HP goes head-to-head with Apple as mobile handset wars intensify

Apple's move to slash the price of its much-hyped iPhone, only a few weeks after it went on sale, promises to take the mobile handset wars to a new level of intensity.

The US price cut – from $599 down to $399 – came on the same day that Hewlett-Packard, the world's largest computer manufacturer, unveiled two new cellphone designs, underscoring how new entrants are taking advantage of converging technologies and shaking up the handset industry.

Stock market investors continued to sell down Apple shares yesterday, upset the company had given up so much of its fat profit margin on the iPhone, but the longer-term game of picking winners and losers is only just beginning.

By lunchtime, Apple shares were off a further 2 per cent, on top of the 5 per cent fall on Wednesday afternoon when Steve Jobs, the chief executive, announced the company was going all out to win customers in the run-up to Christmas.

"The iPhone price cut arrived roughly four months earlier than we expected," said the Deutsche Bank analyst Chris Whitmore, "but we expect the lower price point to drive incremental iPhone demand as it now addresses a larger portion of the handset market. Apple is likely willing to concede lower near-term hardware margins ... to capture a recurring, monthly annuity from AT&T," the phone carrier that exclusively offers the iPhone.

Unlike Apple, Hewlett-Packard is targeting the business market with two smartphones that expand its iPAQ brand of handheld computers beyond PDAs, personal digital assistants, which are declining in popularity in the face of more phone-like devices such as the email- and internet-enabled Blackberry.

The developments represent a further challenge to the traditional handset makers – one of whose number, Motorola, is set to reveal poor results today, showing how it has been pressured by rivals since its ultra-thin Razr fell out of fashion.

Carolina Milanesi, at the market research firm Gartner, predicted the major players in the phone market could be different in five years. "The market is more competitive. The traditional players are not just competing against the usual suspects, because now there are people like Apple who have expertise from the consumer electronics side. Barriers to entry are low, but surviving in the market, that's tough."

Complicating life for manufacturers is the increasing convergence of technologies. Handsets must now, almost as a matter of course, offer internet access and entertainment, making them one-part phone, one-part handheld computer, and one-part digital music player. And that means that handsets which are able to scoop up entertainment content, such as music and video clips, are likely to gain an edge.

In the US in particular, where handsets are usually locked to a particular carrier, manufacturers are being put under pressure by the telecoms carriers as they compete for customers. AT&T's rivals are trying to build relationships not just with handset makers, but with digital music stores. Verizon did a deal last month with the newly merged Rhapsody and Urge music stores, and promised compatible handsets would be unveiled soon.

But Nokia is one handset maker hoping to shift the balance away from the carriers in the US and to build loyalty from its handset owners across the world. It is building its own music store and last week unveiled Ovi, a string of internet services that include music downloads. "Devices are not enough anymore," its chief executive Olli-Pekka Kallasvuo said at the launch.

Ms Milanesi said Ovi pushes Nokia into the lead among the traditional manufacturers as they struggle with the new landscape of all-purpose devices. "The aim is to create these ecosystems of services around the hardware, which allows you to justify higher prices than perhaps the telecoms carriers would like and which also helps the 'stickiness' of the brand. Apple is the company they are all looking at, and its iPhone-iTunes combination is what they want to mirror."

This is also one of the reasons why Mr Jobs was making nice to NBC this week, saying he still hopes iTunes would be able to patch up its differences with the broadcaster, which is withdrawing its shows, such as Heroes and The Office, from iTunes in a dispute over prices. If iTunes loses its ability to offer the most entertainment on the internet, it is not iTunes' profits that will suffer – it is Apple's hardware sales.

There is one further question lurking in the background: What will Google do? The technology giant is believed to be spending millions of dollars on its own secret telecoms project, which has included prototype handsets of its own. It is unclear yet whether Google will plump for building its own mobile phone network, manufacturing its own phone, or simply persuading carriers or handset makers to install its local search software on a device, but either way, the next 12 months will be critical. The handset wars may be only just beginning.