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The iPhone’s devastating impact on rivals.

As the release of the iPhone 3G nears, both competing handset makers and mobile carriers will certainly feel the impact. It didn’t take long for Apple to make its mark on the mobile industry with the introduction of the first iPhone, nabbing up a sizable portion of the handset market. All of this while AT&T, being the only sanctioned U.S. provider, was able to use the device to lure customers from rivals Alltel and T-Mobile USA. Now imagine the effect of unleashing a cheaper, faster and more feature packed version of the iPhone on the market and how it will have competitors shaking in their boots.

Not only has Apple made significant price cuts to the next-gen iPhone, but has also made it capable of working on a faster network and added significant features appealing to both consumers and businesses alike.

BusinessWeek adds that “To cope, wireless service providers are likely to increase their own mobile handset subsidies, boost marketing budgets, and reduce prices on some services, analysts and industry insiders say—all likely to mean slimmer margins. Rivalry from Apple adds to the pressure on an industry already grappling with increased government regulation and competition from new players, including Google (GOOG), that threaten to loosen service providers’ control of the market.”

While many other mobile providers are likely to provide subsidies and offer iPhone knock-offs, there really is no substitute for the real thing. Just as people wanted and could only have a real iPod, as opposed to just any other Mp3 player, people are still going to have these inklings to own the real deal. In light of this, consumers will certainly need some incentive to stray away from the real iPhone, yet with the new features and lower prices, this is certainly going to be no small task.

In order to retain users, companies are rolling out more funding for advertising as Verizon’s ad spending rose more than 30% in Q1 according to TNS Media Intelligence.

“Sprint Nextel’s (S) ad budget fell 20% in the same period due to the carrier’s financial troubles, but it may need to reverse course as the company looks to stem its subscriber losses. “They have to come out with a counter [to the iPhone] and play up their strengths,” says Rich Nespola, CEO of consultancy TMNG (TMNG).” via BusinessWeek.

Another way to retain users would be to offer lower priced service plans. This could be a major player in trying to compete with AT&T as, they have raised service prices to recoup for higher subsidy costs. “The operators are going to get very aggressive with pricing in the second half of the year,” says Walter Piecyk, an analyst with Pali Research. “We could see 30% to 40% price cuts in the industry, [possibly led by Sprint]. If people are paying more for gas, saving $50 a month for wireless will be compelling.” As a result, industrywide margins may slip to closer to 30% from the current 40%, he says.

Moreover, could be the headaches for the handset makers themselves. While the carriers are the ones that absorb the subsidy costs, they are also likely to put pressure on their suppliers to to cut prices on bulk orders. And If iPhone sales see a drastic surge as many analysts predict, rival handset makers market share will thus decline. Rival companies such as Research In Motion (RIM), Samsung, LG, and Nokia, will stand to lose a lot of ground as we come closer to the Iphone 3G release date.

Software and development costs are also rising as these companies try to catch up with the iPhone’s capabilities and graphics, just as HTC has recently unveiled the Diamond, with somewhat of a 3D interface, and Nokia has been investing in Ovi a suite of mapping, gaming and photo sharing services for its smartphones.

It is tough to tell exactly what kind of impact the new iPhone will have, but if analyst predictions are indicative of what may happen, then iPhone rivals certainly have something to be nervous about.