The Great iPhone Debate

It’s two days after Jobs’ Macworld keynote and the question everyone seems to be asking – how revolutionary is the iPhone actually? 

Almost as soon as the phone was announced there were the lists of it’s shortcomings and restrictions: no third-party application support, no Exchange or Office support, no 3G, too expensive, no wifi iTunes sync, no over-the-air downloads from the iTunes store, no removable memory or battery, and the biggest complaint in the blogosphere – why do I need to sign up for Cingular to use it? 

In his blog, Tom Evslin goes off on that last point (via AVC):

Actually, of course, all mobile phones are born network agnostic.  Then the manufacturers of the phones make deals to lock them on to one network or the other so that they can be co-branded and distributed by the network operators.

There are lots of users of Verizon Wireless in the US.  Many of them are not going to be willing to switch to Cingular because Verizon really does have better coverage in many places.  But they can’t get a Verizon iPhone according to this announcement.  If they want music and video integrated on their phone, they WON’T be able to get it on Apple device. 

He’s not entirely correct that all phones are born “network agnostic”.  At least not in the US.  Choosing between building a device for Cingular and Verizon isn't a matter of simply deciding whom you want your device to work for - these are different technologies with different economics.  To build for Verizon is to build a CDMA based device and license that technology from Qualcomm.  Upon doing so you'll find your device doesn't work in most of the rest of the world so you'll need to develop another device (GSM based) for Europe and most of Asia. 

Or you start with a GSM device.  Doing that leads you to build a phone that won't work on Verizon or Sprint but will on Cingular and T-Mobile.  If you want cool features like Visual Voicemail, call merging, etc. (and want to ensure that your device works on these networks at all) you'll need to work closely with operators, so you do pick one or try for both? 

If one of the operators was willing to pay you for every new account you sign up, was in the process of rolling out a 3G network, and had 3x the number of subscribers than the other you'd probably be tempted to work closely with them.  Maybe even exclusively for some period of time.  And Apple did. 

Yes, if this was an unlocked device then T-Mobile subs could use it as well, but it'd lose some features, it'd lose some distribution, it'd lose Cingular’s customer support - and it still wouldn't work for more than 60% of US mobile subs (Sprint + VZW + Alltel + US Cellular.)  And this may just be spin but Cingular says they’re planning on developing more innovative and cutting edge functionality with Apple that requires network functionality to bring to life.  We’ll see if that comes to pass but if I was a carrier I wouldn’t mind having Jobs’ experience design team come to me with new ideas.

Outside the US it's a different story – almost every ex-US network is GSM and phones that work with multiple carriers sell “unlocked” at retail.  It looks to me like ex-US is Apple’s big play here.  After all, the US will account for only a small fraction of the 1bn+ handsets that are expected to sell in 2007.  I wouldn't be surprised to see Apple sell unlocked handsets outside the US.  But again, if an operator like 3 or Vodafone will give apple, say, $200 per new subscriber then selling 5mm handsets (and converting 1/2 of those from other carriers) is an extra $500mm that Apple may not want to leave on the table for the sake of being open.  And Apple can’t go to Europe without a 3G device so expect to see one announced by the end of the year at the latest.

One thing that everyone can agree on, however, is that despite the carrier concern and the other shortcomings above, the iPhone is a revolutionary design.  Jobs jokes in his keynote that someone he was demoing the phone too told him, “you had me at scrolling” and I felt pretty much the same way watching the presentation.  If you haven’t seen it, it’s worth sitting through here.  The “rubber-banding” of the song scroll as Jobs swipes his finger over it gets ohs and ahs from the crowd.  They practically go nuts watching him manipulate images by pinching them and dragging them about with his fingers.  It is truly Minority Report come to life.  I clearly need to reserve judgment until I get to play with the thing myself but people I know who have used it describe themselves as "speechless" upon using it.  And that’s a big deal.

