Apple's iPhone caused a sensation in the US market when it was introduced earlier this year - selling more than one million units in the first three months on the market. With the product poised for introduction into European markets this month and Asia expected to follow suit early next year, rivals have seen the writing on the wall and are investing heavily to overhaul their handset designs and make the user interface more intuitive.
Most analysts say the iPhone has given the industry a much needed kick in the pants and forced handset makers to rethink how their phones are used and radically speed up their interface development schedules.
Stuart Carlaw, wireless research director at ABI Research, says the iPhone could do for the consumer smartphone market what Motorola's RAZR did for mobile design. 'The iPhone is not cutting-edge telecommunications, but where it is radical - in its user-interface and functionality - it will certainly change forever the way handset manufacturers think about their design philosophies,' starting with touch-screen and sensor tech (accelerometers) that can tell which way you're holding it.
Several handset vendors have already started producing user interfaces that are similar to the iPhone.
'It looks as if a new device segment will emerge with the iPhone heading the charge,' says Martin Garner, analyst with Ovum. 'But how big is this segment and how competitive will the other vendors be‾' That remains to be seen.
While there are plenty of competing multimedia smartphones with entrenched and loyal customer bases, the leap forward in usability of the iPhone leaves even the strongest competitors vulnerable as Apple rolls out the model worldwide. This explains the flurry of announcements by competing makers of smartphones, such as Samsung, LG, Sony Ericsson, Motorola and even Microsoft.
The focus has turned, unsurprisingly, toward touch screens and sleek designs and away from adding all kinds of bells and whistles.
This month Samsung is launching a multimedia touch-screen mobile phone in Europe, codenamed F700. It has full touch-screen control but unlike the iPhone, it has a QWERTY keypad hidden underneath it. The model will go on sale in Germany, Britain and France this month, and in Southeast Asia and North America early next year. The handset drew widespread attention last month when its new screen interface called Croix received the iF Communication Design Award.
Another iPhone alternative is LG Electronics' Voyager, which features a large touch screen, a camera and extensive multimedia, web browsing and email capabilities. It distinguishes itself from the iPhone by folding open lengthwise to reveal a QWERTY keyboard and a second, non-touch sensitive screen. The lack of a hardware keyboard has been one of the main complaints about the iPhone.
The Voyager, however, will not come with a large built-in memory for songs and video, but has a slot for memory cards up to 8 Gb. It also has a smaller screen than the iPhone's. In the US the Voyager has direct access to Verizon Wireless' online music store. LG made its first move to a touch screen with the release of its of its high-end Prada phone early in the year.
Also vying for market share in this segment is the HTC Touch, a touchscreen device from Taiwan's High-Tech Computer Corp. The Touch is HTC's fifth-generation phone and is currently being sold in Britain (but not the US yet) for about $665.
And in a move to build an ecosystem of cellphone app developers, BusinessWeek reported in late October the Motorola will become co-owner, with Sony Ericsson, of UIQ, a company that creates a user interface for mobile devices the run on Symbian.
The big question is whether the recent batch of iPhone 'clones' can match its ease of use and cachet. Analysts are debating if the iPhone will enjoy the same success in Asia and Europe, markets where handset subsidies are less common.
Features vs. price
'The iPhone is very iconic and has a great user interface, but Apple had to cut the price $200"&brkbar; to compete in a subsidized market,' says Bill Hughes, principal analyst with research firm In-Stat. 'There's been a lot of hype about the features, but in such subsidized markets, the price gets turned on its head.'
In a recent research report, Hughes suggests the real value of the iPhone may lie in igniting the still-dormant US multimedia phone market. Wireless subscribers are purchasing more multimedia phones - devices that can play audio and video - but they aren't necessarily using that capability, he notes.
'The growth in multimedia handsets has more to do with operators pushing multimedia handsets to the market, rather than a strong desire by consumers to adopt multimedia handsets or use multimedia services,' he adds.
Hughes notes that in Asian markets, the iPhone will not be viewed as the same novel device as it has been in the US because Asian consumers are used to multimedia handsets. That could set the state for fierce competition between Apple and rivals such as Samsung, Nokia and even Motorola.
