Icy Europe

A couple of months ago, there was feverish speculation about whether the British operator O2 might get 400,000 iPhone subscribers in the fourth quarter of 2007. In the end, it took until January 2008 before O2 announced 200,000 iPhone activations. After the French operator Orange announced it had only sold 70,000 iPhones by Jan. 10, estimates for European iPhone sales for the fourth quarter 2007 started moving to the 350,000-400,000 range

Over the weekend, Germany's T-Mobile dropped a bombshell -- it has amassed only 70,000 iPhone subscribers in the 11 weeks the phone has been available. Could there be a massive amount of unlocked iPhones selling in Germany and other European countries? Well, no. T-Mobile is charging more than $1,400 for an unlocked iPhone, so it's hard to see that this avenue could be all that meaningful.

Why is the T-Mobile number such a shocker? T-Mobile had more than 34 million subscribers when it debuted the iPhone. AT&T (T - commentary - Cramer's Take - Rating) had more than 63 million when it launched the device at the end of the second quarter 2007 and proceeded to activate more than 140,000 iPhone subscribers in a day and a half. T-Mobile's sub base is more than half of AT&T's; a direct comparison to AT&T is valid.

It now looks like the true number of European unit sales of the iPhone in the fourth quarter is probably closer to 300,000 than 350,000 -- possibly even below 300,000. The key question here is why the German number is so much weaker than expected when the British operator O2 seems to have activated more than 150,000 units in the quarter. One possible explanation is that the high-end handset competition got remarkably tough during December 2008 and onward, and German consumers are notorious for chasing the best available specifications.

The first-generation iPhone lacks 3G support and packs a meager 2-megapixel camera with a cheap lens. In comparison, LG's iPhone-lookalike called KU 990 features a 5-megapixel camera, 3.6-Mbps mobile data speeds over W-CDMA networks and a petite 112-gram weight. 

The KU 990 has sold more than 550,000 units since late November launch in Europe. The price in the U.K.? Free with an 18-month contract. Samsung has a similar model out and is debuting an even better 5-megapixel model in February. Sony Ericsson has done very well with its 5-megapixel model equipped with a standard QVGA display and is now expected to launch a big-display platform by end of the second quarter of 2008. Nokia (NOK - commentary - Cramer's Take - Rating) is going to revamp its N-series soon. All of these 5-megapixel camera phones are selling for hundreds of dollars below the iPhone when you figure in the combined handset/contract price.

You could argue that the pricing of the iPhone demands a spectacularly strong brand -- a kind of deep consumer awe combined with media hysteria. This existed in June 2007 in the U.S., when the iPhone was launched by AT&T. It wasn't there in Europe in December 2007: perhaps because European consumers crave 3G support and 5-megapixel cameras, perhaps because the Apple brand is not quite luminous enough to justify the royal iPhone price premium.

Apple now faces a tough decision -- either steeply discount the iPhone in Europe or accept low volumes in coming months and assume that the next version with better specs is going to click with consumers sometime next summer or autumn. Launching a new brand with a flop is dangerous business -- there is now a chance that European consumers will start regarding the iPhone as a kind of Pinto of the phone market. The imminent Spanish and Italian launches are probably going to fizzle; they face the assault of the next generation of 5-megapixel models starting with the dazzling Samsung F490 this February.

The next question is what happens to the BlackBerry lineup in Europe as the recession starts biting and consumers continue flocking to handsets with hardware specifications that Research In Motion (RIMM - commentary - Cramer's Take - Rating) likely cannot handle. The year 2008 is unlikely to be the cakewalk for all high-end handset vendors that many investors assumed it would be just a month ago.