One of the things I’m most excited about is, in fact, a revolution for the mobile phone industry – the iPhone is being sold at retail for its actual price. 

The problem with carrier phone subsidies is that they destroy the perceived value of devices.  If you're only paying $49.99 for a phone and have only ever paid $49.99 (or paid nothing) it's hard to appreciate all of the features that handset manufactures pack in.  I hear this complaint from carriers all the time – subsidies are required as the bar has been set at “free” but while low-cost handsets are a critical customer acquisition tool they also serve to devalue the overall product and experience.  (“Oh, my phone has a camera?  Who knew!”)  If every handset has the same price then every handset is worth the same.

Whereas before you spend $500 on a consumer electronics device you're going to make sure you know everything about it and that it's the perfect one for you.  And you’ll be more apt to use the features upon buying, to take care of it, etc.  This is a familiar model in other markets.  In Korea high-end phones can be $500+ and people know what they’re buying and why before making the investment.

I'd like to see this model grow in the US - valuable, exciting, differentiated mobile devices brought to market by strong brands that sell for full retail price.  In this regard the iPhone is far more "open" than many devices out there.  With the Apple brand and iTunes integration they know they’ll sell out of inventory on day one so it may not be as big a risk for Apple as for others.  Also Apple has no legacy carrier-focused business to protect, as other handset manufacturers do.  But still, I'm excited to see other companies (traditional CE or otherwise) step up to try to do the same.

And finally, Jason Devitt reminds us of something critical here.  Love it or hate it, what we’re looking at is version 1.0 of the iPhone:

Version 1.0 of the iPod was $399 in 2001 and did nothing but play music. This year Apple will sell its 100 millionth iPod, and the most popular model is half that price. For the same reason, forget about the lack of 3G, the 2MP camera, and most of the other shortcomings on the feature list. Remember the leap from Version 1.0 of the iPod to the Nano.

He’s dead-on.  Within two years this thing will be 3G with a 5 megapixel camera working across multiple carriers, open to third-party developers, supporting Exchange, selling for $199, with 60 gigs of memory.  Down the road the competition isn’t phones, or even smartphones, it’s the entire ultra-mobile PC industry.  That’s why it’s important that this is running OS X – not for the weather widgets.  And I can’t wait to see what features they bake in when WiMax hits.

Let the competition begin...

Comments

[Scott Rafer]

I'm completely with you on most of the above, but:
1. "it'd lose some features," -- what features would it lose? LBS? I'd rather have open APIs to the phone's internals.
2. "it'd lose Cingular’s customer support" --- You say that like it's a penalty. have you tried calling those people?

[Robert Levy]

Omigod!!! Greg! I can't believe it--I just stumbled upon you from Brooklyn Heights Blog. That's crazy.

Hope you're doing well. Now I've got to go read yer blog!

XOR

PS We're moving next week (a whopping three blocks) and are surrounded by boxes. Pray for our souls...

[Greg]

Ha! Excellent point, Scott... And great to hear from you Robert; good luck w/ the move!

[galeal zino]

Some excellent points Greg. And your last paragraph would be great though it is now more likely to come from a partnership that doesn't begin in a walled garden. Only a couple other commments - have blogged about it and commented on it too much this week ; )

1. "And this may just be spin but Cingular says they’re planning on developing more innovative and cutting edge functionality..."
I won't hold my breath waiting for Cingular/AT&T to develop any innovative features...even if Apple pitched in, they are still restricted by the AT&T infrastructure and processes.
2. "Also Apple has no legacy carrier-focused business to protect, as other handset manufacturers do." Yes, but AT&T does so Apple just inherited it, at least for now...

[Ol' Yeller]

Don't forget that Apple may be digging into the monthly revenue stream as well. If RIM gets a monthly for push email, I have to bet that Apple will get 3x what RIM gets from Cingular. That means more for Apple's business over the long run than anything Apple has done with the iPod (iTunes ARPU will pale in comparison to the revenue share Apple will get with this...).