'In Asia there are a lot of MP3 players out there already,' says Hughes. 'Consumers in the US perceive extra value with the iPhone. It's a status symbol in the US, but status doesn't necessarily translate the same way in Europe and Asia.'
Coming to Europe
That notion may well be tested when the iPhone enters European markets. Apple plans to market its phone this month with operator O2 in the UK, France Telecom's Orange and Deutsche Telecom's T-Mobile of Germany. But analysts note that phone rivals Nokia and Sony Ericsson have stronger market share in Europe than in the US, spelling potential trouble for Apple. And European carrier Vodafone Group already offers the N95 free to customers signed up for a monthly service plan. Finally, the iPhone doesn't support 3G networks, which puts it at a competitive disadvantage for fast web surfing. That fact could really frustrate potential users.
In the UK, Apple will market the phone starting with O2, the largest mobile operator in the country and a unit of Telefonica. However, Apple could face the same competitive problem it does in the US, where its carrier partner AT&T was criticized for offering a relatively slow data network that can make internet browsing a painful ordeal.
'The launch was slightly less than we were hoping for,' says Ovum's Garner. 'The device has not moved on in the light of the initial feedback, notably on the non-removable battery and the lack of 3G.' Garner adds that Apple chairman Steve Jobs said 3G chipsets place a heavy load on the battery, shortening battery life and making 3G unavailable until at least 2008.
He adds: 'AT&T was heavily lambasted as the weak link in the chain when the iPhone started shipping in the US earlier this year. O2 looks to be headed for the same fate here.'
The iPhone in the UK will be slightly less expensive than in the US, but Garner notes that questions remain about how long it will take O2 to break even under the arrangement.
In its research, Ovum also notes that Sony Ericsson enjoys strong brand awareness in Europe and that Samsung, LG and Motorola also are working on enhanced mobile devices for the European market. Similar market pressures likely will unfold in Asia when the iPhone eventually reaches there.
Apart from complaints about the exclusive lock-in to an operator in each market and the noticeable lack of certain features (no 3G, no MMS, no IM, no stereo Bluetooth, etc), the iPhone's touch-screen keypad is reportedly a dud when it comes to good old fashioned SMS.
That's according to usability consultancy User Centric, which tested the iPhone's SMS capabilities with 20 frequent SMSers, all of whom said it took them twice as long to compose messages on an iPhone compared to the phone they normally used for texting. Presumably, Apple will have fixed that by the time iPhones start shipping to Asia next year.
Rising tide
There are also indications that rival vendors around the globe are benefiting from Apple's marketing hype, which is spurring greater consumer interest overall in multimedia mobile devices.
'Key CDMA handset vendors (LG, Samsung, Motorola and HTC) will benefit from the more aggressive investment in marketing and service promotion, including subsidies, from Sprint Nextel and Verizon Wireless [in the US],' says John Jackson in a recent research report for Yankee Group.
'Even by virtue of its absence, Apple has catalyzed the global cellular handset market with its design influence and differentiated distribution model. It has also disrupted mobile data service business models with its influence over the content and digital rights management domains. Service providers and device vendors globally are compelled to innovate in reaction to this new reality.'
Jackson adds that GSM giants Nokia, Sony Ericsson and Motorola could be hurt by Apple, at least in the US market, because the three vendors need 'up-market migration' to boost profit margins. While the three rivals have been successful in non-US markets, 'Apple has stolen a march on this opportunity in the US.'
Even so, there may be plenty of business to go around. And Apple may never catch up to entrenched global market leaders such as Nokia. ABI Research estimates that Nokia currently leads the global smartphone market with a 56% share (although it trails Palm and Research in Motion in North America). 'Motorola, RIM and Sony Ericsson match Nokia in terms of product innovation, but lag behind in respect to implementation, for example, on parameters such as total shipments and distribution networks,' says industry analyst Shailendra Pandey.
That may set the stage for a lively, lengthy and expensive worldwide battle with the iPhone.
With reporting from John C. Tanner