Is the iPhone worth $1000 a year?

iPhone mania nears fever pitch

By Jefferson Graham, USA TODAY

LOS ANGELES — Christopher Parr won't go so far as to bring his sleeping bag to his local AT&T store to be first in line for Apple's coveted iPhone when it goes on sale next week.

But he will be there opening night to plunk down $599 for the combination iPod, cellphone and wireless Internet device within hours of its debut.

"Cellphones have under-delivered," says Parr, 40, of Madison, Wis. "This fills a real void. Most Internet over the phone is a terrible user experience. I love the idea of having the real Internet in my pocket."

June 29 is the day many gear-heads have marked on their calendars as iDay, the release of what independent analyst Richard Doherty calls "the most eagerly awaited consumer technology device of the last 20 years."

Since January, when it was first announced, the iPhone has captivated consumers, Wall Street investors and the media as the right product at the right time.

Apple CEO Steve Jobs has positioned it as the most advanced meeting of the Internet and wireless technology, with an iPod thrown in for good measure. And it looks really cool, and unlike any phone before it.

For Apple, the release of the iPhone promises to effectively double the company's revenue within just a few years, based on the worldwide thirst for cellphones. For consumers, the trick is going to be nabbing one of the early iPhones on opening day before stock sells out.

The iPhone is being sold only at Apple's 200 retail stores, Apple's website and nearly 1,800 AT&T (formerly Cingular) stores beginning at 6 p.m. local time across the country. AT&T says it will close its stores at 4:30 p.m. and reopen at 6 p.m. Apple would not comment on its plans. No pre-orders are being accepted. Fans are expected to camp out in front of stores for days.

Jobs has projected sales of 10 million iPhones within the first 18 months — worth more than $5 billion retail. Neither AT&T nor Apple will say how many phones initially will be shipped to stores. Doherty expects 1 million units to be available in the first wave. He predicts stores will be sold out by the time they close on June 29.

Online discussion boards debate shopping scenarios: Should you stand in line with mobs at a big urban store, only to discover they have only a handful of phones? Or go out to the suburbs and try your luck with a smaller, less-busy store?

Doherty says that big urban outlets generally receive bigger supplies of must-have products, such as the Nintendo Wii and Sony PlayStation 3. He recommends going to the busiest stores that do the most volume.

"In New York, that would be the stores that attract the most people, like Times Square, Carnegie Hall and Fifth Avenue," he says.

Since there are so many more AT&T stores than Apple outlets, he recommends calling ahead to AT&T locations and asking whether they will have a supply of phones. "There's no reason a manager can't be straight with you. If they won't have stock, ask which store will," he says.

AT&T spokesman Michael Coe says not to bother: "We will have the phone at every one of our stores." He declined to disclose how many phones each store will receive.

Harvard University business professor David Yoffie predicts "a lot of frustrated consumers" as stores open at regular hours in the morning but withhold iPhone sales until 6 p.m.

The iPhone is not cheap. Phones are $499 with 4 gigabytes of storage or $599 with 8 GB. And they must be purchased with a two-year AT&T contract. AT&T is not subsidizing the cost as it does with most phones. If you already have a contract, you have to agree to extend it for another two years.

Additionally, a basic starter voice plan isn't going to be of much use to iPhone customers, who will no doubt want to access the cool, colorful Internet features of the device. That will also require a data plan.

AT&T won't say how much its data plan for the iPhone will cost. A current "unlimited" data plan — which makes sense if you're going to be surfing the Web from the phone — is $20 monthly. Couple that with a 900-minute $59.99 monthly voice plan and yearly usage costs could approach $1,000.

"This isn't for the faint of heart," says Doherty.

Why the hype?

Jobs first introduced the iPhone at the Macworld Conference in January, eliciting oohs and aahs from the audience and wowing the media in the process.

"The largest and most beautiful screen I've ever seen on a cellphone," enthused The Wall Street Journal. "Even more impressive than it appeared during Steve Jobs' keynote," chimed in PC Magazine after getting 10 minutes to play with the iPhone at Macworld.

