On the first day that Apple’s new iPhone 3G was introduced in July, a host of chagrined buyers were unable to activate it, which prompted The New York Times to refer to it sardonically as the iCan’t. Nevertheless, we think the iPhone 3G will ultimately prove to be the iCan -- a positive catalyst to advance a long-term global mega-trend known as mobile connectivity, i.e., the ability of consumers to gain access to information and digital applications any time, anywhere, and through any wired or wireless medium.

Over time, we expect the iPhone’s technical sophistication, easy-to-use features, increasingly affordable price, and plethora of customized third-party applications will make Apple a major global competitor in smart phones. And smart phones are the key to mobile connectivity, especially in emerging nations, which we think present the greatest growth market for telecommunications in the years ahead.

Mobile connectivity has special significance in emerging nations because massive numbers of people there don’t own a desktop or a laptop computer, only a handset; in effect their handsets serve as both their phones and their computers. Accordingly, smart handsets like the iPhone 3G have evolved into convenient, powerful devices that enable consumers to use, organize, and share a prolific cache of digital data and applications: voice and audio communications, text messaging, the Internet, e-mail, Global Positioning System navigation aids, video games, and scheduling calendars, among other things.

In our judgment, the worldwide market for mobile connectivity is likely to generate accelerating double-digit growth over the next five to 10 years. Revenue in the mobile-connectivity market is projected by Gartner, a technology-research firm, to rise from $814 billion this year to $977 billion in 2011. By then, the ratio of mobile connections to world population may swell to 64.3%, versus 52.4% today. And sales of smart phones should increase 221% between 2007 and 2011, reaching $151.9 billion.

The bulk of these sales is likely to be overseas, led by India, followed in descending order by Africa and the Middle East, Latin America, Indonesia, Eastern Europe, and China, in Deutsche Bank’s analysis. In the first quarter India, with 261 million subscribers, surpassed the United States as the second largest mobile market. China, befitting a nation accounting for 20% of the world’s population, is the biggest mobile market, with 575 million subscribers, compared with 258 million in the U.S.

As we see it, the iPhone could ultimately be the smartest and most popular of the smart phones, in light of Apple’s design, technical, and marketing savvy. We agree with some of our industry contacts that the iPhone has the potential to expand Apple’s international business to a greater extent than any product in the company’s history.

Apple’s currently modest share of the smart-phone market will soar sevenfold between 2007 and 2009, from 3.7% to 28.0%, in the estimation of the Piper Jaffray investment firm. If that happens, Apple’s market share would probably be second only to that of Research in Motion, the maker of the BlackBerry smart phone, which is favored by business professionals/consumers -- or "prosumers," in the vernacular of telecom marketers. To date, Apple has sold more than 5 million iPhones, and Piper Jaffray estimates that number could hit 40 million by the end of 2009.

In contrast to the original iPhone, which was marketed in only six countries, the iPhone 3G will be offered in 70 countries. Even so, there remains at least one Big Kahuna of a market -- China -- that the iPhone has yet to crack, at least in terms of conventional commerce. Apple is still negotiating with possible partners to provide a telecommunications network in China, so that it can start marketing the iPhone there.

However, to say that the iPhone is not yet being sold in China is not to imply that it’s not being used there: there’s a big "gray" market for iPhones in China. Research firm Net Applications calculates the number of smuggled iPhones in China that have been "unlocked" -- programmed with unsanctioned software to work on local cellular networks -- may be as high as 500,000. Such smuggling is more than a little ironic, since many iPhones are made in China and thus are returning from whence they originated. In one of the many channels in China’s gray market, whose intricacy resembles a hedge maze in an English garden, the iPhones are bought in the U.S., then given to Chinese tourists or airline flight attendants, who are typically paid a commission of about $30 for every phone they deliver back home, The New York Times reports. Although Apple does gain revenue from the sale of each phone purchased that way, the company loses out on the service revenue it would normally receive from its iPhone partners, the telecommunications carriers.

Certain consumers in China and elsewhere have been called Appleholics because they thirst for the new iPhone’s 3G technology, which makes possible more rapid Internet downloads. Apple claims the iPhone 3G downloads are more than 30% faster than those of comparable smart phones from competitors like Sony Ericsson. Plus, the price of the iPhone 3G is appealing: the cheapest version costs $199, down from $399 or more for the original iPhone. Wall Street analysts widely agree that the pricing point for the global mass market is under $200, and we anticipate that over time the iPhone should continue to decline in price and evolve into a true smart phone for the masses.

