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Convergence
By Steven Lord
Dear American Capitalist Reader,
I travel from our home near New York to our offices in Baltimore two or three times a month, and usually take the train. This is not due to any fear of flying – on the contrary, I enjoy it – but because try as you might, you cannot get to Baltimore from New York quicker via an airline.
Another advantage of the train is that the atmosphere is much more relaxed, and passengers easily fall into conversation with one another. On virtually every trip, I have met fascinating people from all walks of life, heading up or down the Eastern Seaboard for one reason or another.
This past week I was headed home late in the afternoon and fell into conversation with a group of Washington-based Morgan Stanley investment bankers headed to New York for a meeting. These guys could have been sent from MGM – perfect hair, exquisite suits, expensive watches, the whole nine yards. And each of the four had been sent forth from their headquarters armed with a Blackberry email/cell phone and a personal mobile phone. When I asked why they carried both, they mentioned so that personal calls and business calls could be kept distinct. This got me thinking, and since APPLE’s new iPhone had been launched the previous day, I turned the conversation to what these folks thought of the new gadget. Their answers surprised me.
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First, they doubt Morgan Stanley will toss the Blackberries for new iPhones, since no matter how sleek the thing is, no major firm is going to spring a lot of money ($400-$500) on something that does the same thing – provide email on the road – as existing equipment. Secondly, they doubted they would buy one to replace their personal phones, at least not right away, since they know from experience with prior phones that the price will drop. The market, it seems, has become conditioned to deflationary expectations (although I doubt these guys have ever worked on Apple’s computers) and for this group, the advantages of combining music, email, web and phone into one gadget is not especially impressive (they already have iPods). They are already carrying two gadgets voluntarily, not because they have to. Finally, these folks noted that the phone will only be available via Cingular, and this of group of bankers were unanimous in their opinion that the quality of the Cingular network left a lot to be desired.
The conversation left me wondering whether Apple would be a good investment from here. The key market for expensive convergence devices rests on the corporate market – Blackberries and Treos would never have become so commonplace had business people not flocked to them because of their remote email capabilities. And if the Morgan group is any guide, companies are not going to shift to iPhones. This means Apple is depending on the non-corporate crowd to shell out $400 on a phone because it is “cool” and it removes the need to carry an iPod. However, iPods barely weigh anything anymore, while the initial price will probably deter most of the under-25 crowd at first. Beyond “cool,” what will drive sales of the iPhone?
Granted, “cool” is a very powerful motivator. I know folks who plunked down $1000 for the first generation of phones so they could call their offices from a meeting and impress their counterparts. But the mobile phone handset market has matured since then, with virtually any phone you buy is able to browse the net, send mail, instant message and make calls. Although Apple chief guru Steve Jobs called the iPhone “revolutionary and magical”, it is neither; the only exclusivity in features is adding music. It might be enough, especially when coupled with “cool” design and interfaces. But then again it might not. Every new product has to fit a human need to be successful.
Margins in the intensely competitive and crowded handset business are not very impressive, and they steal each other’s designs with abandon. Apple stock soared over 10% in the two days following the launch, merrily placing a cool $8 billion onto the value of the company – or put another way, the gross proceeds from the first 21 million iPhones out the door. With the business community unlikely to switch en masse any time soon, the iPhone’s success is squarely in the hands of 20-something cooler-than-though hipsters. Time will tell, but you wonder how much of the iPhone’s upcoming sales have already been discounted in the stock?
Sincerely,
Steven Lord, Editor, GRESSOR