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IPhone Gets Jump on Rivals With Video Chat, Screen Technology

Apple Inc.’s iPhone is outdistancing the pack of phones that use Google Inc.’s rival software, thanks to video-calling features, a sharper screen and its array of 225,000 applications, analysts said.

The iPhone 4, unveiled yesterday by Chief Executive Officer Steve Jobs, is thinner, has better resolution and adds a front- facing camera. It also sports a new type of glass and a stainless-steel band Apple says is designed to improve network reception.

Apple is counting on the product to fend off mounting competition from Android, a Google smartphone operating system used by Motorola Inc. and HTC Corp. The iPhone is evolving fast enough to keep competitors at bay, even if the new version lacked major surprises, said William Kreher, an analyst at Edward Jones in St. Louis.

“They remain the technology innovation leader,” Kreher said in an interview with Bloomberg Television. “While nothing was really revolutionary in terms of the new features, I think that Apple took a nice step forward.”

Jobs, who unveiled the phone at Apple’s developer conference in San Francisco, downplayed the threat from Android. The iPhone was the No. 2 smartphone in the U.S. in the first quarter, with a 28 percent share, he said, citing Nielsen Co. data. Research In Motion Ltd. ranked first, with a 35 percent share, while Android-based devices accounted for 9 percent.

Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference (WWDC) in San Francisco. Close

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference... Read More

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Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference (WWDC) in San Francisco.

Gizmodo Leak

The competition from Google and other phone makers “has sparked an almost fierce level of innovation at Apple,” said Yair Reiner, an analyst at Oppenheimer & Co. in New York. “The competition is taking aim but the target keeps moving faster.”

Though many of the iPhone 4’s enhancements were expected -- a prototype of the iPhone was dissected and photographed by technology blog Gizmodo.com in April -- the upgrade provides Apple with a unique package of capabilities, analysts said. While it’s not the first to offer video chat on a smartphone, it’s the combination of features, coupled with the apps and iPhone interface, that will extend its appeal, they said.

Maynard Um of UBS AG in New York called the new features “significant.” Ben Reitzes at Barclays Capital in New York said the iPhone 4’s “exciting new features” will persuade current users to trade up to the new model. Katy Huberty of Morgan Stanley in New York said Jobs’s demonstration was “compelling.”

Sales Catalyst

“The combination of a new form factor and software will likely serve as a powerful catalyst for iPhone 4 sales,” said Shaw Wu, an analyst with Kaufman Bros. LP in San Francisco. He recommends buying the shares, which he doesn’t own. “The rich features, refinement and higher build quality are worth noting and difficult to comprehend without seeing and using the new iPhone firsthand.”

Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference (WWDC) in San Francisco, California. Close

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference... Read More

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Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4 is held for a photo at the Apple Worldwide Developers Conference (WWDC) in San Francisco, California.

Even so, the new abilities come with caveats. The video- calling program, called FaceTime, will be limited to Wi-Fi networks for now. That means customers won’t be able to make video calls using AT&T Inc., the exclusive U.S. wireless carrier for the iPhone. And while the phone can tap upgraded networks, that technology won’t be available across AT&T’s system until the middle of next year.

In a reminder that some of Apple’s features are dependent on the reliability of wireless networks, Jobs struggled to use some of the new tools during his presentation.

Wi-Fi Disruption

The trouble stemmed from a poor Wi-Fi connection, rather than AT&T’s service. Jobs asked attendees to shut off the wireless connections on their computers and mobile hot spots because of interference, saying, “I’d like you to look around and police each other.”

Apple, based in Cupertino, California, fell $1.61 to $249.33 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 18 percent this year.

When Apple’s first iPhone appeared in 2007, its touch- screen design and app-based interface shook up the market. Research In Motion and other mobile-phone makers clambered to add similar features to their devices. Since then, the industry’s rapid-fire advancements have made it harder for an upstart to catch up quickly, said Charles Golvin, an analyst at Cambridge, Massachusetts-based Forrester Research Inc.

“Apple and its competitors are steadily bringing better and better technology and software to go with it to the market,” he said. “In that environment, it’s difficult to leapfrog the competition in the same way the iPhone did when it was first introduced.”

Top Seller

The iPhone is now Apple’s top-selling product, generating 40 percent of revenue last quarter -- more than the Macintosh computer. The company has three products that work with its App Store: the iPhone, iPod Touch and iPad. All together, Apple will have sold 100 million of those devices by sometime this month, Jobs said.

There are now more than 225,000 iPhone and iPad apps available. The company has paid out more than $1 billion to developers, who get a 70 percent share of the programs sold through its App Store, Jobs said. Android developers, meanwhile, have only created about 50,000 apps, according to Sanford C. Bernstein & Co.

The iPhone 4 adds a camera for capturing high-definition video, as well as software that makes video chatting possible. Its so-called retina display packs four times as many pixels in the 3.5-inch screen, delivering higher-resolution text, photos and videos. New iPhone operating-system software, called iOS 4, supports features such as multitasking -- the ability to run more than one application at the same time.

‘Razzle-Dazzle’

The iPhone 4, set to debut in the U.S. and four other countries later this month, also is about 24 percent thinner than its predecessor, the iPhone 3GS. A 16-gigabyte model will cost $199, and a 32-gigabyte version will sell for $299. Apple will offer an 8-gigabyte version of the 3GS for $99.

“It will have enough razzle-dazzle,” said Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis, who attended yesterday’s gathering. He rates Apple shares “overweight” and doesn’t own them.

Apple, which has delivered a new iPhone every year since it first came out, sees the fourth-generation device as “the biggest leap” in design and functionality in three years, according to Jobs.

A mobile advertising system called iAd will be built into the new iPhone software, giving app creators a new way to make money. Software developers will get a 60 percent cut of revenue from ads placed by Apple within their programs.

Advertising

After eight weeks of taking orders, Apple said yesterday it has commitments for $60 million in advertising for the second half of the year from companies including Target Corp., Chanel SA, J.C. Penney Co., Sears Holdings Corp., Campbell Soup Co. and Nissan Motor Co. The first ads will appear July 1.

With iAd, Apple is less concerned about making money from the ads, Kreher said. It’s more about making its software and mobile devices more attractive for developers -- and creating one more way to distinguish itself from Google.

“They just want to cultivate a better ecosystem for developers and advertisers to be comfortable in working with them,” Kreher said. “It’s really just about getting more people on board then driving the bottom line.”

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net

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