$499 phone to fly off shelves, Apple says

Apple predicted that 10 million customers will pay at least $499 to buy an iPhone next year because they realize most free mobile phones are worthless.

"A lot of people pay zero for the cellphone. Guess why? That's what it's worth," Apple Chief Operating Officer Timothy Cook said Wednesday at a conference in Las Vegas. Some wireless providers win customers by offering phones that lack the latest features free with service contracts.

The iPhone, scheduled to ship in June in the U.S., combines Apple's best-selling iPod music and video player with a mobile phone that offers Internet and e-mail access. Chief Executive Officer Steve Jobs said in January that Apple expects the iPhone to capture 1 percent of mobile-phone sales.

"This will be a big piece of the Apple story for years to come," Cook told attendees at the Goldman Sachs Group technology conference. "If we offer something that has tremendous value, that is sort of this thing people didn't have in their consciousness — it was not imaginable — then I think there's a whole bunch of people that will pay $499, $599."

When asked how the company estimated the market of opportunity for the iPhone, Cook said Apple rejected traditional approaches that call for comparing the product to devices sold in a similar price range. Apple plans to offer two iPhone models priced at $499 and $599.

"That kind of analysis doesn't make really great products," Cook said. "The iPod would not have been brought to market if we would have looked at it that way — how many $399 music players were being sold at that time?"

Up to 75 percent of U.S. iPhone buyers probably will be first-time subscribers to AT&T's mobile-phone service, AT&T Chief Financial Officer Rick Lindner said Wednesday. The phones will only work on AT&T's wireless network, formerly known as Cingular Wireless.

"The majority of those customers, two-thirds to three-fourths, will be coming from outside of our current wireless customer base and that's a good thing," Lindner said during a speech at a Merrill Lynch conference in New York. AT&T is the largest U.S. phone company and its mobile-phone unit is the biggest U.S. wireless carrier.

The iPhone is likely to draw more customers to AT&T stores "at the launch and throughout the rest of the year," Lindner said. "Creating more traffic in the stores means more sales."

Apple has sold more than 90 million iPods since Jobs released the player in October 2001, helped by new, smaller, higher-capacity designs, Cook said. Apple shipped a record 21.1 million players during the 2006 holiday season. It's too early to tell whether the iPhone will damp demand for the iPod, he said.

"These are being sold for a wide variety of usages, there's a wide variety of form factors, wide variety of capacities, and wide variety of price points," Cook said. "We'll just see what happens."