow on rollouts as they try to figure out how to monetize music phones and wireless music streaming and download services. Their nightmare scenario is a world where everyone simply synchs their iTunes phones with their computers and cuts the carriers out of the food chain.

Still, sometime over the next year or so, everyone will have an MP3 player in their phone. And if Apple decides to support an iTunes phone this week, it will be a tacit admission of that fact.

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