"In 1984 we introduced the Macintosh. It didn't just change Apple, it changed the whole computer industry," the technology group's chief executive said to raucous applause. "In 2001, we introduced the first iPod and it didn't just change the way we all listen to music, it changed the entire music industry."

"Today," he told the swooning crowd, "we are going to reinvent the phone."

It was classic Jobs bravado. But the excitement surrounding the iPhone is hardly limited to the Macintosh faithful. In the eyes of its boosters, the iPhone seems destined to change the world. Freed from the shackles of the "baby software" that cripples most phones, the argument goes, iPhone users will become the first consumers in the world to gain full and unfettered access to the internet while on the move, as well as enjoying a simpler way to manage contacts, listen to music and make traditional calls.

On Friday, more than two years of anticipation will come to a head when the iPhone goes on sale in US stores, in what is sure to be one of the most closely-watched product launches of all time. It is expected to make its debut in Europe later this year and in Asia in 2008.

But is the iPhone truly a breakthrough device? Or is the frenzy around the iPhone launch just that - hot air amplified by clever marketing? As with any new Apple product, it is difficult to separate the hype from reality.

"If the chief executive of Nokia had stood up and said he was launching a phone that was big and heavy, had no keyboard, was only 2G and not available for six months, he would have been crucified," says Ben Wood, an analyst at CCS Insight. "It is unique that Apple have been able to get away with that."

The fact that Apple has chosen to make the iPhone run on a slower 2.5G radio rather than a faster 3G connection is just one of the issues that could cause the iPhone to hit a snag, at least in its first incarnation.

"The two obvious areas for improvement in this version of the iPhone are adding the 3G network and adding more memory," says Charles Golvin, an analyst at Forrester Research. The lowest-priced iPhone has just four gigabytes of storage - far less than most video iPods.

At $499 for a basic iPhone handset, Apple is entering at the top end of the smart phone market. The iPod was priced at a similar premium to other music players when it arrived on the scene in 2001, but Apple was soon able to segment its market and offer stripped-down versions of the player to more price-sensitive consumers. Today, an iPod shuffle can be bought for less than $80. It may be difficult to achieve similar price flexibility with the iPhone.

"If Apple wants to bring the price down like they did with the iPod, they have to re-engineer the entire operating system from scratch," says Richard Windsor, an analyst at Nomura.

The excitement around the iPhone stems from a simple fact: in spite of their increasing importance in our day-to-day lives, most mobile phones remain clunky, crammed with hard-to-use features, second-rate software and awkward keypads.

When it launched in 1984, the Macintosh was the first personal computer to abandon clumsy text commands in favour of a visual interface controlled by a computer mouse. The move made the world of computers accessible to the mainstream, setting a new standard for ease of use in computers that is still copied today.

To improve the user interface of mobile phones, Apple has done away with a fixed keyboard in favour of a touch-screen that allows button configurations to change depending on whether a user is making a phone call, viewing a picture or composing an e-mail message.

One of Apple's chief breakthroughs with the iPod was to tie the new gadget closely to its iTunes music software, a move that made it easy for iPod customers to store and organise entire libraries of music. With the iPhone, Apple has sought to replace the dumbed-down software found on most smart phones with a fully-fledged operating system capable of supporting graphics and web browsing usually found only on desktop computers.

"It's really about taking experiences and capabilities that have been here for a long time in most mobile phones and making them much, much better," says Barry Jaruzelski, a consultant at Booz Allen Hamilton. "It's basic innovation. Having observed over two decades how people interact with technology, Apple understand how to solve problems people don't even articulate they have."

While it may be tempting to view Apple's entry into the handset market as a calculated move designed to cement its position as the world's leading lifestyle brand, the reality may be more complex. The truth is that, in contemplating its next move after the iPod, Apple may have had little choice but to enter the mobile phone business.

"Apple almost had to do the iPhone," says Mr Jaruzelski. With a 70 per cent share of the digital music market, it was just a matter of time before iPod sales growth started to even out.

For at least a year leading up to the iPhone's debut in January, Wall Street analysts had been arguing that Apple would need to come up with several new blockbuster products in the same class as the iPod in order to justify the huge growth premium attached to the company's stock price.

