The iPhone: A Consumer Perspective

The iPhone: A Consumer Perspective

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Maxims of Tech: Rules of Engagement for a Fast Changing Environment
Contents:
The iPhone:
A Consumer Perspective
A Parks Associates White Paper

Authors: Kurt Scherf, Vice President and Principal Analyst Michael Cai, Director, Broadband & Gaming John Barrett, Director of Research � 2007 Parks Associates

The iPhone: A Consumer Perspective � 2007 Parks Associates

Attribution
Authored by: Kurt Scherf, Michael Cai, John Barrett Published by Parks Associates � 2007 Parks Associates Dallas, Texas 75230 All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America.

Disclaimer
Parks Associates has made every reasonable effort to ensure that all information in this report is correct. We assume no responsibility for any inadvertent errors.

Attribution and Disclaimer

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Table of Contents
Data Points..........................................................................................................................1 1.0 2.0 3.0 3.1 3.2 3.3 3.4 3.5 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 The Introduction ....................................................................................................2 Stronger Links between Content and Mobile Devices........................................3 The Consumer Perspective: The Apple iPhone...................................................6 What Mobile Features are Important? ................................................................ 7 Consumer Familiarity with the iPhone ............................................................... 8 Interest in the iPhone at Price Points .................................................................. 9 Potential Inhibitors............................................................................................ 10 Will AT&T Get Leverage with Exclusivity?.................................................... 12 Parks' Analyst Comments...................................................................................13 Network and Speed ........................................................................................... 13 The Business Play? ........................................................................................... 14 Does this Help AT&T? ..................................................................................... 14 Downsides to Apple.......................................................................................... 14 Application Developers .................................................................................... 14 Throwing Down the Gauntlet on "Three Screens" ........................................... 15 Appealing to Technophiles ............................................................................... 15

List of Figures
Figure 1 AT&T Wireless Subscriber Growth..................................................................... 3 Figure 2 Apple� iPod� Shipments .................................................................................... 4 Figure 3 U.S. Mobile Phone Revenues & ARPU: 1999-2010............................................ 5 Figure 4 Predicted versus Actual Purchase, Portable Devices ........................................... 6 Figure 5 Penetration of Consumer Electronics Devices ..................................................... 7 Figure 6 Internet Use for Videos and Games...................................................................... 7 Figure 7 Mobile Devices: Desired Entertainment Features................................................ 8 Figure 8 Smart Phone: Familiarity...................................................................................... 9 Figure 9 Interest in the iPhone at Specific Price Points.................................................... 10 Figure 10 Consumers and Mobile Convergence............................................................... 11 Figure 11 What are Key Barriers to Converged Mobile Devices? ................................... 12 Figure 12 Decision Factors in Choosing a Mobile Carrier ............................................... 13

Table of Contents & List of Figures

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Data Points
� Only 3% of U.S. consumers express a strong interest in purchasing the iPhone at a $499.99 price point and two-year contract. The majority of consumers still consider network and voice quality as the most important factors for their choice of mobile carriers, and only a small percentage consider handset design as important. AT&T has extensive reach with its current customers � it now serves more than 62 million customers, and its customer base has grown at least 40% since the end of 2004. Apple has sold more than two billion songs since iTunes was launched in 2003, and shipments of iPods have increased from 4.4 million in 2004 to 39.4 million units in 2006. 40% of all U.S. households have a portable digital music player (such as an iPod). 17% of U.S. Internet households revealed an interest in playing digital music files on a new mobile device. Consumers on average are willing to pay only $99 for a regular phone and $199 for a smart phone with a two-year contract. 22% of U.S. Internet households are clearly in favor of a mobile device with the type of converged functionality embodied by the iPhone. Significantly, 41% of portable music player owners prefer a stand-alone portable device, and only 26% desire a multifunction device. Cost and performance are key reasons why consumers prefer stand-alone devices -- 49% believe multifunction devices would be expensive, and roughly one-third believe it would suffer from performance issues, including limited battery life. Only 10% of mobile subscribers regard "exclusive handsets" as a highly important factor in their selection of a mobile carrier (45% said it was not important), while network coverage (72%) and voice quality (68%) were much more significant factors for consumers.







