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Saturday, March 03, 2007, 08:00 am PT (11:00 am ET)

iPhone primed to trump rivals in audience appeal

Analysts at Bank of America and Morgan Stanley say Apple is poised to snap up marketshare from competing smartphone producers, even though some segments, as always, would prove tough to crack.

Research notes from the financial institutions, published late this week, told investors that the iPhone is entering a market where many of its audience's tastes (and competitors' weaknesses) would play into its creator's hands.

Ironically, much of this support came after a conversation held by Bank of America's Keith Bachman with Apple's strongest opponent, Nokia. Executives from the Scandinavian company painted an optimistic picture for the high-end phone business, predicting that sales would blossom from 90 million phones sold worldwide in 2006 to over 250 million by 2008.

The Finnish cellphone maker went on to note that today's environment is already very friendly to media-wise phones from its own line — and, Bachman added, the iPhone. Roughly 60 percent of premium phones are used for music on a regular basis, Nokia estimated. Some owners are even dependent on their handsets to such a degree that just under half of the segment's users rely on the devices as their only cameras.

And while Nokia's devices were best positioned to compete with those from Apple, the latter could brag of advantages its rivals simply couldn't offer. No current phone designer has the same kind of devoted fan base, the Bank of America researcher said. Neither could they claim iTunes' grip on existing customers nor the same skill with creating a user interface.

Other cellphone heavyweights are at considerably greater risk, said a similarly-voiced investor note from Morgan Stanley's Katheryn Huberty.

While some phone makers are shielded from the potential damage of Cupertino's initial onslaught, particularly RIM and its work-oriented BlackBerry line, others are especially vulnerable. Those devices whose Internet or media features appealed to the iPhone's target audience, but yet weren't crucial to a corporate environment, were the most likely to be dropped in favor of the Apple model.

Palm's Treo phones may be at the greatest risk of all, Huberty said. Beyond sharing features and prices, Palm is also in the unfortunate position of having a disproportionately large number of Apple enthusiasts in its midst. Treo owners are twice as likely to own an iPod or Mac, according to a Morgan Stanley survey, and are much more likely to consider iPhones regardless of their existing Apple product ownership.

Motorola, which helped Apple experiment with music phones through the ROKR, is now a virtual non-factor thanks to the poor reception of its music efforts and an emphasis on less expensive phones.

Still, both Huberty and her equivalent at Bank of America cautioned shareholders that the iPhone wouldn't have automatic control of the market. Price was a particularly familiar sore point, with the two experts independently concluding that Apple needs to quickly expand its lineup with phones under the $499 mark if it wants to grow outside of its soon-to-be-established niche.

Bachman also noted that Nokia's assessment of the market's hardware preferences would have Apple falling just short of the ideal. The "sweet spot" for camera phones is between 3 and 5 megapixels versus the iPhone's 2-megapixel unit, Nokia claimed. A lack of 3G wireless could also hinder the California-based company's success outside of North America, Bachman wrote.

With most of these potential problems likely to be solved by 2008, however, the two analysts were convinced that Apple could spark a long-term interest in its pioneering phone over the long run.

"We believe there is [a] high likelihood the iPhone portfolio expands in the next 12+ months, generating additional demand," said Huberty.