FOCUS: France Upsets Apple's iPhone Party In Europe

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PARIS (Dow Jones) As Apple and European mobile operators get ready for the launch of the long awaited iPhone on Friday in France the party has been pushed back and the sheen taken off Apple's normally slick marketing efforts.

After France Telecom's Orange brand and Apple made a meal out of unveiling Orange as the chosen distributor in France, doubt lingers over just how much exclusivity Orange will have over the sought-after handset, due to French consumer law.

The situation threatens to scupper Apple's fiercely defended business model of distributing the iPhone through one operator exclusively. It could also gnaw at iPhone revenue for France Telecom and Apple while potentially benefitting other operators and phone distributors.

In the UK and Germany, the two other European markets where the iPhone will go on sale this autumn, operators are primed to launch the phone on Friday with all the showbiz panache associated with Apple products. But it won't be officially launched in France until Nov. 29.

Carolina Milanesi, an analyst at Gartner Research believes that the iPhone will be "one of the most wanted consumer electronics products for Christmas."

Some French consumers have avoided the wait, though, after a Web site started selling unlocked iPhones tied to contracts with rival operators Bouygues Telecom, the telecom division of Bouygues, and Virgin Mobile.

Following legal threats from Apple, the website phoneandphone.com, has agreed to hold off selling the phone until "it comes on to the European market."

A spokesman for phoneandphone.com said it planned to continue selling phones tied to contracts with other operators.

The episode suggests Apple, already battling to thwart the spread of unlocked handsets, and Orange will have to fight to keep the iPhone exclusive in France where the law forbids the sale of a product linked exclusively to a particular service with an operator.

The exclusive operator system is something Apple has made a central plank of its business model for the iPhone.

Apple recently tried to stamp out the proliferation of unlocked iPhones by restricting sales in the U.S. to two per person and demanding that customers pay for them by card, not cash. In the U.S., iPhones are sold exclusively locked to AT&T's mobile network, but hackers have consistently found ways through Apple's defenses.

Phoneandphone.com managed to procure unlocked iPhones from "an import network" in France while obtaining Bouygues and Virgin contracts from wholesalers, the Web site's spokesman said.

Once the phones go on sale officially in France on Nov. 29, customers will be able to buy them for EUR399 locked to an Orange contract, or for a higher, yet to be specified, price unlocked and without a contract. France is the only country where unlocked phones will be sold, providing a fresh source for those wishing to sell them on.

Customers who put SIM cards from Orange's rivals into an unlocked iPhone run the risk of not being able to use all of its features, including the iTunes music player.

The phoneandphone.com spokesman said the iPhones the company had been selling were fully functional, but admitted that software upgrades from Apple could turn the phones into bricks. Phoneandphone.com offers to fix customers' immobilized phones, he said.

Apple did not respond to requests for information about the situation, but an Orange spokesman said the company was ready to take any legal action necessary to defend its exclusivity.

Its lawyers may have plenty of work ahead of them. Matthieu Cordelier, a Paris-based lawyer specializing in intellectual property law, said Apple and Orange "cannot legitimately limit the distribution of a product - in this case the iPhone - through a system of linked sale, benefitting a sole national distributor for a defined geographic region."

"Parasitic" sales of the iPhone by smaller distributors like phoneandphone.com should nonetheless initially remain "marginal" compared to those of Orange, said Gontran Filer, a consultant for Idate. A spokesman for phoneandphone.com declined to say how many iPhones the company had sold before withdrawing them from sale.

Elsewhere in Europe, life looks simpler for Apple. In the UK and Germany, where Telefonica's O2 and Deutsche Telekom's T-Mobile respectively have the exclusive rights to the iPhone, analysts expect to see much of the fanfare witnessed when the iPhone launched in the United States on June 29.

O2, Apple, and Carphone Warehouse Group, Europe's largest mobile retailer, will open more than 1,300 stores across the U.K. Friday to queues of shoppers for late night trading starting at 6:02pm. Carphone Warehouse, which is selling the phones on behalf of O2, expects to sell around 10,000 phones in its first night of trading.

O2's U.K. Chief Executive Matthew Key forecasts "a couple of hundred thousand" phones will be sold over the Christmas and New Year trading period, making it the biggest seller in its stores during that time.

"The 200,000 number O2 referred to as a target market is quite safe. We think 350,000 iPhones could be sold in the first two months," Gartner's Milanesi said.

Forrester analyst Pete Nuthall agrees that O2's sales figures are achievable, with demand perhaps higher. "It's a hugely powerful device in terms of its user experience compared with other mobile phones," he said.

However, Nuthall adds that O2 will need to avoid a couple of stumbling blocks if it is to achieve the strong sales AT&T witnessed in the U.S.

"The question is whether O2 can control the supply chain to satisfy customer demand. There's been horror stories in the past of operators not being able to get hold of enough of their top selling phones to meet Christmas demand," he said.

O2 say they have ordered hundreds of thousands of phones in line with forecasts and are controlling the distribution channel on behalf of both O2 and Carphone Warehouse.

In Germany, eager customers will be able to get their hands on iPhones at 12:01am Friday when Deutsche Telekom's shop in Cologne opens its doors.

European iPhone operators also face greater competition from rival device makers, says Nuthall. Finnish mobile phone giant Nokia is launching upgraded Nokia N95 and N81 music phones, both with 8 gigabytes of memory, to take on the iPhone. It has also launched Nokia MusicStore to rival Apple's iTunes online music service.

Sony Ericsson has also launched a number of high-quality Walkman music phones, with rival functionality to the iPhone. On Tuesday, it outlined plans for its own Internet music portal and launched three new handsets.

Whereas AT&T had a clear run in the music device segment in the U.S., O2 also potentially faces competition from Apple itself, which now offers overlapping products.

Since the iPhone's release in the U.S., Apple has launched its iPod Touch, which carries all the functionality of the iPhone minus voice and text capabilities. "If you're attracted to the functionality of the iPhone but don't want to pay so much for a phone, you may go for the iTouch," Nuthall said.

In France, Orange's closest rival in the French mobile market SFR, jointly owned by Vivendi and Vodafone Group, Tuesday launched its own riposte to the iPhone, unveiling a new range of tariffs allowing customers unlimited use of the Internet via their mobile phones.

By Jethro Mullen and Daniel Thomas, Dow Jones Newswires; 33 1 4017 1738; jethro.mullen@dowjones.com

(Stefan Mechnig in Dusseldorf contributed to this article)

(END) Dow Jones Newswires­

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