Is Wal-Mart cool enough for the iPhone?

By MarketWatch

Remember all those people who camped out and waited in line at Apple stores to be among the first to snag an iPhone?

Well, that novelty and feeling of smug superiority might soon wear off if the rumors are true that Apple (AAPL, news, msgs) may sell its sleek smart phone at Wal-Mart Stores (WMT, news, msgs).

I was surprised when I heard the buzz. Isn't Wal-Mart, the discount behemoth with more than 2,500 homogeneous big-box stores in the United States, the antithesis of everything the unique, design-focused Apple brand stands for?

Officials at Apple in Cupertino, Calif., were of no help in confirming the story, but that's to be expected. Apple spokesman Steve Dowling declined to comment.

Even so, it does appear that the company, and its service and distribution partner AT&T (T, news, msgs) will be selling the iPhone at Wal-Mart, possibly by the end of this month, analysts say.

• Tell us: Would you  buy an iPhone at Wal-Mart?

"Our research indicates that recent market reports of Wal-Mart selling Apple's iPhone 3G appear to be true, though details (timing, price, etc.) remain uncertain," wrote Toni Sacconaghi, a well-regarded analyst at Sanford Bernstein, in a report last week.

As Sacconaghi points out, key details remain uncertain, including the price. A blog called The Boy Genius Report first reported that the iPhone at Wal-Mart would be priced at $99 for a lower-end model with a smaller, 4-gigabyte storage capacity. But several analysts have since dismissed the $99 price point.

Still, even at its current price of $199 for the 8-gigabyte iPhone, I wondered if selling the hot smart phone at Wal-Mart would detract from its cachet as the most stylish and sought-after gadget of the year. Would it become another Motorola (MOT, news, msgs) Razr, which was initially a trendy luxury item but lost its status?

"It's probably premature to say whether this will lead to the kind of value erosion that we saw with the Razr," said Ross Rubin, director of industry analysis with the NPD Group, in an interview. "A lot of that came from independent dealers and the Internet. Apple hasn't opened up the floodgates (with its distribution). But the Razr had quite a few years of being positioned as a high-end device before it became a free offering."

Apple is clearly looking to make the iPhone as mainstream as possible, much as it has done with the iPod, the dominant digital music player in the United States.

The iPod, which has an entry retail price of $49 for an iPod Shuffle, had a 71% share of the $2.4 billion MP3 market as of the end of September, according to NPD Group's retail tracking service. The iPod can be found at Wal-Mart.

"Apple's potential partnership with Wal-Mart likely indicates that Apple ultimately wants to drive mass-market adoption of the iPhone (like it has done with the iPod), rather than maintain a high-end positioning (as in the case of the Mac)," Sacconaghi wrote.

With the low-priced, high-volume iPod music player, Apple's distinguishing feature is its iTunes music download service, which hooks consumers with its simplicity when the two are used together. As more cell phone makers are now emulating the iPhone's ease in surfing the Internet, as well as other features like the touch screen, in their own smart phones, Apple is banking on applications created just for the iPhone to set the device apart.

Analysts are not yet clear on how much volume Apple would drive initially by selling the iPhone at Wal-Mart. NPD's Rubin points out, however, that buying an iPhone is a much more complex purchase than buying a new iPod because it entails signing a subscription agreement with a cell phone service provider. Some budget-conscious Wal-Mart customers might balk at the monthly cost of the service plan for an iPhone, which starts at about $70.

"There are far more considerations that go into the purchase of a cell phone than into the purchase of an MP3 player," Rubin said. Many customers are wedded to their current cell phone providers, either through a family plan or through regional coverage issues.

"For Wal-Mart's customer base, it is a stretch for many of those customers to be considering any smart phone," says Rubin, though the iPhone's arrival could bring new shoppers to Wal-Mart.

Sacconaghi expects a "less-than-proportionate impact" on iPhone sales, and he's not yet adjusting his iPhone estimates; he expects 21.3 million units will be sold in fiscal 2009.

"We believe iPhone sales will benefit from the added distribution, though not proportionately," he said.

• MSN Shopping: Buy an iPhone

Wal-Mart is the second-largest consumer electronics retailer in the United States, after Best Buy Stores (BBY, news, msgs).

"Wal-Mart will have a greater impact on the iPhone's demographic reach in terms of raising awareness and availability among lower-end consumers who are less likely to shop at the Apple Stores or Best Buy," Sacconaghi said.

So for those waiting for an even lower-priced iPhone, it may not happen this year, even if the iPhone is sold at Wal-Mart. But Shaw Wu of Kaufman Bros. Equity Research believes the $99 price point is inevitable as Apple "rounds out its cell phone product line."

So, yes, some of the exclusiveness of the first iPhones will inevitably be lost in the process as the price declines, but isn't that true with all hot new electronics products, thanks to the constant evolution of ever-shrinking semiconductors and storage at the heart of most consumer electronics devices?

This article was reported and written by Therese Poletti for MarketWatch.