Apple iPhone 3G Launch Marred by Activation Problems

The lines weren't quite as long as during last year's mass hysteria surrounding the initial launch of Apple's iPhone, but the handset that billed itself as the third computing platform might just be living up to its name.

Checks with various East Coast locations reveal a number of long lines, including smaller cities like Johnson City, TN, where fellow Streaming Media magazine columnist Jose Castillo arrived at 6 a.m. to find himself in a line of 20 people. An AT&T store in Madison, WI, reported 60 people in line at 8:30 a.m.

"You're talking to me on the new phone now," said Castillo when I phoned him from New York this morning around 9 a.m. "The quality of the sound is much better on my end." Castillo put additional positive light on the new phone, though, that provides some perspective on the benefits awaiting those who visit the App Store, Apple's repository of third-party applications designed to extend the iPhone's lead in productivity and media tools.

"White is the new black," said Castillo, referring to the fact that Apple often puts out devices in a particular color that require a higher price point, including a 16 GB-only white iPhone, "but the biggest benefit I've seen is the App Store. I have already downloaded several applications including fun ones like the PhoneSaber and also business applications. The media tools including VoIP and streaming, really look like they've pushed the iPhone in to a full-fledged computing platform."

Indeed the audio quality was much better on the receiving end of our call. Yet the sound clarity, the App Store, and indeed all other features of the second-generation iPhone were lost on many potential customers in large part due to Apple's rollout strategy, which required in-store activation due to the fact that AT&T is subsidizing these phones and Apple wanted to minimize the opportunity for buyers to "jailbreak" or hack iPhones so they could be used with other carriers.

"We arrived at our local Apple retail store a little after 6:00 a.m.," said one blog post this morning, "and we surprised to find only about 50 customers ahead of us. But by the time the store opened at 8:00 a.m., the line had swelled to several hundred."

Checks of the Apple 5th Avenue flagship store, as well as the AT&T store on Broadway in Times Square, revealed long lines of waiting customers well after 10 a.m., in sharp contrast to the first launch where Apple allowed customers to pick up the product and then go home and activate it.

AT&T had similar problems during the last launch, with horror stories of hour-long waits to activate in store. Apple apparently thought it could solve AT&T's previous problems but ended up succumbing to the same issues, with the iTunes servers, required for activation, falling completely offline this afternoon.

Ron Johnson, Apple's retail chief, said in a television interview on Wednesday that he expected activation to only take 15 to 30 minutes, adding that the store would spend whatever time it took to make sure customers were activated and satisfied.

There were reports that some customers were sent home, though, to attempt activation via iTunes, which also didn't work due to the overload of launching the phone across more than 20 countries in a rolling 24-hour period.

While this outage or delay might be acceptable for those buying a new phone, the fact that Apple also rolled out updates for the first-generation iPhone today—which completely wipe these phones in order to perform the iPhone 2.0 update—means that millions of old phones were trying to access the same activation servers that the new hundreds of thousands of phones were also trying to access at the same time. Many customers were left without a working phone for several hours, and warnings began popping up all over tech news and blog sites warning potential upgraders to wait before attempting the 2.0 update.

All of this may explain why Apple's stock dipped to $171.00 per share at one point during the day, but for those who waited in line and didn't get a phone due to stock shortages, the company stock price was less of a concern than the company's inventory control.

While Apple and AT&T will undoubtedly gain several opening-day lessons, and eventually get the bugs worked out of the in-store activation system, the bigger story here is the platform.

With its inherent H.264 video, AAC audio, and extensibility of the platform for third-party developers including Adobe—reportedly hard at work at putting Flash Lite on the iPhone—the new device may provide an interesting business case for the use of Flash and H.264 in the enterprise, one of Apple's key target markets for the iPhone 3G, begging the question about Microsoft's VC-1 and Windows Media streaming on this new device. A spirited discussion on this topic can be found in today's Streaming Media podcast.

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