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Why the Pre won't be the Next iPhone

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By JJMSpartan
May 14, 2009

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Cross posting this from the Stock Advisor message board...

Ever since Palm made the announcement of the Pre, analysts have fallen all over themselves to compare it to the iPhone. And rightly so - it's WebOS operating system offers much of the same functionality of the iPhone, removes a few of the shackles Apple has imposed on the iPhone, and possibly forced Apple to speed up the development and implementation of it's 3.0 software (that last point is pure speculation as most OS changes are being developed for several months to a year prior to a new OS release). It's gotten to the point where many analysts are predicting that the Pre will be the first "iPhone killer". However, I think that these analyses are missing a few key points which lead me to believe that the Pre will be just another "also-ran" device.

To understand this, you need to look back at history, not only of the iPhone, but also of the iPod. Neither device was the first of their kind on the block - MP3 players certainly predated the iPod, and there were Smartphone's before the iPhone. But what each of these devices did was they filled a need of the greater market that was not being met. MP3 players before the iPod were clumsy, awkward devices that were nearly impossible to navigate. The iPod and iTunes made it simple to put your music on your MP3 player, organize it, find and play back the music when you wanted it. iTunes was a much underappreciated part of this environment by analysts who did not understand how much easier it was to use than competing software, including single-click ripping of music CD's to the computer. And it was all wrapped in a beautifully designed package and marketed brilliantly. The combination of those items along with a lack of competitors who understood what was happening to them and what their own deficiencies were made the iPod the dominant success it continues to be. There have been hundreds of so-called iPod killers released and none has of yet made a significant dent in the market share of the iPod - largely because Apple doesn't sit still and let them catch up. They continue to innovate and stay 2 -3 steps ahead of the competition. Evidence - have you even heard of another touch-screen MP3 player that competes with the iPod Touch? how about another matchbox size MP3 player with voice features like the Shuffle? Didn't think so.

What the iPhone did to Smartphone's was surprisingly similar to the iPod's entry into the MP3 player market. There were Smartphone's out there before the iPhone, but they were mostly large, clunky devices the responded slowly, were difficult to operate, navigated only the mobile web and did that poorly, and failed to combine all of a users media into one place. Then came the iPhone, with it's beautiful aesthetics, incredible ease of use, and seamless integration to a users media - even more so if they already had an iPod (and who didn't?). It was almost a year later when the first true competitors came out, many of them being called "iPhone killers". But Apple has a habit of never sitting still and basking in their success. Apple was busy refining and improving their device and shortly released the iPhone 3G which added additional features and another bombshell that the competitors didn't see coming - the iPhone App Store. 40,000 Apps and over a billion downloads later, and none of the competitive devices are even in the ballpark of the iPhone.

So now the Pre is set to roll out, offering many improved features over the current iPhone. It could be an iPhone killer, but it won't be. It simply has too many long odds to beat to dethrone the iPhone.

- It's network partner - Sprint. If people were upset over Apple's decision to go with AT&T for the iPhone, how will they react to Sprint being the vendor of choice for Palm? Sprint has much worse coverage than AT&T or Verizon. It simply has no coverage in a lot of places in the country. Had this been a Verizon phone, it would have had a much better chance.

- It's late entry. The iPhone succeeded in large part because it was a game changing device that leapfrogged competitive technologies - a true paradigm shift. At the time of the original iPhone release, the Nokia N95 had arguably a much better feature set than the iPhone. Yet the difficulty in using the N95, coupled with it's even higher price tag to the original iPhone made it a bit player quickly. There were no other real competitors to come near the iPhone interface - and arguable there are still none that interface with a computer as easily. The Pre will come out with a playing field that has several competitors, all of whom are gunning for the iPhone and getting better at the game. Is it any more of a game changer than Google's Android? That's unlikely, and Android phones have still not fared well against the iPhone.

- Apple isn't sitting on their hands. As evidenced by the upcoming iPhone 3.0 software release and the many rumors making the rounds of new iPhone hardware, Apple is doing what they do best - take a proven winning formula, improving on it, refining it, and staying 2-3 steps ahead of the competition. When the Pre launches, the number of features it will boast that the iPhone does not will be significant, at least until Apple lets loose the 3.0 software update - which will be mostly backward compatible (and free!) for all existing iPhones, making them just as usable as any new Pre. The timing of iPhone OS 3.0 and the launch of the Pre will negate most of the advantages the Pre might have claimed over the iPhone before the Pre gets a chance to gain any momentum. And what wonders the next iPhone will provide are still unknown, but will assuredly provide several "ohh's and ahh's" based on Apple's history.

- Palm won't have the Apple App Store. The magnitude of the Apple App store is significant - it's so easy to download and install software on an iPhone, it's basically intuitive. The app catalog already has a boatload of titles to choose from in nearly every genre which will surely grow with the new 3.0 capabilities being added. Palm coming to the game this late will take years to have any chance to catch up to the Apple lead. IMHO, this is what Warren Buffett would call the iPhone's "Moat" - it provides such a significant advantage over the competition that it raises the cost and difficulty of entry by several orders of magnitude.

- The iPod / iPhone ecosystem is getting better. There are already hundreds of devices that can plug into an iPod, and many of them now can plug into the iPhone. One feature of the 3.0 software update adds the ability of the iPhone to interact with external devices via the dock connector much easier. One such device shown in the 3.0 roadmap would allow a diabetic glucometer to directly interact with the iPhone. It was so impressive that the following day that Lifetouch (the presenter and a division of Johnson and Johnson) had to post on it's homepage that the device would not be available until after the 3.0 software came out, the demand was so high. There will surely be countless other application possibilities that people have not even thought of yet. Palm has nothing to match this.

- And finally the ace in the hole for Apple is the iPod Touch. It is truly the next generation iPod, and it's sales are what gives the iPhone that much more pull with Apps and developers. most analysts completely forget about this when comparing Smartphone's. People do not have to have an iPhone to take advantage of the App Store's goodness. On the surface, that seems to negate the App store as being a benefit for the iPhone, since consumers could still have another phone and still use the Apps. But it means to developers that an app they create has a much larger audience, and therefore much larger potential sales. Again, the Pre is far behind the curve on this - there are over 30 Million iTouches and iPhones out there to sell apps to. It will take a long time for there to be 30 Million Pre's to sell apps for.

It is because of these advantages that I do not see the Pre as an iPhone killer, and as merely an also-ran. It's not a big enough game-changer. There are too many good competitors out there. Apple isn't sitting still and is continuing to innovate. And it will not have an ecosystem to compare to Apple's. In time, it surely could prove to be successful. But it almost certainly won't be on day one, as many pundits would have you believe.

Best Regards,

Sparty

Disclosure: LONG AAPL