iPhone price raises issue for Apple

SAN FRANCISCO — Although personal computers and digital music players have largely become commoditized products, Apple has been able to use innovation and design to maintain premium price levels in these markets.

That ability may come under the ultimate test, as the Cupertino, Calif.-based company prepares to enter the wireless-device market later this year.

Last week, Apple lifted the wraps on its much-anticipated iPhone — a combination wireless phone, Web browser and digital music player.

The device is to go on sale in North America in June through an exclusive relationship with wireless carrier Cingular Wireless, which itself is being rebranded as AT&T.

While the iPhone has many head-turning features — such as a touch-screen display — its price is also popping eyeballs. The cheapest model, with four gigabytes of memory, will sell for $499. Another model with 8GB of memory will sell for $599.

That would be the most expensive phone in Cingular's lineup. The closest competitor — the Treo 750 from Palm — is available for $399 with a discount for a two-year contract plus a $100 rebate.

"Frankly, this might appeal to an Apple lover who has been willing to pay a premium for its products in the past, but it's a great leap for most of the wireless users out there," said Linda Barrabee, a wireless analyst with the Yankee Group.

In a note to clients last week, Richard Gardner of Citigroup said the price plus the use of a single carrier "are likely to limit the available market to a subset of the already-modest smart-phone portion of the handset market."

Pricing in the wireless-device market, affected heavily by subsidies from carriers, will be a new issue for Apple.

Companies typically debut new devices that plunge in price within a year or two. The popular Razr line from Motorola came on the market in 2004 also with a $500 price tag. It can now be had free at many carriers with a two-year contract.

Mike McGuire, a wireless-industry analyst with Gartner, says Apple is not immune from pricing pressures.

But the company's ability to closely integrate hardware and software has allowed it to maintain a premium on past products and will likely bolster its position with the iPhone as well, he added.

"BMW doesn't cut its prices to match the Honda Civic," McGuire said. "I think they're going to feel that they can keep the price high because they are not trying to attract everyone who gets their phones for free right now."

Rob Sanderson, a wireless analyst with American Technology Research, pointed out that in the wireless market, carriers typically have a lot of power over handset pricing.

"There's 10 to 15 companies in the world that account for the bulk of the buying power, so it's pretty concentrated compared to consumer electronics," Sanderson said.

"Still, Apple brings a lot to the table in that regard," he said. "They already have a pretty decent distribution channel themselves."

Apple may address the pricing issue they same way the company did with the iPod.

When the player first debuted in 2001, it sported only 5 GB of memory and was priced at $399. The company now sells an 80GB version for $349. It has also introduced a line of smaller players such as the Nano and Shuffle at lower price points.

Jesse Tortora of Prudential thinks the company will follow a similar approach with the iPhone.

"We expect to see Apple move down the stack and introduce phones with less capabilities at lower price points, aimed at mass-market adoption," Tortora wrote in a note to clients Wednesday.