� � � �





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The iPhone: A Consumer Perspective � 2007 Parks Associates

1.0 The Introduction
Officially introduced to the public on January 9, 20071, the Apple� Inc. iPhoneTM is the definition of a convergence device. It has the ability to play back music and videos on its 3.5" display, a unique ability for video/image displays to automatically flip between landscape and portrait views when the device is rotated, special software that makes finger-based scrolling easier, a SafariTM Web browser that shows Web sites in their standard format, and more options for users to access and listen to voice mail. The iPhone is exclusive to AT&T customers (formerly Cingular Wireless), which may be a boon for the wireless carrier. The "must-have" nature of the phone will draw a certain group of customers to AT&T and away from other wireless carriers in the U.S. (assuming that they can extricate themselves from their current contracts). However, the milliondollar question is exactly how many wireless subscribers will switch carriers for the iPhone. Our consumer survey Mobile Entertainment Platforms & Services (Second Edition) shows the majority of consumers still consider network and voice quality as the most important factors for their choice of mobile carriers and only a small percentage consider handset design as important. Nonetheless, AT&T has extensive reach with its current customers � it now serves more than 62 million customers2, and its customer base has grown at least 40% since the end of 2004 (when Cingular Wireless operated the service). Given AT&T's large customer base, an iPhone introduction could attract millions of users (Figure 1).

1 2

"Apple Reinvents the Phone with iPhone," Apple� Inc. press release, January 9, 2007. Q1 2007 earnings release from AT&T.

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The iPhone: A Consumer Perspective � 2007 Parks Associates
AT&T Wireless Subscriber Growth
(Millions of U.S. Subscribers) 70
Millions of U.S. Subscribers (#M)

61.0
60

54.0
50

49.1

40 2004
Source : Company financials and presentations

2005

2006

Figure 1 AT&T Wireless Subscriber Growth

2.0 Stronger Links between Content and Mobile Devices
The Apple iPhone is emerging on the scene at a time when end-user digital lifestyle products are defined by their functionality and the type of experiences they offer. In other words, the adage "no man is an island" is an appropriate guide for today's product, service, and application companies. Customers won't make purchase and subscription decisions based solely on product design or price point. They will also factor in an item's integration capabilities, particularly how well it integrates with a service, value-added feature, or application that comes from an access service, such as broadband, television, and/or communication. Further, the sale of products that may not at first appear to directly correlate to an access service (e.g., a high-end home theater system) are now more strongly linked to value-added services including installation, extended warranties, monitoring, and troubleshooting. So, products that were originally sold as stand-alone and single-purpose are being acquired via a "digital lifestyles value chain" in which thirdparty providers of value-added services are more strongly linked to the end-user product itself.

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The iPhone: A Consumer Perspective � 2007 Parks Associates This scenario has certainly been true in the case of Apple's iPod� portable digital music player, which is tightly integrated with the iTunes� Music Store. Apple's recent success with the sale of its portable music and multimedia players is an interesting reversal on the old sales strategy of giving away the "razor" to sell the "blades." According to its fourthquarter earnings report, Apple has sold more than two billion songs since the service was launched in 2003, and as Figure 2 indicates, device sales have skyrocketed since then. However, in this case, the truly profitable component has been the device itself (the "razor") and not necessarily the digital music (the "blades"). At any rate, the iPod's success has inspired several other companies to attach services to devices, as in the case of the Microsoft's Xbox and Xbox Live! bundle.
Apple� iPod� Shipments (Millions of Units)
50 40
Millions of Units (#M)

