Is the iPhone Vulnerable to Substitution by Palm Pre?

Here's the notion being floated by Roger McNamee, co-founder of Elevation Partners, which owns 39% of Palm:

"If you bought the first iPhone, you bought it because you wanted the coolest product on the market,” said McNamee, 52. “Your two-year contract has just expired. Look around. Tell me what they’re going to buy.”

Of course the answer is the Pre now, in McNamee's mind. Indeed, his public argument is that once these initial iPhone contracts are up people are going to switch from AT&T to Sprint to get the Pre. 

We'll see whether McNamee's prediction is accurate but I just don't think it is. The Pre has prevented me, a Sprint subscriber, from defecting to AT&T to get the iPhone but it's unlikely to lure people from AT&T in anything like the numbers that the iPhone has driven for AT&T. 

Yes, the Pre is exciting as a handset but it's not the iPhone and doesn't have the software marketplace, notwithstanding the Palm apps market, that the Apple device does. It's also true that the market and consumers are not in the same place they were two years ago. The iPhone has moved beyond fashion statement into functional device or gaming platfrom or whatever. People are attached to those phones.

Two years is a lifetime in the mobile market.

Android has so far not caused many subscriber defections to T-Mobile in the US. And though the Pre looks to be a sexier and better integrated device it's likely to have a similarly limited impact on other carriers' subscribers. (The Android G2/Magic is coming too, which could affect Pre sales.) We might see movement among Sprint's customers from other devices to the Pre; it's much more likely, for example, that Windows Mobile will suffer. Apple iPhone owners en masse are not going to abandon it for the Palm handset. 

Sprint's battered brand is also a potential problem for Pre sales, although Sprint hopes Pre will help reinvigorate the brand. If everyone involved really wanted to ensure the success of the Pre and maybe lure some new customers to Sprint the way to do it is to aggressively discount the device upon launch to <$150 or <$100. Alternatively Sprint could offer a special, discounted voice/data plan for the Pre. 

If the carrier is tentative about pricing it may not get the momentum out of the gate it needs to make the Pre a success. Pre as "fashion statement" (see McNamee's comments) requires rapid adoption and related buzz.

If the iPhone didn't exist perhaps all this would be different. But it does; and so competitors must do more to attract customers than might've been the case a couple years ago before the Apple handset. 

The Pre has essentially been set up to be the "savior" of Palm by financial analysts and the media. If it fails to live up to what are now lofty and fairly unreasonable sales expectations, fueled in part by comments such as McNamee's, it could have the opposite effect and cause investors to flee the company. 


Related: Juniper Research predicts "by 2013, around 23% of all new mobile phones will be smartphones." That's a reasonable and perhaps even conservative forecast, I believe. 

Update: Palm, recognizing how damaging high expecations can be for the company, sought to qualify and distance itself from McNamee's inflated predictions.