Europe respond to the Iphone

If you're associated with the European mobile phone industry as an investor, customer, business partner, or employee, here's the good news about how the highly-anticipated Apple (AAPL) iPhone will affect you: not much.

Despite all the fuss over the sleek new multimedia gizmo—which ships June 29 in the U.S. and comes to Europe in the fall—analysts figure it will barely scratch sales for giants such as Nokia (NOK) and Sony Ericsson (SNE) (ERIC). Researchers at Strategy Analytics forecast that worldwide shipments of the iPhone this year could amount to just 3 million units—a 2% share of the high-end smartphone market now dominated by Nokia, and only 0.3% of the total handset business, which could hit 1 billion units in 2007.

The same goes for software suppliers to the mobile sector, such as London-based Symbian, which makes the market-leading operating system for smartphones, and Oslo-based Opera Software, whose pint-size Web browser is widely used in handsets around the world. No question, the iPhone is getting a lot of attention—but it won't put a dent in their businesses anytime soon.

Resetting Expectations

Still, nobody in Europe's big mobile industry can afford to ignore the iPhone phenomenon. Even if its immediate impact is limited, experts say Apple's new take on handsets could prompt big changes over the long run. "The iPhone will reset expectations on what a software platform can deliver on a mobile phone," says Ben Wood, a wireless analyst at CCS Insight, a tech consultancy in Britain.

Indeed, a kind of "iPhone effect" is already starting to ripple through Europe's mobile players. Nokia recently announced a reorganization set for next January, in which it will create a new business unit focused on mobile software and services. Analysts think that the company will roll out its own branded music and multimedia services within a year, the better to compete with the iPhone/iTunes duo from Apple.

To shore up its market position, Symbian has released a new version of its mobile operating system that promises to accelerate software application loading by up to 75%. The company is also perfecting a way for phones to use the same Internet connection to perform multiple tasks, says Jorgan Behrens, Symbian's executive vice-president of marketing.

Opera Software, whose browser already works on nearly two dozen different operating systems, is preaching a message of diversity. It's not just going after high-end smartphones, but also entry-level handsets that make up the bulk of the market. "We tell operators who would like to offer iPhone-like browsing on a variety of phones that we have the solution for them," says CEO Jon von Tetzchner.

A Slicker Experience

What these and other European companies are responding to is a device that undoubtedly raises the bar. True, products such as Nokia N-series and Sony Ericsson's high-end Walkman family have built-in MP3 digital music players, cameras, browsers, and all the other capabilities of an iPhone. But Apple has packaged all these features in a slick package with an intuitive, touchscreen-based interface.

"Apple has succeeded in cramming a Mini Mac into a phone," says Richard Windsor, an equity analyst with Nomura Securities in London. That means the gizmo has enormous power and the capacity for big, sophisticated software programs. It also offers a great browsing experience—something other phones have struggled to do.

The implicit promise is that the iPhone could finally give mobile operators a device that lets their customers take full advantage of the wireless Web. If a better handset experience encourages more use of data services, carriers stand to boost average revenues per user—their Holy Grail in an era of sagging voice revenues.

Where iPhone lags

To be sure, Apple faces plenty of challenges in Europe. For one thing, the first version of the iPhone doesn't work on third-generation (3G) or faster networks, so wireless connections to the Net will be only about one-twentieth the speed offered by rival 3G smartphones. (There were widespread rumors on June 30, though, that Apple could announce a 3G iPhone for Europe as soon as Monday.)

Then there's the price, which is likely to be $500 to $600, even after operator subsidies. A Nokia N95, by comparison, sells for $300 or less—and has a better camera, longer battery life, and built-in GPS.

Analysts also say that Europeans may be less impressed by the iPhone because whiz-bang smartphones are less of a novelty in the Old World. The U.S. market is still mostly made up of conventional voice models, whereas up to a quarter of handset sales in Europe are now multimedia-capable smartphones. Neil Mawston, a Strategy Analytics wireless analyst in Britain, predicts that consumer reaction to the iPhone in Europe will be "more muted."

Still, European mobile companies can ill afford to dismiss the iPhone. Mawston points out how much trouble Nokia got into when it didn't take the threat from folding "clamshell" handsets seriously enough. Motorola (MOT) had a field day with the RAZR while Nokia raced to catch up.

The Finns may not be quaking in their boots over Apple's latest salvo, but you can be sure that the lessons of the past aren't forgotten. This time around, Nokia will use every weapon in its arsenal—new phones, services, marketing campaigns, and competitive pricing—to keep Apple in check before it gains an edge.