39.4

30 20 10

22.5

0.9
0 2003

4.4
2004 2005 2006

Source : Apple� Computer Inc. earnings releases

Figure 2 Apple� iPod� Shipments The mobile phone industry also has developed this symbiotic relationship between the service and the handset, with significant success. Enabling the seamless transfer of a ringtone from the mobile operator's network to a mobile phone handset is a simple yet powerful example of this type of service-to-platform convergence. Facilitating this link between content and the platform allowed mobile operators who deployed this service (among other additional features) to maintain a relatively steady average revenue per customer, despite the declining prices for pure voice services (Figure 3). This sort of A Parks Associates White Paper 4

The iPhone: A Consumer Perspective � 2007 Parks Associates tightly integrated data features such as text and Web access is emblematic of how future services � in combination with products � will be deployed.
U.S. Mobile Phone Revenues & ARPU: 2000-2010
$100 $200

Total Market Revenues ($B, USD)

$50

$100

$50

$0
Total Revenues ($B) ARPU ($M)

2000 $19 $16

2001 $56 $39

2002 $87 $54

2003 $97 $54

2004 $111 $54

2005 $125 $53

2006 $140 $53

2007 $153 $53

2008 $163 $53

2009 $172 $53

2010 $181 $54

$-

Sources: Operators, Parks Associates' forecasts � 2007 Parks Associates

Figure 3 U.S. Mobile Phone Revenues & ARPU: 1999-2010 Certainly mobile communications and portable digital music have struck a strong chord with consumers, as evidenced by recent sales trends. Whereas consumer interest in a new device often does not materialize into an actual purchase, both mobile phones and digital music players have defied this widely accepted dictum on consumer purchase behavior. Many consumers bought a new mobile phone and portable digital music player in 2006 without having plans to do so (Figure 4). Could this trend offer a new opportunity in 2007 to entice consumers looking for both a mobile communications and multimedia device, all with the legendary Apple ease-of-use and unique functionality?

A Parks Associates White Paper

(Monthly ARPU, $ USD)

$150

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Predicted versus Actual Purchase, Portable Devices
(Percentage of U.S. households)
50% Likelihood of Purchase (Q4 2005): n=1,000 Percentage of U.S. Households (%) 40% Actual Purchases During 2006 (Q1 2007): n=1,000 Likelihood of Purchase in 2007 (Q1 2007): n=1,000

38%

30%

22%
20%

15%

14% 7% 5%

10%

0% Cell-phone or mobile phones Portable, MP3 player such as iPod

Sources: Electronic Living @ Home (2003); National Technology Scan (2005); National Technology Scan (2007) � 2007 Parks Associates

Figure 4 Predicted versus Actual Purchase, Portable Devices

3.0 The Consumer Perspective: The Apple iPhone
With so much hype surrounding the launch of the iPhone, and many predictions abounding about its potential success3, we felt it important to provide our own commentary on the iPhone's strengths and weaknesses vis-�-vis true consumer sentiment. We had an appropriate vehicle with which to measure consumer interest with the study Mobile Entertainment Platforms & Services (Second Edition). Parks Associates conducted this survey of 2,000 U.S. Internet users ages 13 and older between April 30 and May 10, 2007. Its primary goal is to better understand consumer perspectives on mobile phones, portable gaming devices, portable music players, portable multimedia players, and imaging devices and applications. It further examines consumer desires for new convergent devices and services, identifying both growth opportunities and inhibitors to spending.
3

Apple CEO Steve Jobs noted at the iPhone release that the company's goal would be to sell ten million units by the end of 2008. Considering that Apple has an exclusive contract with AT&T in the U.S., close to 14% of AT&T wireless subscribers would have to purchase an iPhone to reach that goal, assuming 69 million AT&T wireless subscribers by year-end 2008.

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The iPhone: A Consumer Perspective � 2007 Parks Associates

3.1 What Mobile Features are Important?
With U.S. household penetration of portable digital music players (such as iPods) sitting at nearly 40% of all U.S. households (Figure 5), it's little surprising to find that the ability for a mobile device to play digital music files is the top entertainment feature that consumers desire on a mobile phone (see Figure 7). Additionally, downloading video from the Internet is becoming more commonplace, particularly for playback on portable multimedia players such as an iPod with video capabilities (Figure 6).

