An Apple phone is no slam-dunk

The wireless world can be a harsh place. Just ask Sony, says Fortune's Stephanie Mehta.

By Stephanie N. Mehta, Fortune senior writer

NEW YORK (Fortune) -- A well-regarded computer and consumer-electronics maker plunges into the competitive wireless market with a combination music player/cell phone. The company's loyal users can barely wait to try the new gadget, and analysts predict the device will deliver on the long-promised marriage of music and mobility.

We're describing, of course, a phone Sony (Charts) made for Japan's NTT DoCoMo, circa 2000. But you'd be forgiven for thinking we were talking about Apple's rumored wireless phone, which could be launched as early as next month.

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It turns out that Sony's wireless experience is a cautionary tale for any consumer electronics maker - including Apple - trying to make the move into the cell phone business. Sony stumbled badly with its music player/phone, and in May 2001 DoCoMo recalled 40,000 of the handsets due to software glitches. (One phone reportedly shut down if the user was listening to music when the phone rang.)

Then, another Japanese operator recalled more than 500,000 Sony Internet-capable handsets. A few months later, Sony entered a joint venture with established telecom player Ericsson, in part, executives of the venture say, to gain much-needed wireless expertise. The alliance, Sony Ericsson, today is the No. 4 maker of wireless phones, after Nokia (Charts), Motorola (Charts) and Samsung.

While we don't know exactly how Apple (Charts) intends to enter the wireless market (the company declines to comment) it is clear the mobile world has its own quirks and demands that Apple will need to negotiate. And cell phones, obviously, are a very different, very specialized type of technology.

Some cell phone makers like to point out that today's high-end phones really are miniature computers - powerful, Internet-enabled machines that also happen to make voice calls.

"At Motorola, we call this the device formerly known as the cell phone," Padmasree Warrior, Motorola's chief technology officer recently said, holding up her own RAZR. That, however, does not mean a computer maker simply can install some radios, receivers and vocoders (short for "voice encoders" that translates voice sounds for digital transmission) and turn any old device into a cell phone. "If only it were that easy," laughs Steve Walker, vice president of product marketing for Sony Ericsson.

Indeed, several makers of personal digital assistants tried to do just that in the late 90s and early part of the decade, with disastrous results. The voice quality wasn't very good, and the PDA makers discovered what most cell phone users already know: Talking on the phone a lot is a big drain on batteries. Heavy voice users found they couldn't access their calendars or address books, the very things they needed from their PDAs.

We're not suggesting Apple would be so naïve, but there are many good reasons why even the most sophisticated consumer electronics companies team up with wireless specialists when it comes to making phones. Bang & Olufson's pricey Serene, for example, is produced in conjunction with Samsung, which had its own rocky transition from consumer electronics to cellphones. According to my colleague Peter Lewis, the Korean company's chairman gave its first phones to all his friends as gifts, and the feedback was so horrendous he had employees destroy Samsung's entire inventory of phones in a bonfire.

So what do Bang & Olafson and Sony get from their wireless partners? Help with the logistics of getting wireless devices to interconnect with the hundreds of phone networks around the world. Each phone company network is engineered a little differently, and in order for a phone to work on that network, it must go through trials and tests. Then there are all the special extras a phone company might ask of the phone maker: a special logo on the device, special user interface software, etc.

"You need to have a global infrastructure, the ability to do localization, and language variants," says Tero Ojanpera, Nokia's chief technology officer. "There aren't that many players that can do that."

Of course, Apple may not want to make a device for the entire world, and it may not even want to make a device for all Americans. Some analysts believe Apple will enter the market as a mobile virtual network operator, or MVNO, buying wholesale airtime from Cingular or another phone company, and reselling the service under the Apple brand, along with its device. Such as strategy would give Apple complete control of the user experience, something Steve Jobs is keen on, especially after hard-core Apple fans complained about the ROKR, the Motorola/iTunes phone distributed by Cingular.

But the MVNO model would limit Apple's base of potential users, and more scarily, thrust it into the role of phone operator. The most successful MVNOs in the U.S. are companies such as Virgin Mobile and Tracfone, which focus on the pre-paid market. Virgin targets teens who don't have credit histories needed to get traditional cellular plans, and Tracfone similarly targets credit-challenged or thrifty users.

The track record for MVNOs trying to address the high end of the market is not so good. Disney shut down its ESPN mobile operations earlier this year, in part, because consumers didn't want to pay a premium price for handsets and services that weren't all that different from offerings from Verizon (Charts), Sprint (Charts) or Cingular. And Ranjan Mishra, Mercer Management Consulting director specializing in wireless, questions why Apple would want to be a phone company, albeit a reseller, with all its customer-service headaches. "It seems like a risky proposition to me," he says.

No matter how Apple enters the wireless market, it is sure to make a big splash. One of the big questions is whether the company can learn to navigate the industry alone, or, if like Sony before it, Apple will end up seeking a wireless partner.

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