Most of the praise emphasized the iPhone's large, 3.5-inch screen and the elegant integration of phone, Internet, iPod and other tools such as calendars.

Unlike traditional phones, there is no keypad. Consumers will have to get used to surfing the Web by touching icons on the screen and typing in Web addresses on a virtual keypad. This week, Apple announced an upgrade to the screen before its release. The company says it will be optical glass, less prone to scratching than the plastic one it originally planned.

As with the iPod, dozens of companies are working feverishly to introduce add-ons for the iPhone. Belkin, which makes cases for the iPod, already has three it plans to introduce next week. Several headsets and car chargers have already popped up for sale on Amazon.com. A search at Amazon also finds 10 books about the iPhone already in the works.

On Wednesday, Reuters reported the iPhone will allow subscribers to wirelessly stream material from YouTube. YouTube has begun encoding its videos in a new format to improve quality and save battery life when viewed over wireless devices. More than 10,000 videos will be available at the iPhone's launch.

But is the iPhone really such a sure thing?

Not if you ask Roger Entner.

"It's a product of mythical proportions, " says Entner, senior vice president of IAG Research. "They're not saying the iPhone will cure cancer and bring world peace, but that it will do everything else. It's impossible to live up to these expectations."

The high cost of the phone, and the expense of switching carriers to AT&T, could keep some customers away, says research firm IDC. An IDC survey of consumers found that 60% were interested in the iPhone, but only 10% said they would be willing to pay full price for it.

Also, AT&T has chosen to run the iPhone on its Edge network, which is faster than a regular cell network but not as fast as so-called 3G networks in use by AT&T and other firms.

Battery life could be a potential pitfall, as well. Apple says its battery will offer eight hours of talk time, six hours of Internet use or 24 hours of iPod use.

But with Internet use, iPod use and talk time all competing for the same battery, Entner doesn't think consumers will get more than four hours on a charge. Many bloggers have estimated battery time as low as 45 minutes.

In San Francisco, consumer David Lau has heard it all, and he doesn't care. He wants his iPhone.

"I have the gear lust that many people experience when the newest, coolest thing comes out," says Lau, 26, who works in real estate. "I work in an office by myself, and this device gives me freedom. It could be my entire office anywhere I choose."

His girlfriend, Tien Tang, just wants him to stop talking about it.

"For the past four weeks, I've heard nothing but iPhone talk from David, his friends, my brother and, basically, any male between the ages of 13 and 40 within earshot. It's insane. I'd pay 500 bucks and sleep outside in line to just shut these guys up."

Apple's future

The avalanche of post-Macworld news stories generated an estimated $400 million in free publicity, according to Yoffie at Harvard. On June 7, Apple shares hit an all-time high of $127.61 and now trade at about $124.

Tech analysts are downright giddy about the potential of the iPhone and what it means to Apple.

Gene Munster, who covers Apple for investment firm Piper Jaffray, says the iPhone could nearly double the size of Apple within two years. Apple revenue is now at $24 billion. Munster projects iPhone sales could push that to $42 billion — including $15 billion in iPhone sales — by 2009.

It's simple math, Munster says: The wireless industry is 12 times the size of the digital music player market that Apple dominates.

"The total audience for cellphones is so huge, it's shocking what it does to Apple's numbers," he says.

According to IAG Research, about 1 billion cellphones are shipped yearly worldwide.

Apple began in 1976 as a computer company. It hit hard times in the 1990s when it was eclipsed by Microsoft, which dominates personal computing. The introduction of the iPod in 2001 transformed the company, and now Apple sells more non-computer items than it does Macintosh computers. About 100 million iPods have been sold to date, and Apple no longer has "computer" in its name.

"Within 10 years, I see Apple selling 100 million phones a year," says Charles Wolf, an independent analyst who has covered Apple for 22 years. "Apple will have 7% of the phone market."

Reuters contributed to this report.