Penetration of Consumer Electronics Devices
(Percentage of U.S. households with at least one product) Q2 2003
100% Percentage of U.S. Households (%)

Q4 2005

Q1 2007

75%

73%

78%

84%

50%

37% 27% 29% 19% 10%

25%

0% Mobile phone Portable, MP3 player such as iPod Portable DVD player

Sources: Electronic Living @ Home (2003); National Technology Scan (2005); National Technology Scan (2007) � 2007 Parks Associates

Figure 5 Penetration of Consumer Electronics Devices

Internet for Videos and Games (Percentage of U.S. Households Participating in Activities)
Q4 2005 Q1 2007 11% 15% Download video from the Internet 20% 22% Watch video online Sources : Electronic Living @ Home III; National Technology Scan 2005; National Technology Scan 2007 � 2007 Parks Associates

Figure 6 Internet Use for Videos and Games

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The iPhone: A Consumer Perspective � 2007 Parks Associates
Mobile Devices: Desired Entertainment Features (Q2/07)
("How interested are you in having the following applications on a new mobile device?" (Among Internet HHs surveyed, n=2,000, �2.2%)

20% Percentage of U.S. Households (%)

17%
15%

10%

9% 7%

5%

0% Play digital music files Purchase and download iTunes music to phone Download and play videos

Sources: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

Figure 7 Mobile Devices: Desired Entertainment Features

3.2 Consumer Familiarity with the iPhone
Apple launched television advertisements for the iPhone at the beginning of June 2007. The timeframe of our survey (late April and early May) preceded this mass-marketing campaign, so only 9% of consumers indicated a high familiarity with the device, well behind the Blackberry and just ahead of Windows mobile phones (Figure 8).

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Smart Phone: Familiarity (Q2/07)
"On a scale of 1-7, "1" meaning "not familiar at all" and "7" meaning "extremely familiar", how familiar are you with the following types of phones?" (Among Internet HHs surveyed, n=2,000, +2.2%)

Highly familiar (Rating of 6-7)

Not familiar (Rating of 1-2)

Blackberry

22%

33%

Apple iPhone

9%

61%

Windows Mobile Phone (The Smart phone is integrated with Windows Mobile software. Windows Mobile software is a compact operating system similar to desktop version of Windows.)

7%

66%

40%
Source: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

20%

0%

-20%

-40%

-60%

-80%

Percentage of Households

Figure 8 Smart Phone: Familiarity

3.3 Interest in the iPhone at Price Points
The high price point for the iPhone (beginning at $499.99) will be a significant deterrent to likely iPhone buyers. Consumers on average are willing to pay only $99 for a regular phone and $199 for a smart phone with a two-year contract. Price points at $499.99 and above are keeping interest in the iPhone very low (Figure 9). The iPhone will shift a few paradigms about consumers and price points if it becomes a success.

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Mobile Phone: Apple iPhone (Q2/07)
"How interested are you in purchasing the following phones with a two-year contract at the following price points [at least $499.99]?" (Among Internet HHs surveyed, n=2,000, +2.2%)

Highly Interested 3%

Other Responses 97%

Source: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

Figure 9 Interest in the iPhone at Specific Price Points

3.4 Potential Inhibitors
Although "convergence" as a buzz phrase gets used quite often in the digital lifestyles arena, it's worth questioning whether consumers truly gravitate toward all-in-one devices. This question is critical regarding the iPhone in particular, given its multiple uses � multimedia player, music device, phone, Web access devices, etc. Mobile Entertainment Platforms & Services (Second Edition) finds that most consumers are either indifferent about multipurpose mobile devices or simply prefer a single device for one type of function. Only 22% of respondents are clearly in favor of a mobile device with the type of converged functionality embodied by the iPhone. Forty-one percent of portable music player owners prefer a stand-alone portable device, compared with 26% who prefer a multifunction device.

