By Mark Caron

While the iPhone has been one of the most successful mobile devices in history and has clearly created a whole new level of engagement with mobile applications, the excitement surrounding it has blinded the industry from a frank assessment of where the iPhone is, and what it is lacking.

The facts are that it currently is, and will likely remain, a small slice of the mobile market as a result of its singular product offering, limited functionality -- even with 3.0 -- and high cost of ownership.

Attending mobile conferences and reading mobile blogs and news, it is easy to believe that the iPhone has taken over the world, or at least is destined to do so very soon.

Hearing developers say, "The iPhone is the only platform that matters," and seeing half of every conference audience raise their hands when the speaker asks, "How many of you have iPhones?" reminds me of a story about the BlackBerry in 2003.

I was pitching a venture capitalist about the emerging growth in text messaging, and he interrupted me saying, "Why would Americans text message? Everyone has a BlackBerry." I happened to know that BlackBerry maker Research In Motion was approaching its millionth subscriber, so I decide to play with this guy a bit.

"What percent of U.S. mobile subscribers do you think own BlackBerrys?" I asked. "I don't know -- maybe half?" he responded. When I told him it was less than 1 percent, he refused to believe it. "Everyone I know uses a BlackBerry," he said.

Niche market
The facts are that AT&T probably has between 9 million and 10 million iPhones active on its network, even after the introduction of the 3G S in mid-June. That is about a 3 percent market share nationwide.

When Apple/AT&T announced first-quarter 2009 U.S. iPhone sales of 1.6 million units, everyone cheered.

Knowing this number was lower than earlier quarters, I scoured the media for some critical assessment of iPhone's trajectory. I could not find a single article that mentioned iPhone's first-quarter sales represented the second consecutive quarterly decline in unit sales, and that sales had fallen 33 percent from their peak in the third quarter of 2008.

In addition, you can bet that second-quarter sales would have been down again, probably way down if Apple had not slashed the price to $99 on June 6, and launched the 3G S model.

And given AT&T's generous upgrade plan, do not be surprised if many or even most of the new iPhones are being sold to existing iPhone users upgrading from their older iPhones. This will slow the growth of the iPhone installed base even more.

It certainly seems that the Apple-lover market is nearly tapped out, and the brutal competition of the mobile phone industry is in full swing.

It is safe to assume that Apple will never get above single-digit market share unless it makes massive investments in a very broad product portfolio, just like the major handset players have done for years.

This would likely lead Apple to have margins that gravitate toward the mobile industry mean, so do not expect to see it happen soon. Like the Mac, mobile products from Apple will remain a niche market.

Great phone, but ?
But what about those 65,000-plus amazing iPhone applications?

Indeed, iPhone applications have broken new ground in level of user engagement. The cool visual effects alone make the applications fun to play with -- I love the deleted file getting sucked into the garbage can -- but many applications go further with the pinching, squeezing, tilting, shaking and even blowing into the microphone, making for a truly engaging experience.

While these applications have opened a whole new market, "engagement" is not always the goal for mobile users. More often than not, mobile users just want to get something done fast -- while walking/talking/driving and using one hand and not pinching/squeezing the screen with two hands.

And here is where the iPhone falls down.

Have you ever noticed that the weather icon on the iPhone always shows "Sunny and 72"? That is because the iPhone, remarkably, does not support applications running persistently in the background.

The only way to get the current weather on the iPhone is to launch the weather application and let it retrieve fresh data. And on the iPhone, only one application can be open at a time.

Ironically, the iPhone is the only smartphone platform that cannot run third-party applications persistently in the background.

Windows Mobile, Symbian and BlackBerry have been running third-party applications in the background for years. Android and Palm Pre do it, too. Now even proprietary OS feature phones, such as ones from Sony Ericsson can do this.

Many developers were sorely disappointed, and some shocked when Apple announced that the new version 3.0 of the iPhone OS would not support application multitasking.

This limitation prevents whole classes of applications from running effectively on the iPhone, including persistent messaging/communications, LBS tracking, enterprise monitoring and widget applications.

T-Mobile and Sprint have been hammering AT&T on this point. It is not just the upfront device cost. It is the ongoing monthly cost. To buy an iPhone you must commit to two years of a minimum $70 per month plan -- $40 for voice, $30 for data. With fees and taxes, that is nearly a $2,000 commitment -- a huge barrier for most Americans, especially during this recession.

What many consumers, but few industry insiders, are increasingly realizing is that their existing phone or a "free" new phone on a $5-$15 per month data plan can access more than 1million mobile-optimized Web sites, and some very cool new mobile widget applications for fast access to top Web services and content.

And many of the new "feature" phones have touch screens and QWERTY keyboards, so consumers think they are getting a "smartphone" but at a fraction of the ongoing cost. This is a core reason feature phones remain the vast majority of the installed base and continue to outsell smartphones by two-to-one.

The iPhone has brought remarkable innovations to the mobile industry, but we do ourselves a disservice if we do not keep its role in perspective and exert our collective industry efforts accordingly.

Mark Caron is CEO of Snac Inc., New York. Reach him at .