Apple Inc recently unveiled a next-generation iPhone with faster Internet access that will run on advanced wireless networks and sell for as low as $199 – half the current entry-level price.
Shares of Apple, after strong gains in recent months partly driven by anticipation of the new device, fell 2.2% after Chief Executive Steve Jobs indicated the company was going after the mass market with the new model.
"It changes the game for all smart-phone makers," Tim Bajarin, head of consultancy Creative Strategies, said of the price and new features.
The new phone also marks a dramatic departure for how Apple will make money in its third major business alongside Macintosh computers and iPod media players.
Wireless network companies will no longer pay Apple part of the subscription fees they get from iPhone users, but instead will subsidise the devices up front to make them cheaper.
"The vast majority of agreements we have reached do not have those follow-on payments, so you can conclude that the vast majority of carriers do provide subsidies for the phone," Tim Cook, Apple's chief operating officer, said.
Cook declined to comment on how the new arrangement would affect Apple's profit margins, but AT&T Inc, the exclusive U.S. carrier for the iPhone, said the subsidy would hurt its earnings and margins through next year.
"It is still a very profitable business. Now the negative is they announced the elimination of some of the monthly fees," said Shaw Wu, an analyst with American Technology Research. "But I can't really imagine the economics really being too much different."
Improved e-mail features for the iPhone are intended to woo business people, while its ability to run on faster networks is key to Apple's push to gain market share in Europe and Asia.
"It's amazingly zippy," Jobs said, showing off the encore to a device that melds a mobile phone, iPod media player and web browser, nearly a year after the original went on sale.
The new one, which looks similar to the old one but with glossy black or white plastic in place of a metal back cover, loads Internet pages 2.8 times faster than the original, he said.
Eyes on Nokia, Rim, Palm
An entry-level version of the new iPhone, with 8 gigabytes of memory, will cost $199, versus $399 for an older iPhone with similar memory. A version of the new one with twice the memory will cost $299.
"These lower price points seem somewhat designed to cope with the economy, the softer environment," Wu said. "They definitely make this product more resilient."
The new phones will go on sale on July 11 in 22 countries and regions, expanding to 70 by the end of the year.
As for China, the biggest cell phone market in the world and one where Apple does not have a deal to sell iPhones, Cook said the company would get there "over time," and CNBC quoted Jobs as saying Apple hoped to be there later this year.
The new iPhone will run on third-generation (3G) wireless networks and includes satellite navigation capability, Jobs told developers at a conference in San Francisco.
"This positions Apple well vis a vis other smart-phone competitors such as Nokia and RIM," said Shannon Cross of Cross Research. "IPhone is no longer an expensive device. It's now priced at the mass market."
Shares of Palm Inc, maker of the rival Treo smart-phone, fell 4%, but those in Research in Motion, maker of BlackBerry devices, rose 2%.
A new service, "MobileMe," will automatically send e-mail and other information to iPhones, similar to Microsoft Corp's Exchange e-mail server product. The pay service will replace Apple's .Mac service and offer web applications intended to make the phone work more like a desktop computer.
"It clearly puts them in a competitive position on the services side against Google, Microsoft and most importantly Nokia," Ben Wood, research director of UK-based CCS Insight, said of MobileMe.
Jobs said Apple has sold 6 million iPhones so far, and Cook said he was "still very comfortable" that the company would hit its goal of selling 10 million units by the end of 2008.
Apple shares closed at $181.61. The stock had risen more than 50% in just three months, primarily on good demand for Macs and iPods, as well as anticipation of the new iPhone.