Friday, March 28, 2008

The iPhone Pain Train Keeps Coming

Don't think Apple can hit its goal of selling 10 million iPhones this year? Think again. Chief Executive Steve Jobs is about to open a fresh crate of pain for the rest of the mobile-phone industry.

Taiwan's Hon Hai Precision Industry, also known as Foxconn, has secured an exclusive contract to build the next-generation iPhone, Dow Jones reported Friday. The report, which cited an unnamed source, is in line with Apple's (nasdaq: AAPL - news - people ) usual practice of outsourcing the gritty business of building its products to big contract manufacturers in Asia. Apple declined to comment on the report.

That was just the latest sign that a fresh iPhone is on the way. The Huffington Post reported earlier this week that iPhones were sold out at Apple's New York stores, hinting that the company may be trying to keep supplies of its current generation lean as it prepares to add a new handset to the mix.

In a note to investors Friday, Bank of America analyst Scott Craig said Apple will begin building a third-generation iPhone in May. He added that he now believes Apple will build more than 3 million phones next quarter, and more than 8 million in the third quarter, backing away from an earlier estimate that Apple will sell just 8 million phones this year. "Our iPhone estimates are starting to look too conservative," Craig wrote.

While the 3G iPhone is something of an "open secret" (see " Sorry, First Adopters--A Better iPhone Is On The Way"), the biggest mystery remains the new handset's design. "Apple almost always updates its design just enough so you can tell who has the new one and who has the old one," said Roger Kay, President of Endpoint Technologies. "Where's the snob value if it looks just like the old one?"

Kay said the business-friendly features Apple unveiled last month for the iPhone are just a start. It's unclear if they would be tied to the release of the 3G iPhone, or bundled in with future iPhone software and hardware updates.

Pricing will be much less of a surprise. Kay thinks Apple will drop the price of today's iPhones and sell the new model for $499, or--somewhat less likely--it will sell the new iPhone for $100 more than the current-generation phones.

Either way, the result will likely be a renewed sting for Apple's rivals. Since its release in June 2007, Apple has grabbed 28% of the U.S. smart phone market, according to research firm Canalysis. Apple now lags only Canada's Research in Motion (nasdaq: RIMM - news - people ), maker of the BlackBerry, with 41%, and leads Palm, (nasdaq: PALM - news - people ), which holds 9%.

But thanks to a slow start in overseas markets, Apple controls only 6.5% of the worldwide smart phone market. A 3G iPhone would help change that, giving Apple the ability to grab more sales in markets such as Japan and Korea, where high-speed wireless networks are already ubiquitous. It would also pep-up Web browsing in areas of the United States where high-speed networks are available. "One of the very few complaints you get from iPhone users is the slowness of the network," Kay said.


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