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6/29/2006
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Music Phones: What Has Apple Got Up Its Sleeve?

Rampant speculation about the possibility of an iPhone in the making has reached new heights in recent weeks.

Earlier this month, an article in Nikkei Net Interactive stated definitively that Apple and Softbank plan to jointly develop cellular phone handsets that have built-in iPod digital music players, and which could download songs directly from Apple's iTunes Music Store. The phone is expected to first be marketed in Japan. Softbank has released a statement calling such reports "speculation."

This follows on the heels of confirmation from the U.S. Patent and Trademark Office to Macsimum News that Apple in December filed a patent application for a wireless iPod with ringtones and a browser.

"Our take is that there's a 75% chance that it comes to market first quarter 2007," says Gene Munster, an analyst with Piper Jaffrey, who said his firm compiled a survey of the market for an iPhone. Of adults surveyed, an impressive 30% said they'd buy an iPhone from Apple, but a whopping 70% of high school students said they would leap to purchase such a device.

The interest is not surprising. A study by the NPD Group shows that sales of new music-enabled mobile phones are rising steadily. In the second quarter of 2005, music-enabled phones represented just 2.9% of all new mobile phone sales. By first quarter 2006, however, that number had risen to 6%. "It's still a small percentage of the whole, but rising steadily," says Ross Rubin, NPD's director of industry analysis.

Indeed, a report published earlier this month by ABI Research said that cell phones and smart phones with hard disks will eventually cut significantly into sales of MP3 players. Currently such players are very expensive--about $800. But the fact that cellular operators have started offering music services with which users can download music directly onto their phones also means that Apple might be forced to release an iPhone just to preserve its iPod revenues.

"If it does happen, it will largely be a defensive move," says Charlie Wolf, an analyst at Needham Co.

But although an overwhelming number of industry observers fully expect an iPhone in the near future, there are some who believe the logistics are just too complicated for Apple to pull off.

For one thing, the cell phone market is already saturated with very aggressive players. "Unlike the MP3 market, which was a really nascent industry, they're never going to enter the cell phone market and get 65% of the market share," said John Gruber, a blogger who runs the Flaming Fireball Web site. "An iPhone would be like a Mac: it would fall into the most expensive--and therefore profitable--niche of the market. I would expect a $300 to $400 cell phone that might get a 2% to 3% market share. Would it change the industry? Not likely."

Then there's the issue of finding partners--and maintaining the type of control that Apple likes to have over its products and services. "I don't think it's something that we'll see soon," says Rubin. "For Apple to launch a phone that is compatible with the iTunes music store, it has to partner with a carrier, which I don't think would be very appealing for them."

"The phone rumor has been around forever," agrees John Siracusa, a writer with Ars Technica. "They can bend the record labels to their will, but just let them try that with the biggest carriers. It's an established market, and they can't dictate the terms."

If you look at what happened when Apple partnered with Motorola for the iTunes-enabled cell phone, it had very limited appeal, says Tim Deal, a senior analyst with Technology Business Research. "Apple had very little control over the design, marketing, and distribution of the product, and it showed."

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