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Analysis: Apple's iPhone: still the hottest ticket around

Apple CEO Tim Cook speaks in front of an image of an iPhone 4S at Apple headquarters in Cupertino
Apple CEO Tim Cook speaks in front of an image of an iPhone 4S at Apple headquarters in Cupertino

By Sinead Carew and Poornima Gupta

NEW YORK/SAN FRANCISCO (Reuters) - The iPhone 4S wasn't exactly Apple's brightest moment. Yet it will probably still outshine the competition this holiday season.

And people seeking to commemorate the legacy of Apple's iconic co-founder Steve Jobs, who died on Wednesday, may scoop up the last iPhone to be unveiled in his lifetime.

The latest smartphone from Apple Inc landed with a thud on Tuesday, outraging fans who had hoped for a revolutionary new design after a wait of more than 15 months.

But Wall Street analysts were still forecasting that software enhancements -- and a sprinkling of cool new features -- would keep Apple's leadership of an ever-growing pack of competitors intact.

Then the bombshell dropped when Jobs died Wednesday. Fans abruptly switched from complaining about Apple across the Internet to praising Jobs and his life's work.

Apple was unwittingly pushed into an even bigger spotlight just a day before the October 7 start of pre-orders for its latest device, and right before its most crucial holiday season in years.

The timing may boost sales, but the extent remains to be seen.

"Store traffic will increase and there's going to be some sentiment-related purchases," said Janney Montgomery Scott analyst Bill Choi.

But any sales boost would be small compared with music sales after the death of an entertainment superstar like Michael Jackson, he added. Jackson died in 2009.

Bill Kreher of Edward Jones, said Jobs place in pop culture will cause a sales boost.

"But over the long run the products will stand on their merit," he said.

STANDING ABOVE THE FRAY

Apple's iPhone -- seen as the market's gold standard -- is its highest-margin product and accounts for 40 percent of its annual revenue. It is the world's biggest selling smartphone, maintaining a slim market share lead on Samsung's Galaxy, at 18.4 versus 17.8 percent.

The iPhone 4S hits store shelves on October 14 in select countries including Japan and the United States.

It will have to compete for attention with not just a host of Google Android-powered gadgets like Samsung's Galaxy, but also new gadgets likes Amazon.com Inc's $199 Fire tablet.

But analysts say Apple will have one of its best holiday quarters on record this year with brisk sales of a cheaper version of iPhone 4 and a free iPhone 3GS on top of iPhone 4S sales to customers who want the latest device.

The iPhone 4S remains among the fastest smartphones out there. It will be available on more than 100 carriers by year's end, and a free-with-a-contract older-generation model will draw in new users, analysts say.

Then there's the "Siri" voice-command software that has pundits gushing over its ease of use versus rivals' offerings.

"The iPhone 4S maybe isn't the most compelling upgrade," said Morningstar analyst Michael Holt. "But people on the 3GS and other phones, those people are ready to upgrade. It will sell well."

Jefferies & Co analyst Peter Misek said he received one phone call from a person who told him they would probably get an iPhone 4S to commemorate Jobs.

But more importantly, he said, a large number of existing iPhone customers may be eligible for a discounted phone upgrade if they renew with their wireless provider, as their two-year contracts will expire in the next 12 months.

"The bigger thing is that 50 million to 70 million people will be coming off contract in the next year," Misek said.

Apple shares fell heavily after the iPhone 4S announcement. But analysts point out that, although the transition from the iPhone 3G to the 3GS was similarly incremental, that didn't stop buyers from buying it up in record numbers.

Ticonderoga analyst Brian White called the initial outcry "a knee-jerk reaction" and expects Apple to sell 27 million iPhones in the October-December quarter.

Globally, iPhone shipments are likely to be 83.6 million units in 2011, rising to 112.5 million in 2012 and up to 169.0 million in 2015, according to a forecast by IHS iSuppli Design.

Total sales of all iPhone models may reach 28 million in the fourth quarter, of which 10 million or more are likely the new iPhone 4S, Brad Gastwirth, co-founder of ABR Investment Strategy, an independent research firm, said. Apple sold over 20 million of the iPhone 4 in the April-June quarter.

Wider distribution also helps. It will be the first iPhone at money-losing No. 3 U.S. mobile provider Sprint Nextel, which will be under heavy pressure to boost subscriber numbers from its launch of the costly device.

Sprint's plan to offer iPhone customers its unlimited data service for a flat monthly fee may also help.

But the software upgrades -- including voice commands for everything from sending messages to searching for stock prices -- may be enough to keep people hooked on iPhones, on top of the surge in attention around Jobs' personality.

"I don't think they need it but they will get some of that bump," said Hudson Square analyst Daniel Ernst.

(Additional reporting by Liana B Baker and Noel Randewich; Editing by Gary Hill)

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