The throngs of Apple fans who crowded into the Moscone convention centre in San Francisco to hear Steve Jobs give his annual MacWorld keynote address went into the room with high expectations. Judging by their response their expectations were more than met.

The unveiling of the iPhone, Apple's long-awaited entry into the mobile handset market, was greeted by rapturous applause, gasps of disbelief and occasional whoops of joy from the Apple faithful.

Six years after Apple transformed the market for digital music players with the introduction of the iPod, the company had attempted a repeat performance in the market for mobile handsets with the iPhone - a slim, sleek handset that relies on an innovative touch-screen interface.

'This thing is amazing', says Van Baker, an analyst at Gartner, who had a chance to try the iPhone himself during an analyst briefing by Apple. 'It's the biggest home run for them I've seen yet'.

Apple is far from the first company to try to crack the so-called smartphone market. Microsoft, Apple's arch-rival, has been talking about such devices for years, but its mobile windows effort has slumped - in part because mobile carriers were wary of Microsoft and kept out.

Just 6m smart phones were sold in the US last year, compared with more than 1bn mobile handsets sold worldwide.

Two million of them operated on Windows software, with the rest of the market split between Research In Motion, makers of the Blackberry; Palm, maker of the Treo handset; and a handful of others. Shares of RIM fell 7.9 per cent yesterday while Palm stock fell 5.7 per cent.

Charles Golvin, analyst at Forrester, cautions that, even with Apple's impressive device, the market for phones that integrate voice calls, e-mail, web browsing and music will remain a small part of the overall handset market.

Miro Kazakoff, senior associate at Compete, an industry analyst group, says his research shows that 'it's unlikely that any phone, no matter how good, is going to get people to pay a high price and up to $200 in early termination fees on their current contract'.

'Wireless shoppers are hooked on free phones as carriers have subsidized better and better devices over the years'.

Apple is betting that the iPhone's unique user interface - the result of years of research - will reinvent the entire smartphone category, just as the Macintosh redefined computers and just as the iPod redefined what customers came to expect from their digital music players.

'Apple is going to reinvent the phone', was Mr Jobs's bold pronouncement at MacWorld.

The early signs are encouraging. Ralph Simon, MEF Americas Chairman Emeritus of the Mobile Entertainment Forum, says that the iPhone represents a 'quantum leap in innovation' for the entertainment industry.

'You can't overlook the strides already made by competitors like Nokia and Motorola, but the seamless marriage of the iPod's kudos to the mobile phone is a key step evolution of the mobile to becoming an all-round entertainment device', says Mr Simon. With the least expensive

iPhone models priced at $499, price remains a concern. 'How many people will be out there willing to pay that kind of premium?' Mr Golvin asks.

However, he says there are some encouraging signs in Motorola's recent experience with the Razr, its ultra-thin premium mobile phone. 'The Razr is now several years old - they were able to keep their premium prices for quite a while', Mr Golvin says.

Mr Jobs was keen to signal Apple's intention to become a leading player in consumer electronics yesterday. At the close of his MacWorld speech, he announced the company had decided to drop the word 'computer' from its name now that its brand has spread well beyond the Macintosh to include other devices.

Even the most jaded observers would be hard pressed to deny that, with the iPhone, the newly christened Apple is off to a great start.

Discussion questions

1. What is driving Apple's entry into the mobile phone market?

2. Is the move consistent with Steve Job's vision for Apple?

3. What strategic focus does the move signify? What alternatives are open to Apple and how could Apple pursue them?