Blog of Doom: Why the iPhone is a rip off

By Lucas Mearian

I love whiz-bang technology.

I love it so much that when MP3 players first came out, I bought one as a voice recorder for business interviews when all my reporter counterparts were still buying reel-to-reel mini recorders or digital recorders with a one-tenth the memory and no file-manipulation capabilities. And, I love my cell phone because I can send and receive messages in a meeting, take photos on the fly, shop on it and perform Google searches no matter where I am -- and it was free with my cellular service plan. So why would I ever pay $500 for a cell phone? I don't think I'm alone here.

Market research firm Isuppli Corp. today released a research report stating that the iPhone will generate more than a 50% gross margin for Apple -- nothing unusual for them. That basically means that Apple is pocketing $250 for every iPhone it sells. Compare that with the average gross margin of 10% to 20% for handsets and you'll see where Apple is really relying on fan loyalty to gouge.

In a recent interview, Steve Ballmer chortled when asked about the iPhone. Not that I would normally take anything seriously that a Microsoft executive would say about an Apple product, but in this interview posted on YouTube, he makes two very good points: 1) $500 for a phone is outrageous when you can get the same features on another cell phone for less than $100; 2) The iPhone has no keypad, so it's not business/text-message friendly.

Then you have to consider iPhone's competition. In 2007, it's estimated that there will be 835 models of music-enabled phones introduced by various Apple competitors. iSuppli estimates that 14 phones already shipping -- from Nokia, Motorola Inc., Samsung Electronics Co. Ltd. and LG -- have features comparable to what the Apple iPhone will have when it ships in June.

But Jagdish Rebello, a PhD, and director and principal analyst with iSuppli, says Apple knows its market and is good at displacing competitors.

People just love the iPod. Why, I don't know. There are plenty of cheaper MP3 players with the same functionality on the market, but hey, it's Apple. Apple equals anti-establishment, and therefore, it's cool. So I have no doubt that Apple will sell the 8 million iPhones it's aiming for this year. And, with a total of 1 billion handsets being sold every year, those 8 million iPhones are only a fraction of the marketplace. So why the rant?

It's the principle. It's like Boston Red Sox tickets. The team wins one World Series, and they go about gouging their fans. Apple gets a big win with its iPod and it believes it can gouge the consumer on a follow-on product.

It's very likely that when Cingular begins selling the iPhone, it will subsidize a portion of the cost -- so the consumer won't have to foot the full $500 bill -- at least that's the hope. But until I see it, I won't be running out to buy it.

The iPhone is cool technology -- you can't help but ogle the interface -- but like PS3, you'd have to be out of your gourd to pay that kind of money for something that's basically whiz-bang with no more substance than other cheaper, comparable products.

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