Old iPhone may steal glow from Pre, others

NEW YORK (Reuters) - Apple Inc's (AAPL.O) price cut for its year-old iPhone takes direct aim at the days-old Pre smartphone from Palm Inc PALM.O, but it could also shake up other rivals by setting a new low benchmark for phone prices.

While Apple's announcement of its new iPhone 3G S with a faster processor and some new bells and whistles was met with little excitement from analysts, a $100 discount for its older iPhone, launched last summer, caught people's attention.

In the same way that a $200 iPhone set a new low for smartphone pricing last year, analysts said that iPhone's new $99 price could hurt rivals such as Nokia (NOK1V.HE), Samsung Electronics (005930.KS) and LG Electronics Inc (066570.KS).

"The most important aspect of the Apple announcement was the price reduction on the existing 8 Gigabyte model effective yesterday," said CL King analyst Lawrence Harris. "That's fairly significant. It brings smartphone pricing below that key $100 threshold."

Pre received rave newspaper reviews ahead of its Saturday launch. Both Palm and Sprint Nextel (S.N), the exclusive U.S. Pre carrier at least until year-end, have warned of supply shortages due to better-than-expected demand.

Harris said shortages could make Pre, which sells for $200 after a $100 rebate to customers who sign up for a 2-year contract, more vulnerable to lose out to the $99 iPhone.

But JP Morgan analyst Ehud Gelblum said the price drop would cause more woe for makers of so called feature phones, a market lead by companies like Nokia, Samsung and LG. Feature phones have extra functions like cameras but lack advanced frills like application downloads, which are supported by iPhone, Pre and BlackBerry from Research In Motion (RIM.TO).

"(The $99 iPhone) is not going to cannibalize other smartphones," said Gelblum, adding that a $100 price cut won't sway people who want the latest smartphone. "Its going to attract people who were buying feature phones."

And since Palm's share of the smartphone market had already fallen so low, any Pre sales would be good news, Gelblum said.

"The world is their oyster so if (Palm) gets less of an oyster than they would have we'll never know the difference. It's all upside for them," he said.

But Collins Stewart analyst Ashok Kumar said the new price "creates considerable headwinds for competitors like Palm."

As competition heats up and consumers look for bargains, Kumar said the price cut made sense for Apple, even if it means fewer sales of the more expensive new iPhone 3G S.

"They want to cannibalize their own product line rather than have competitors do it," Kumar said. "It shows an aggressive message that they're leader in both market share and cost."

SERVICE PRICE VS DEVICE PRICE

However, there is the question about how much the iPhone discount will save truly cost-conscious users.

Sprint argues that even after the $100 iPhone discount, Pre users would save $380 to $1,100 in service fees in two years compared with iPhone users because Sprint charges lower data fees than AT&T Inc (T.N), the exclusive U.S. iPhone provider.

But some analysts say that service fees will not make many consumers looking for a hot device change their minds.

"Unfortunately consumers are focused on the initial cost and probably less focused on the monthly service fee. That's just human psychology," said Harris.

Pre sold out at some Sprint stores and attracted small crowds outside Sprint stores during its weekend launch, giving Sprint record sales for a new device.

Investors will look closely at how well Palm can take advantage of the attention by boosting future sales.

"The bigger question is whether Palm can ramp into relevance and get critical mindshare or just fade," Kumar said, referring to Palm's recent declines in market share.

One promising sign is that both No. 2 U.S. mobile service AT&T and its bigger rival Verizon Wireless, owned by Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L), recently said they want to sell the Pre once Palm's exclusive deal with Sprint for the smartphone expires.

CL King's Harris said he would be looking closely at other handset prices next Monday, the weekday that service providers often start offering new handset prices.

"They will have several days to see if AT&T gets some additional traction at $99," he said.

(Reporting by Sinead Carew; Editing by Richard Chang)