Also, we think Apple enjoys a considerable competitive advantage in that it controls the entire design and development of the iPhone -- a level of control unequalled in the smart-phone market. BusinessWeek notes that Apple has "used that control -- of the form factor, the interaction design, the operating system, and the software development environment -- to create a simple, intuitive user experience. . . . And because Apple controls the platform, it is able to iterate, improve the experience, and introduce new features or applications more quickly than other handset makers," who must work with service providers or third-party developers.

Perhaps the biggest competitive differentiator of the iPhone 3G is the quality of its operating software. Here, Apple is perhaps without peer in the smart-phone market, in that its operating software is a strong core competency. Basically the same Macintosh software that powers Apple’s personal computers is the same software incorporated into the iPhone.

What’s more, software is critical to the applications that are developed for the iPhone 3G and other smart phones. The wider the array of unique software applications for a smart phone, the more commercially valuable that phone is likely to be. As a result Apple and competitors like Nokia, the world’s largest handset maker, have a keen interest in making it easy and rewarding for developers to create plenty of applications. For its part, venture-capital firm Kleiner Perkins Caufield & Byers, which has a dazzling investment record, thinks its next fortune may be made in applications: Kleiner plans to invest more than $100 million in small developers that create iPhone and iPod applications and equipment.

In Apple’s favor, developers find the company’s programming tools easy to use, in part because they are generally familiar with the Macintosh operating system, according to The Wall Street Journal.  "As a result, a wide range of software companies have been scrambling to build new iPhone applications," the Journal notes.

In fact, some industry observers make the case that the best feature of the souped-up iPhone 3G isn’t its increased speed or improved sound quality but Apple’s App Store, which business journalist Olga Kharif characterizes as "an online grab bag of games, books, friend-finder tools, and hundreds of other software applications designed to make the iPhone more fun and useful." To date, consumers have downloaded from the App Store 25 million copies of these applications, which number more than 500 and are growing monthly. The App Store could generate as much as $1 billion in revenue and enhance the operating income of Apple by 1-3% in 2009, in Piper Jaffray’s estimation.

As we see it, Apple, to fully capitalize on the App Store and the global smart-phone market, will need to do two things: 1) offer prepaid smart-phone subscriptions, which are popular with consumers in emerging markets, and 2) make deals with more than one wireless carrier in a country (which the company is in fact now doing). Previously Apple signed up only one wireless partner per country: AT&T in the U.S., O2 in England, and Deutsche Telekom in Germany, for instance. Now, however, the company is choosing to do business with multiple national partners, such as Telecom Italia and Vodafone in Italy, Vodafone and Orange in Egypt, and Orange and Swisscom in Switzerland.

Going forward, Apple (market capitalization: about $146 billion) may, in our judgment, encounter two particularly formidable smart-phone competitors in Research in Motion (market capitalization: about $62 billion) and High Tech Computer (about $12 billion). At this point, the iPhone 3G doesn’t offer all the capabilities that Research in Motion’s BlackBerry does, such as the means to remotely erase data from a lost phone. And High Tech Computer’s much-anticipated Dream smart phone, expected to be released late this year, will be the first to use Android operating software from Google, which sees mobile as a promising market for its bread-and-butter business, digital advertising.

Finally, certain suppliers to Apple and the other handset manufacturers stand to benefit from the growth of mobile connectivity. We think these suppliers have above-average prospects:

*  Altera (market capitalization: about $6 billion), Broadcom (about $14 billion), Marvell Technology Group (about $9 billion), and Xilinx (about $7 billion) in semiconductors;

*  Akamai Technologies (about $6 billion), Cisco Systems (about $128 billion), F5 Networks (about $3 billion), Juniper Networks (about $12 billion), and Riverbed Technology (about $1 billion) in data-networking equipment such as servers, routers, and switches; and

*  American Tower (about $15 billion), Crown Castle International (about $10 billion), and SBA Communications (about $4 billion) in cellular towers.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $26 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of June 30, 2008.

As of June 30, 2008, Turner held in client accounts 2.7 million shares of Apple, 25,000 shares of Research in Motion, 1.7 million shares of AT&T, 823,790 shares of Google, 6.0 million shares of Altera, 7.0 million shares of Broadcom, 13.8 million shares of Marvell Technology Group, 5.7 million shares of Xilinx, 4.9 million shares of Akamai Technologies, 22.1 million shares of Cisco Systems, 172,160 shares of F5 Networks, 1.8 million shares of Juniper Networks, 1.3 million shares of Crown Castle International, and 3.6 million shares of SBA Communications. Turner held no shares of Sony Ericsson, Nokia, Telefonica S. A. (parent company of O2), France Telecom (parent company of Orange), Deutsche Telekom, Telecom Italia, Vodafone, Swisscom, High Tech Computer, Riverbed Technology, and American Tower.