Motorola hits the wrong note with 'iPhone' but that won't hurt Apple

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"The iTunes ROKR looks like a lemon," Dario Betti, a senior analyst at Ovum, said. "We haven't had a chance to test it, but there's a string of bad decisions. The ROKR is a step backwards - it doesn't have a megapixel camera, the Bluetooth [wireless connection system] is limited, there's a poor user interface and this isn't even a 3G phone."

Paul Lee, the technology and telecoms research director at Deloitte, pitched in: "There are question marks over the ultimate demand for the phone. Downloading and playing tracks drains the battery, and that may mean the phone can't make or receive calls because the music function has used up the battery." Neither operators nor users would welcome that, he said.

That certainly sounds as though Apple might - to the potential delight of rivals - have made a misstep on its path to dominance. So why were financial analysts falling over themselves to mark up Apple's stock, at precisely the same time that others were wondering how soon the ROKR will sell at a markdown?

Two reasons: first, the ROKR does not bear the name of Apple, or the iPod, so its putative failure will not drag down either brand. (In fact in the mouth of Mr Jobs, "pretty cool" is not a compliment at all, especially for something he's demonstrating. It's a put-down.)

And secondly, Mr Jobs - once he had disposed of the phone - moved on to what is for Apple a far more important unveiling, of the "iPod nano" - the replacement for the best-selling iPod mini, itself only introduced in January last year, which makes up more than half of all iPod sales.

The iPod nano is so tiny that Mr Jobs could pull it from the change pocket of his jeans. Yet it also features a full-colour screen, the familiar scroll wheel unique to the iPod, and a remarkably thin profile, less than a pencil's.

Mr Jobs admitted that replacing the iPod mini was "a bold gamble" which incorporates a number of innovations, but said it would "change the rules for the entire portable music market".

He added that "entire factories were created to make this device", and said the design had come from a meeting of the company's top executives earlier this year where he urged them to take a big risk instead of becoming complacent with their lead in the digital music market.

Had the timing gone wrong, Apple would have been left short of both old and new stocks of its most popular model just before the peak buying seasons - and seen its revenues plummet.

Exactly that disaster happened in summer 2004 when supply-chain problems held up the introduction of a new version of its signature iMac computer, and it could not compete for one of its key markets, for vital university and student contracts in the autumn.

But the "nano" is here, and in quantity. That's uncomfortable news for rivals who have long struggled to make an impression on Apple's market lead.

Apple dominates both the digital music player market and the online music download market worldwide, with roughly 70 per cent of both, and it's all because of the iPod, launched only in October 2001.

The small white machine has effected a dramatic transformation on the revenues, business model and outlook for the Cupertino-based company, previously better-known for its computers. So far Apple has sold about 22 million - 6 million in the past quarter - and the launch of the "nano" has got analysts upping their expectations again.

In July, it reported third-quarter earnings and revenue which were the highest in the company's 20-year history at $320m (£170m) on revenues of $3.52bn - up 425 and 75 per cent respectively. Shaw Wu, an analyst at American Technology Research, estimates that the iPod makes up 31 per cent of Apple's revenue and 27 to 28 per cent of profit, and that the online iTunes Music Store generates another 4 to 5 per cent of revenue and less than 1 per cent of profit. (Apple does not break the figures down.) That's remarkable for two brands introduced into a crowded market four and two years ago respectively.

Meanwhile, the potential market is growing apace - and rivals want a slice of it. Simon Dyson, a senior analyst at Informa Telecoms & Media, calculates that worldwide sales of portable audio and video players (the latter exist, it's just Apple hasn't made one yet) rose 71 per cent in the past year to reach $6.8bn this year, and will rise to $16.1bn next year. Of those, 81 per cent will be able to play MP3 music files - marking the death of the traditional Sony Walkman - while he expects sales of mobile phones that can also play music to grow from 76 million this year to 478 million by 2010.

So who can dethrone the iPod? Sony has tried, repeatedly, and said yesterday that it will launch yet another brace of MP3-playing Walkmans in a renewed effort to create what the industry is seeking - the fabled "iPod-killer".

But it is possible that no such gadget exists - or that if it does, it is not a music player. Many companies have pointed to their players' better feature set or lower price, in vain; the iPod keeps outselling them. Two weeks ago, one major maker, Rio, announced it would cease the struggle. Others may follow, for even in an expanding market there is downward pressure on margins, exerted now by Apple.

That leaves the phone companies to take up the cudgels. Many are convinced they can win because phones are so widespread, because operators can charge people money through them (for ringtones, a billion-pound business in its own right), and because most phones can play music files.

But efforts to persuade people to buy songs over the air have floundered in Europe and the US. "We estimate that less than one million tracks have been both paid for, then downloaded to mobile phones over the last year, despite this being a service offered by most of the UK's operators," said Mr Lee at Deloitte. That compares with the iTunes Music Store, which in June passed the 500 million songs mark after just two years' operation, and is expected to hit a billion in December.

Indeed, the ROKR - which cannot download songs on the air, and can store only 100 songs - is unlikely to be a hit in its own right. But Michael Gartenberg, an analyst for Jupiter Research, thinks the ROKR's lack of wow factor masks an important step: Apple has for the first time put its iTunes software and the software protection (or "DRM") that guards songs bought online on a non-Apple device - and a phone at that.

"Clearly the computer is still very much a part of the equation for Apple, and the mobile phone (as we have said in the past) isn't meant to compete with the iPod but rather complement it... if Apple thought that mobile phones were iPod killers, would they have licensed their stuff to Motorola?" Mr Gartenberg said.

"Apple has shown that they can partner with mobile phone vendors as well as operators, and that has implications for the future."

The implication is that Apple is ready to enter partnerships with mobile phone companies. Their only problem will be to make anything as compelling as the iPod itself. Meanwhile, Apple rides on the apparently unending wave of interest in digital music.

The latest gadgets: how do they shape up?

Motorola ROKR

Suffers from the problem common to phones which try to do too much: which button should you press, when? This is not a phone designed by Apple; instead, its team devised the iTunes software for the phone. Makes life too hard in many ways. Can only store 100 songs, no matter how much storage you add. Without the iPod's magic scroll wheel, navigation among songs is by a nub (common on most newer phones) or by keypress - but in the latter case, only to the first letter of the song or artist. (If you could find songs as though typing a text message, navigation would actually be faster than an iPod's.)

Two more flaws: you cannot buy songs directly from the iTunes Music Store, but must buy them on your computer, then transfer them to your phone. And although the phone has the wireless Bluetooth system, you must use bulky, expensive wires for transfers. Overall, very disappointing.

iPod Nano

Credit-card sized, and with all the hallmarks of Apple design: the scroll wheel and a decent-sized colour display (for those who fear for their eyesight). Able to store up to 1,000 songs, as well as photos, and so light you'd barely know it's there. Available in two colours, white and glossy black.

The nano replaces the best-selling iPod mini, and will probably outsell that. Biggest risk is not from rivals, but of irretrievably slipping down somewhere thinner than your fingers. Overall, remarkable.