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The iPhone: A Consumer Perspective � 2007 Parks Associates

Consumers and Mobile Convergence (Q2/07)
"Among the various mobile devices, which of the following would you prefer?" (Among Internet HHs surveyed, n=2,000, +2.2%)

I don't care. 40%

I prefer purchasing a portable device with multiple functionalities. 22%
Source: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

I prefer purchasing a stand-alone portable device for a specific purpose. 38%

Figure 10 Consumers and Mobile Convergence Cost and performance are key reasons why consumers prefer stand-alone devices. Fortynine percent believe multifunction devices would be overly expensive; roughly one-third believe these devices would suffer from performance issues, including limited battery life. Both cost and battery life remain questions with the Apple iPhone. Apple has addressed the battery issue recently, noting that it should be improved over the earlier estimates that were initially provided with its announcement. The company notes that the iPhone will be capable of eight hours of talk time, six hours of Internet use, seven hours of video playback, or 24 hours of audio playback.4 These new numbers compare with five hours for talk, Internet, and video, and 16 hours for audio playback that the company originally referenced in January 2007.

4

"iPhone Delivers Up to Eight Hours of Talk Time," Apple Inc. press release, June 18, 2007.

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The iPhone: A Consumer Perspective � 2007 Parks Associates
What are Key Barriers to Converged Mobile Devices? Q2/07
"Which statement best describes why you are not interested in a single portable device?" (Among Internet HHs not seeking a single device, n=1,556, +2.5%)

60% Percentage of U.S. Households (%)

49%
40%

32%

20%

0% I believe that such a device would be very expensive
Source: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

I believe that the battery on such a device would drain quickly

Figure 11 What are Key Barriers to Converged Mobile Devices?

3.5 Will AT&T Get Leverage with Exclusivity?
As previously mentioned, access to an exclusive handset is not the most important consideration for consumers to choose one mobile carrier versus another. Mobile Entertainment: Platforms and Services (Second Edition) shows that only 10% of mobile subscribers regard "exclusive handsets" as a highly important factor in their selection of a mobile carrier (45% said it was not important). Factors such as network coverage (72%) and voice quality (68%) were much more relevant for consumers. See Figure 12 for specific details.

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The iPhone: A Consumer Perspective � 2007 Parks Associates
Decision Factors: Choosing a Mobile Carrier (Q2/07)
"When choosing a mobile phone service provider, how important are the following?" (Among Internet HHs surveyed, n=2,000, +2.2%

Rating "Highly important" (6 & 7)
Network coverage The quality of its voice services Selection of mobile phones The availability of a service bundle Availability of exclusive mobile phones The variety and quality of its entertainment services (music, video, and game) The availability of mobile TV services "Convergence" service features such as remote programming

Rating " Not important" (1 & 2)
72% 68% 30% 17% 10% 7% 5% 5% 9% 6% 14% 36% 45% 53% 58% 60%

Percentage of Households

Source: Mobile Entertainment Platforms & Services (Second Edition) � 2007 Parks Associates

Figure 12 Decision Factors in Choosing a Mobile Carrier

4.0 Parks' Analyst Comments
The Parks Associates' analysts have compiled their thoughts on the viability of the iPhone as a major player in the consumer electronics space in 2007 and beyond. Below are specific references to both the strengths and weaknesses of the mobile handset.

4.1 Network and Speed
In the U.S., only AT&T users will be able to get an iPhone, and there are currently about 62 million AT&T subs. Even if AT&T grows its base significantly because of the iPhone, the forecasted adoption is still a very tall order. The iPhone will be on the slow EDGE network, which offers essentially dial-up speed. Apple is positioning the iPhone as a device with lots of cool Internet functions, which are likely to require lots of bandwidth. However, AT&T cannot offer a national mobile broadband network to support those "Internet experiences." Early adopter won't be too pleased to find they can drive their new Porsche only on a bumpy road with a lot of potholes.

