The iPhone Invades Europe

Will Europeans fall for the Apple phone's user-friendly flash, or stick with spec-heavy phones from Nokia and Sony Ericsson?

Apple's knack for generating fanatical customer loyalty was clearly on display in London Nov. 9, as a line of plucky fans braved inclement British weather outside the company's Regent Street store. They wanted to be the first to get their hands on the iPhone, which finally launched that day in Britain and Germany.

Bracing himself against the cold, student John MacGregor, 23, says he has been looking forward to the iPhone's British launch since the device was first unveiled in January, 2007. "There's nothing quite like it out there at the moment," he says.

Despite the hoopla surrounding the iPhone—more than 1.4 million units already have been sold in the U.S.—Apple's bid to grab a share of the European mobile-phone market is no sure bet. The European market is home to well-entrenched locals Nokia (NOK) and Sony Ericsson, which enjoy dominant market share and offer their own multimedia music phones. European consumers also could turn up their noses at a phone that, despite its groundbreaking user interface, offers lesser specifications and slower data speeds than some of its rivals.

Exclusive Deals Signed

"European users have higher expectations for mobile phones than their U.S. counterparts," says Aleksandra Bosnjak, media and technology analyst at StrategyEye Digital Media in London. "The iPhone is a great product, but in terms of full functionality [for the European market], it still has a long way to go."

That hasn't stopped Britain's O2 (TEF) and Germany's T-Mobile (DT) from signing exclusive deals with Apple (AAPL) to offer the iPhone to their domestic customers. In Britain, subscribers will have to pay between $74 and $115 per month for an 18-month contract, while in Germany, customers must fork over $72 to $130 per month for a two-year contract.

Such figures are in addition to the cost of the iPhone handset—which is itself a radical departure for the European market, where most phones are heavily subsidized by operators. British and German customers must pay $565 and $439, respectively, for the iPhone, compared with $399 for U.S. consumers.

Dead-Simple Operation

"The handset price could be an issue because people don't usually pay for their phones," says Jonathan Arber, analyst at telecom consultanncy Ovum in Britain. "Apple is banking on the cachet of its product to overcome the extra cost."

The question is whether buyers will opt for specs or coolness. Nokia's N95, for example, sports a 5-megapixel camera, vs. the iPhone's 2-megapixel offering. The Sony Ericsson W960 handset can download data over speedy third-generation (3G) networks, whereas the iPhone runs only on a souped-up second-generation technology called EDGE. But no other phone on the market today has the iPhone's touch-screen technology and dead-simple operation.

Another issue for Apple will be prying customers away from existing contracts and phones. According to mobile market researcher M:Metrics, a third of people who express interest in buying an iPhone already own a 3G phone, while 40% of potential buyers already have a phone with a 2-megapixel or above camera.

Bringing Apple to a Wider Audience

"High-end smartphones with lots of gadgets are already widely available within the European market," says Paul Goode, a senior analyst at M:Metrics. "Apple faced a lot less competition in the U.S. market than it will in Europe."

Still, the company is aiming right now for only a 1% share of the estimated 1.1 billion unit mobile-phone market. It shouldn't be too hard to find tech-savvy Europeans who will pay extra to be one of the first to own an iPhone. "Apple has positioned the handset as a premium product," says Paul Lee, director of research for the Technology, Media & Telecommunications practice at Deloitte Consulting. "The iPhone will have a halo effect for the company to demonstrate Apple's technology to a wider audience."

Eventually, a larger number of buyers could be drawn to Apple's user-friendly operating system, which focuses on simplifying basic services such as music, Internet, and phoning. Analysts say that consumers inundated with new technologies are finding them more and more difficult to master—hence the appeal of Apple's radically simple approach.

Will Curiosity Lead to Acceptance?

What's more, the iPhone's combination of integration and ease-of-use already is manifesting different usage patterns among owners. Whereas only about 10% of regular cell-phone users try to access the Internet from their phones, according to M:Metrics, among iPhone owners the number jumps to 90%. The high adoption rate affords Apple and its partners higher revenues—as customers pay a premium to surf the Web—while kick-starting the mobile content business.

Such advantages could give the iPhone enough boost to break into Europe. And if the line of diehard fans outside Apple's London store is any indication, there's plenty of curiosity about the handset. But the competitive and tech-savvy nature of the European market means the iPhone's expansion into Europe won't be a walk in the park.

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