"Every consumer electronics category goes through a boom and a flattening out," Mr Jaruzelski explains. "Apple had to add a new category to sustain their growth."

Once the need to move beyond the iPod into new areas of revenue growth had been identified, mobile was an obvious choice. People around the world bought about 1bn mobile handsets last year, 10 times the number of iPods sold in the past six years combined.

The sheer size of the market means that if Apple hits its goal of capturing 1 per cent of the worldwide handset market next year, a number equivalent to about 10m handsets, it could result in billions of dollars in new sales.

Yet, in spite of its size,the mobile handsetmarket is far froman ideal battleground. "It's a much more brutalcompetitive set when you are taking on Motorola, Nokia and Samsung than when you compare it to the MP3 player folks Apple were competing withon the iPod," says Mr Jaruzelski. "They're going to focusintensely on a new entrant."

Nokia's N95 phone, the Upstage phone Samsung has created for Sprint, the HTC Touch phone launched only a few weeks ago and Sony Ericsson's W960, launched earlier this month, are all potential iPhone competitors.

The mobile handset business is not only well established and stocked with big competitors, it also is driven largely by demands of network operators. "Here in the US, operators buy 90 per cent of the phones. As a result, they dictate what the experience is like. Mobile phone makers are really under the thumb of the operators," says Mr Golvin.

This skewed power arrangement is at the heart of many consumers' frustration with mobile phones, which are often tailored to meet the requirements of network operators rather than customers, according to Mr Golvin. In the past, with both the Macintosh and the iPod, Apple has tried to minimise technical glitches by managing every aspect of the user experience. That level of control will not be possible with the iPhone, which will rely on AT&T's mobile network for service in the US.

"Their partnership with AT&T is a huge change for Apple," Mr Golvin says. "To be so highly dependent on a partner is very different." Still, he says: "I think consumers understand the difference between the handset and the network. It's possible that because there is so much hope around the experience, if consumers get an inflated idea of the experience there's some risk of disappointment."

Although the details of the arrangement between Apple and AT&T remain unclear, many suspect that Apple has negotiated special concessions not granted to other handset makers, such as a share in the revenue from service fees and greater control over the iPhone's feature set. "In this case, Apple is the one that's calling the shots on the device," says Hugues De La Vergne, an analyst at Gartner.

Apple's special arrangement may signal an opportunity for other handset makers to try to secure more favourable terms from their network partners.

Mr Windsor at Nomura says AT&T's willingness to cede control in order to do business with Apple could amount to a Pyrrhic victory. In other words, the balance of power between mobile operators and handset makers may have been irrevocably altered by the iPhone. "Nokia, Sony Ericsson and Samsung have been given carte blanche to continue pushing their brands through the user experience at the expense of the operator," he says.

Others are not so sure. "There aren't any other players out there who can exercise the kind of control and leverage in getting new products to market," says Mr Golvin. "It's not like this is a harbinger of changes that Motorola, Nokia and Samsung will be able to benefit from."

For the network operators themselves, the iPhone could prove a double-edged sword, says Mr Wood of CCS Insight. Operators have been working for years to encourage more users to download ringtones, pictures and video over their mobile connections. But with the iPhone, users will be able to download all the content they want by synching their device with iTunes over a PC connection. "This will encourage side-loading of music content from the PC, rather than over the air. It is not as attractive to operators," Mr Wood says.

Mr Wood says Nokia, which is understood to be planning to launch its own music service later this year, could pose the same challenge. "Manufacturers like Nokia and Apple are looking to get more revenues from services, but face a challenge in doing that without treading on operators' toes," he says.

For Apple, the potential benefits of capturing just 1 per cent of global handset sales are likely to outweigh the risks of entering a new and unfamiliar market.

Yet even if it were to carve out a 10 per cent share of the mobile phone market, the iPhone would remain a niche product more akin to the Macintosh than the iPod; significant, perhaps, to Apple and its shareholders, and a beautiful piece of technology, but far from the revolution in human affairs that some observers have made it out to be.