Apple's iPhone Must Avoid the Razr Trap

SAN FRANCISCO -(Dow Jones)- The maker of a hot-selling revolutionary phone cuts its price to spur more mass-market demand.

Sound familiar? That happened to the Razr, and while the move spurred sales for a while, Motorola couldn't duplicate the success because it failed to innovate. Motorola's stock is trading now near multiyear lows as the company searches for a new growth driver.

While no one is predicting such a dramatic reversal for Apple and its iPhone, many are noting that the most revolutionary change to the latest iPhone is its reduced pricing - and even that doesn't represent a big shift in an industry long dependent on carrier subsidies.

The iPhone is, by all accounts, a truly innovative piece of technology. Yet the most innovative parts - its user interface, its touchscreen capabilities and its appearance - remain what Apple brought out with the original device. The iPhone's latest additions, such as the ability to tap faster wireless networks and its location services, have been available in smartphones for years.

"Where's the innovation?" Global Equities Securities analyst Trip Chowdhry said in describing his initial impression of the new iPhone.

An Apple spokesman defended the innovative nature of the new iPhone. As the company pointed out Monday, among other things, the new iPhone can download Web pages 36% faster than two competing phones from Nokia, can receive email notifications of software updates, and has a battery life that is about 90 minutes longer in some cases than rival devices.

However, those developments pale in comparison to the shock factor from the original iPhone. The lack of a signature technical improvement in the second-generation iPhone has raised some concerns about whether the company can keep innovating fast enough to keep the iPhone fresh in an extremely competitive smartphone market.

Apple hasn't faced this type of competition with its music player, as the iPod blew away the competition with a unique form factor and ran away from the field. With smartphones, Apple is trying to distinguish itself in an industry already crowded with well-established, well-heeled heavyweights.

For example, by the fourth quarter this year, the iPhone is expected to face increased competition from new smartphones from Nokia and Research In Motion's Blackberry. While details of those phones remain under wraps, they are expected to offer similar features as the iPhone.

Another challenge is from Microsoft's ever-improving Windows Mobile operating system, which powers many smartphones and has experience dealing with corporate information technology systems.

Presently, RIM has a significant lock in the U.S., while Nokia will remain the world leader in the smartphone market. Nokia held 45.2% of the global market for smartphones, while RIM followed with 13.4%, according to Gartner Inc. Apple holds 5.3% of the market.

Few Tech Highlights

"The big news here is the price cut," was an oft-repeated sentiment of analysts commenting on Apple's latest moves.

The most noteworthy new feature on the new iPhone is how it can tap cellular networks that download Web pages at near broadband speeds. But top handset makers have been selling so-called third-generation, or 3G, phones for years.

The company also unveiled a number of enterprise security features such as a remote wipe option that lets users erase valuable data if the phone is stolen. Yet the new features are already found on phones from the likes of Palm or RIM.

The device also will come packed with navigation capabilities, which even basic handsets already boast.

"Putting something like global positioning systems into inside the iPhone is no big deal," Gartner analyst Ken Dulaney said. "The difference is going to be what Apple does with it. Think of Nokia, Motorola, Samsung, they pretty much are putting in lots of features just to increase the features list."

Even on the iPhone, the global positioning services featured aren't seen overcoming major challenges, like GPS' low-degree of accuracy in urban areas.

Razr Trap

While the iPhone's lower price is expected to increase sales, that is the trap Motorola fell into with the Razr. Motorola kept pushing at lower and lower prices with only superficial changes and upgrades, destroying its image as a high-end device.

Razr's initial success forced the likes of Samsung Electronics and Nokia to counter with similar thin phones - much like Apple's success with the touchscreen has every device maker, and every carrier, selling one or more touchscreen handsets.

Finally, Razr became the standard device given away in exchange for service contracts.

To be sure, Apple has a solid and well-earned reputation as a technology innovator, and analysts note the iPhone has such a headstart in multiple areas that significant jumps in innovation aren't necessary.

"They don't need to take a dramatic step forward because their form factor, software and ecosystem are so far ahead of everything else," said Rory Altman, a partner at telecom consultancy Altman Vilandrie & Co.

Nonetheless, Motorola's stumble with the Razr should serve as a cautionary tale for Apple and for future iPhone development.

-By Ben Charny; Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

Posted to the site on 11th June 2008