Risks

OK, now on the downside, this product is largely vapor right now. Yes, they have a working prototype but there is so much we don't know and some of what we do know could be trouble. Let's start with what we do know that could be a problem.

Lead Time: Apple has given both their competitors and Cingular's competitors a lot of lead time in a market (cellphones) that actually can change in months. Cingular's competitors in particular will be desperately looking for ways not to lose a lot of market share and may be suddenly willing to cut deals they wouldn't have even considered as a result. This is the second time Apple has pre-announced a product apparently to move their stock price but they may have sacrificed substantial competitive advantage and created a risk, if they cannot actually meet the date they have set - which could prove problematic at launch time. Now Steve Jobs' comments indicate he thinks he has a five-year-lead, but I could point to a very similar device that Philips showcased in the late 90s that would show this probably isn't the case. The UI work is excellent but the technology isn't that advanced and appears to be at a similar level to embedded Linux.

Price: Phones sell in volume in the sub $200 price range and haven't done (in terms of iPod like volumes) particularly well in the nose bleed $400+ range. Apple is carrying a lot of margin and but, once in a Cingular store, buyers could be pulled on to any number of lower cost phones that may be "good enough." And clearly, the competing carriers will be motivated to finally market aggressively their price advantages with these other phones. This phone will pull store traffic, but like other flagship products, it may not actually drive expected purchase levels, because it is priced too high for the targeted volume.

Name: Apple does not own the name "iPhone". This means that a lot of the coverage on the product won't be on the product but on the battle for the name with Cisco. The Cisco brand is trademarked and Apple has demonstrated they knew this before moving. This is incredibly dangerous, because it appears arrogant and makes them look like they feel laws don't apply to them and judges tend to have little regard for such behavior. More problematic, given their iPod brand and HP's iPaq brand, the very tactics they use against Cisco might be used against them at some future point.

Cisco iPhone (left) and Apple iPhone

Intellectual property: It has taken Microsoft and Linux years to get where Apple apparently is. While it is unlikely they copied Microsoft, OS X and Linux are actually very close. To meet what was an incredibly fast time to market, the intellectual property (IP) to make this phone work had to come from somewhere. There is a good chance it came from Linux and that community has rules that they enforce about taking their stuff and not giving back (the BSD community used to complain that Apple rarely contributed anything valuable back to their efforts).

iPod: If you were in the market for an iPod, you are now much more likely to wait until the Apple iPhone ships. This could cause a slowdown in sales until the iPhone hits the store shelves. Keeping demand up on iPods will be more difficult for the first half of this year as a result.

Surprises

I'm expecting a number of surprises in June. The first is a second, lower cost, phone that will be smaller and likely sell in higher volumes. This phone would be more similar to the Nano in terms of size and much more limited in terms of capability but it would also better hit the sweet spot and address at least some of the risks noted above. My guess is that this phone would also come from Cingular but it wouldn't have to and, remember, Apple is one of the riskiest partners in the segment. The second is connectivity to Exchange and or Lotus Notes. While I would expect this software to come from a third party, this is the one thing that really keeps this product from attacking the RIM/PALM/Microsoft smart phone segment and there is a lot of technology out there that should allow them to address this need.

The final surprise won't come from Apple but it will be the competitive response to this phone. Apple has just scared a large number of very powerful companies half to death. This is one of the few ways you can get big companies to move and, be sure, they will move. Whether or not the iPhone is a success, it dramatically changes the playing field. This change goes well beyond any single vendor.

I don't think any of us realize just how big a change this new product class is likely to make in the world.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at renderle@enderlegroup.com.