Calling All Competition
IPhone Promises to Change Way Wireless Industry Plays

By Kim Hart
Washington Post Staff Writer
Saturday, June 23, 2007

Sprint Nextel is trying to upstage the iPhone.

A week before the much-anticipated launch of its rival's flashy music phone, the company is trying to stave off competition by promoting a new red version of its UpStage multimedia phone.

That's a tough task: Sprint has done little to impress Wall Street or consumers with its marketing campaigns of late, and the Reston company also lacks the sheen of Apple or its shiny new product. Still, such defensive moves are critical for Sprint, which has already lost subscribers to other mobile phone companies and is bracing for others who might flock to AT&T, the sole carrier for the iPhone.

Wireless companies traditionally put more advertising muscle behind the quality of their networks rather than the coolness of their phones. But the iPhone is being hailed, even before a single customer has gotten their hands on it, as an industry game-changer. It promises to marry technological prowess with simplicity in a way that has critics saying it could be the first phone that shifts the spotlight away from a cellphone's primary purpose: making calls.

"Now the intrinsic value of being mobile is in the device itself," said Mike McGuire, the vice president of research at Gartner, a market-research firm. "That's going to mean big changes in the carrier world."

In April, Sprint unveiled Samsung's UpStage phone, which works as a cellphone on one side and a music player on the other. The phone is being marketed as a less-expensive alternative to the iPhone, at $99 with a two-year contract. The iPhone will sell for $499 or $599, depending on the size of the memory.

"I would never say I don't think the iPhone won't do well, but I struggle with the idea that people are going to be willing to pay the high price," said David Owens, Sprint's director of devices.

Recent research suggests the iPhone has a large potential audience. More than two-thirds of cellphone users interested in buying an iPhone are not AT&T customers, the wireless market research firm M:Metrics said. Analysts expect about 1 million people to leave their current carrier to get their hands on one, even if it means paying about $175 to break their contract.

That's a significant threat to Sprint, which has been loosing customers steadily. According to an M:Metrics survey, 8.1 percent of Sprint's customers expressed interest in buying an iPhone. Other carriers face a similar risk: 12.5 percent of T-Mobile's customer base and 6.7 percent of Verizon Wireless's may defect, according to the survey.

Even if customers don't depart immediately, wireless companies will have to rise to the challenge by coming up with competitive new products and multimedia perks.

The iPhone will reset consumers' expectations about cellphones, said Thomas Thornton, a cognitive psychologist at Perceptive Sciences, an Austin research firm that tests mobile products.

Competitors taking cues from the iPhone are adding features like larger color touchscreens, user-friendly Web browsers and high-capacity music players to their phones. Verizon Wireless is planning to roll out updated phones with similar components. This week, Sprint released its Mogul phone, with an extra-large screen and a WiFi connection. It is planning a music phone aimed at teenagers this fall.

Phones that double as music players, cameras and Web browsers have been on the market for more than two years, including Verizon Wireless's Chocolate phone and T-Mobile's Sidekick. But the iPhone's simple design, coupled with the user-friendly reputation of Apple's brand, is the biggest draw, McGuire said.

"Somehow, a halo has formed over Apple," he said. "A lot of handset manufacturers are gritting their teeth that Apple is poised to take credit for bringing Internet to the cellphone."

All the anticipation could also amplify any potential glitches with the new phone.

Thornton said business users may find the touchscreen awkward for quickly tapping out e-mails. But his main concern is whether Apple, as a newcomer to the phone business, has made a device that functions well as a phone.

"The phone takes a backseat to all the other features Apple has crammed into it," he said. "Technologically, can it deliver?"

In the Washington area, adoption of the iPhone may be hindered by the fact that AT&T does not provide service in underground portions of Metro. Only Verizon Wireless and Sprint, which roams on Verizon Wireless's network, receive underground signals. AT&T's high-speed network is also slower than the network used by other carriers.

In preparation of the iPhone's launch Friday night, AT&T is adding capacity in areas that get weaker signals, spokesman Mark Siegel said.

By going head-to-head against a digital music phone, Sprint is trying to gain ground in mobile entertainment services. Last month, the company announced a partnership with Pandora, the online radio site, to stream songs directly to phones. It also signed a deal with the Disney-ABC Television Group, allowing customers to download movies and TV shows. Song downloads from its 1.6-million track music library helped boost data revenue by 44 percent in the first quarter.

But where Apple's marketing of the iPhone has succeeded, some say Sprint's efforts with the UpStage have faltered.

"With the UpStage, Sprint is clearly taking aim at the iPhone, and it's not even close to being an iPhone competitor," said Avi Greengart, an analyst at Current Analysis, a Sterlingmarket research firm. Its ease of use doesn't match its sleek design, he said.

The iPhone is just one indication that AT&T has made more of its merger with Cingular than Sprint has of its merger with Nextel, he said. "Now AT&T has the iPhone. And what does Sprint have? I'm not sure, and I think that's a problem."