Will iPhone Dial Up Europe Mac's Sales?

Apple CEO Steve Jobs is on a mission to secure deals with companies in advance of an iPhone launch overseasand to drive up Mac sales

Apple (AAPL) CEO Steve Jobs is making the rounds of European capitals announcing plans for a Nov. 9 overseas launch of the iPhone. As of this writing, he's announced deals in Britain with O2, a division of Spain's Telefonica, and in Germany with T-Mobile, a unit of Deutsche Telekom (DT). Rumors are rife that his next stop is France. Or maybe Spain.

Wherever he lands next, Jobs is on a critical mission. The iPhone's European tour has big implications not just for Apple's new music-playing cell phone, but could also set the tone for Macintosh computer sales in markets where Apple has minimal share.

iPhone Halo Effect?

Depending on whom you ask, the iPhone is either the greatest electronic device to grace the planet or an overpriced, overhyped status gadget sold to rubes with more credit than sense. (I don't fall into either camp, though I think the iPhone by many standards is an extraordinary device (BusinessWeek, 7/03/07) that will clearly shift the way wireless phones are made in the future.)

And while it generally plays well in New York, L.A., and many points in between, how will it be received in London, Berlin, Paris, Madrid, and Rome? For that matter, how about Tokyo, or Shanghai? And a key question for those who still care about Apple's computer business is whether the iPhone, like the iPod before it, can help goose Mac sales abroad. Talk of an iPod Halo Effect—that interest in the iPod would lure buyers to the Mac as well—was initially dismissed but turned out to be real (BusinessWeek, 6/15/06). Could an iPhone effect materialize in Europe and, in time, in Asia?

Europe and Asia are proving to be particularly healthy PC markets right now, especially in notebook sales. Yet much of Apple's strength in computers is flexed on this side of the pond. Of the 5.6 million Macs sold in calendar 2006, 3.1 million were sold in the U.S. That was sufficient to give Apple a 4.7% share of the U.S. market in 2006, a boost from previous years.

Limited EDGE

Compare that with Apple's share in other markets: Western Europe: 2.7%; Latin America, 0.76%; and in Asia—the fastest-growing market last year, according to IDC—Macs account for a tiny 0.70% of the personal-computer market. In Latin America and Asia, which together bought 65.7 million PCs last year (more than the U.S. market), Apple sold a minuscule 470,000 Macs. "Apple intends to leverage the number of buyers it can reach in Europe," says IDC analyst Karine Paoli. "From a branding perspective, its presence is quite strong in Europe, but its PC sales are patchy." Patchy with pockets of strength, namely Britain, home to 10 Apple stores so far and where Apple airs localized versions of the popular Mac vs. PC TV ads. In France it sells iPods and Macs at FNAC. There's even an Apple store in Rome.

Before the iPhone can have a halo effect, though, it needs to generate a halo. In Europe, consumers are crazy for their phones, buying 175 million units in 2006, according to Gartner (IT). And it's not uncommon for consumers to have more than one phone and switch between them for different occasions. So far, so good for Apple.

But European wireless consumers are a demanding lot, accustomed to using their wireless phones much more than their U.S. counterparts. They caught the text messaging bug years before Americans, and they expect (and get) better network coverage than is common here. Trouble is, the iPhone relies on network technology known as EDGE, which isn't as fast or as widely available as the advanced 3G wireless technologies to which many Europeans have become accustomed. O2 says that only 30% of its network footprint will be EDGE-ready, making Web browsing tricky when you're outside EDGE network range. Early adopters will be quick to notice the lack of service in various places they frequent and tell their friends, who will hold off on buying ones themselves.

Premature Debut?

To be sure, consumers can also operate their iPhones using a different technology, Wi-Fi, which makes for an altogether better experience. But you can bet established players such as Nokia (NOK), the world's largest mobile phone maker, are hard at work on handsets they hope will one-up the iPhone, whatever technology it uses.

Jobs says a 3G iPhone will hit next year, once the chipsets stop eating the battery so fast. Given what wireless consumers in Europe are used to, it can't happen fast enough. And taking a non-3G iPhone to Asia is a nonstarter. Wireless consumers in Japan, Taiwan, China, and South Korea are even more demanding than those in Europe, though rumors are already starting to pop up of talks between Apple and South Korea's KFT.

Not that I think it will happen, but an iPhone flop in Europe would cast a pall just as Mac sales are beginning to grow at healthy clip. For the first three quarters of 2007, Mac sales in Europe hit 1.3 million units, an improvement of more than 31%. But unhappy iPhone buyers won't do Mac sales any favors. Maybe Apple should have waited till 2008 to try to make the iPhone the international superstar Jobs so badly wants it to be.

Before it's here, it's on the Bloomberg Terminal.