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The iPhone: A Consumer Perspective � 2007 Parks Associates For road warriors, many of them have made handset and service provider decisions based on the availability of 3G service. In addition, the IT departments in large companies are heavily involved in service provider and handset selections. They may not be too pleased to pay a premium for a handset that does not integrate well with their e-mail and other IT systems. - Yuanzhe (Michael) Cai, Director of Broadband & Gaming

4.2 The Business Play?
The iPhone may be an awkward market play. Business users who are likely to shell out $500 for a phone are not necessarily seeking a device that stresses entertainment and multimedia applications first and foremost. The bread-and-butter business applications (e-mail, Web access, etc.) are more important. Here the question is whether the iPhone will be "just as good as" a Blackberry but cooler. I don't think it will be as functional as a Blackberry. On the other hand, the younger subscribers who are crazy for multimedia applications cannot always afford a $500 phone. Mom and Dad will only pay so much. - John Barrett, Director of Research

4.3 Does this Help AT&T?
For AT&T, so far it looks like a smart move. There seems to be little downside to including the iPhone in its lineup of phones, but the devil will be in the undisclosed details. - John Barrett, Director of Research

4.4 Downsides to Apple
For Apple, there are some potential downsides. If the iPhone turns out to be another AppleTV, there will be financial repercussions, not to mention an embarrassing highprofile failure. Even a moderate market success could have little benefit. If iPhone purchases come at the expense of iPods, Apple will just be delivering users to AT&T. Along these lines, it is hard for me to see someone that wouldn't buy a $250 iPod buying a $500 iPhone. I think this kind of buyer will be few and far between. - John Barrett, Director of Research

4.5 Application Developers
One potential hurdle for the iPhone is that third-party app developers weren't pleased that the iPhone will only support Web-based applications from outside developers. Without an SDK, third-party developers may be limited in the types of applications they can develop. - Yuanzhe (Michael) Cai, Director of Broadband & Gaming

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The iPhone: A Consumer Perspective � 2007 Parks Associates

4.6 Throwing Down the Gauntlet on "Three Screens"
The iPhone certainly solidifies Apple's "three-screen" strategy, where content and applications can be accessed and enjoyed on the mobile platform as well as the PC and the TV (iTunes made available via the Apple TV, for example). In this sense, Apple could be laying the groundwork for a more highly integrated service that seamlessly crosses both mobile and fixed-line capabilities. - Kurt Scherf, Vice President & Principal Analyst

4.7 Appealing to Technophiles
If the iPhone does not appeal to the road warrior with the large budget for this device, then I think Apple will have to rely on the cool factor to appeal to technophiles. If AT&T will provide hefty subsidies to lower the price, then this offer begins to resonate ... if not, $500 may be very risky. Looking at the iPod, one has to remember that while the device is cool, what really made it was the accompanying iTunes commerce experience. Does the iPhone have anything like this to give it a "transactional advantage"? Perhaps Apple's key to success is to win the technophiles who will pay a premium price and so evangelize their love for the product that it becomes desirable to replace one's corporate Blackberry with an iPhone, which may at first be considered an expensive teen toy. - Stuart Sikes, President
About Parks Associates: Parks Associates is a market research and consulting firm focused on all product and service segments that are "digital" or provide connectivity within the home. The company's expertise includes home networks, digital entertainment, consumer electronics, broadband and Internet services, and home systems. Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start-ups through market reports, multiclient studies, consumer research, workshops, executive conferences, and custom-tailored client solutions. Parks Associates is also a reliable resource for industry, local, national and international press, providing data, analysis, and insight on all aspects of the "digital living" markets. Parks Associates hosts several fall events and co-hosts CONNECTIONSTM and CONNECTIONSTM Europe (in partnership with the Consumer Electronics Association) each year. In addition, Parks Associates produces the publication Industry Insights two times per year in conjunction with the CONNECTIONSTM Conference series. www.parksassociates.com | www.connectionsconference.com | www.connectionseurope.com | www.connectionsindustryinsights.com

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