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Wednesday, January 10, 2007, 09:00 am PT (12:00 pm ET)

Macworld: Apple seen following iPod expansion strategy with iPhone

Though the introductory price point of Apple's new iPhone device is a steep $499, an analyst for American Technology Research believes the company is likely to follow a similar strategy to the iPod, starting out with high-end units and then working its way down to more affordable models.

"We believe this is the first of many cell phones from AAPL with AAPL having the potential to revolutionize the space," analyst Shaw Wu told his clients following the company's iPhone unveiling on Tuesday. "While its $499 and $599 price points appear high, they are highly functional devices and best-in-class."

Wu said it would not come as a surprise to see simpler Apple-branded cell phones in the future at much more aggressive price points. "We believe AAPL will likely follow its iPod strategy, which is to start out at the high-end and then trickle down to mid-range and low-end," he said.

Overall, the analyst says he is "very impressed with iPhone and its minimalist touchscreen design," but finds the functionality much more ambitious and aggressive than we anticipated for a first phone.

Of all the analysts chiming in on Apple these days, Wu was one of the most vocal in his convictions that an Apple handset was growing increasingly near. However, as he conceded in his note to clients Wednesday morning, he did not foresee the initial product as a single device that would act as widescreen video iPod, a cell phone, and a mini Mac running Mac OS X.

"We had picked up from our supply chain sources a candy bar form factor, widescreen technology, and Bluetooth, however, we did not anticipate it to be just one device," he said.



In terms of functionality, Wu said the iPhone's multi-touch interface, full-page web browsing, free Yahoo e-mail access, widescreen digital media player, and tight integration with iTunes are some of its most compelling and competitive differentiators. He sees such features delivering success over similar but now less capable alternatives in the Sony Walkman phone, LG Chocolate, and Samsung BlackJack.

And while the analyst admits that choosing Cingular as its exclusive wireless carrier in the US reduces Apple's control over the iPhone experience, he believes it "is the right move and a less risky strategy" than forming its own mobile virtual network operator (MVNO).

"Arguably, AAPL has less control over the experience, but it will stick with its core competencies – which is making and marketing the best hardware and software – while Cingular will handle the service and billing," he wrote.

Wu maintained his Buy rating on shares of Apple with a price target of $99.