Why Apple's New iPhone Doesn't Matter Nearly as Much as its Old One

• Apple
• iPhone
• cellphones
• smartphones
• AT%26T
• Steve Jobs

Apple introduced its latest iPhone, the 3GS yesterday. The new phone will be priced at $199 for 16 GB and $299 for 32 GB (with a new, two year AT&T contract), and its most visible new feature is that its new, 3.0-megapixel camera can focus and take video, a first for the iPhone. On the inside, the 3GS will boast a faster processor.

Most of the iPhone 3GS's new functionality is already available on the Palm Pre, which costs $199 (after rebate, also with a contract). True, the 3GS is technically a better deal than the Pre, since you get double the memory, but the comparative price of phones does not reflect the price of the memory going into them. An 8-GB micro SD card, for instance, costs as little as $15 (I'll bet Palm is now kicking itself for not including a micro SD card slot on the Pre now). In terms of features, the iPhone and the Pre are about on par in terms of what you get, hardware-wise, for the money. Instead, the prices reflect the extent to which AT&T and Sprint are willing to subsidise these smartphones in order to win new customers.

When it comes to software, however, there's no comparison. The Pre has a slick new OS, but with new 3.0 software, the iPhone is just as impressive, if not more so. And Apple's greatest strength is the legions of developers lining up to make cool and useful applications for the iPhone. (Don't write off Palm, however. Give it a year or so to get a developer community off the ground, and the Pre will have a formidable collection of software, too.)

Which is why the old iPhone 3G, the one that was launched almost a year ago and will continue to be sold alongside the 3GS, is the most important of all of these phones. Now reduced in price to $99, it will run all the same software as the 3GS and is half the price of both its faster cousin and the Palm Pre. (Those who just purchased an iPhone 3G at the $199 price are the latest victims of the Apple new product vortex.) Even in a bad economy, that brings a sophisticated smartphone on a popular development platform down to a more palatable price point.

But won't the slower processor punish performance? While it's true that the OS itself, and especially intense games, may run more slowly on the 3G than on the 3GS, application designers will try to maximize performance on all the various versions of the iPhone—when you're charging $5 or less for software, you need the largest possible customer base to make money.

Furthermore, Americans have time and again demonstrated that they look for value over horsepower in personal electronics. Consider netbooks, which are equipped with slow processors and meager storage, yet sell like hotcakes. Or the graphics-light but fun Wii, which trounced the far more powerful and more expensive PlayStation 3. Despite the relatively high prices it charges for personal computers, Apple understands how to price a mass market entertainment device—the iPod sold well, but the far-cheaper iPod minis and nanos have been the company's real blockbuster hits.

By the time the software truly catches up with the hardware—in other words, when the standard iPhone 3G really wheezes when running sophisticated apps, you'll probably see a version of the 3GS drop down to the magic $99 price point—I'm guessing about a year from now.

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