The iPhone Effect

by Neale Martin published February 19, 2007 in Telephony Telephony

As of this writing, the iPhone returns 60 million hits on Google, so one more column on the Apple of every media writer's eye won't hurt.

Previously, I wrote that when Apple came out with its cell phone, users would find it easier to add voice to their iPod mind-set than music to cell-phone habits. In another column, I contended that devices must fundamentally change to meet the opportunity presented by 3G networks. So, does Steve Jobs' new toy represent a quantum shift in the future of wireless communications? Oddly, I believe it does — just not for Apple.

Much has been made of Jobs' ability to upstage the electronics industry, making the Consumer Electronics Show look like a collection of hobbyists out in the desert. Part of Apple's marketing genius is to never enter a massive exhibition hall with hundreds of its competitors. However, the hype around the iPhone is as much about the phone as it is about Apple's marketing genius.

At first blush, the iPhone made most of the new handsets that debuted at CES look clunky. Going through the interactive demonstration on Apple's Web site, I was impressed by how this beautiful device combines applications and features. Like millions of others, I was blown away by the gimmicks: flipping through album art to pick a CD or enlarging and shrinking pictures by “pinching” them with my fingers. But does this device represent the same kind of seismic shift the iPod did in 2001?

Unfortunately, once I got past the excitement, certain realities tempered my view. The iPod was introduced when the MP3 market brought in around $100 million in annual revenue; the iPhone enters a competitive market measured in hundreds of billions in annual revenue where more than a billion handsets were sold last year. LG, Motorola, Nokia, Samsung, Sony/Ericsson, etc. will have similar products within the year priced far below the $500 Apple wants for the iPhone.

The other flaw is the exclusive deal with Cingular (aka AT&T) and its limited EDGE network. Although the folks at AT&T see this as a great opportunity to skim customers from it rivals, which it certainly will, the exclusivity of the deal will push competing handset makers into close alliance with Sprint and Verizon Wireless. In a world with 70 million heavily discounted iPods and cell phones — averaging less than $75 — the $500 iPhone will be a profitable niche product, not a huge home run for Apple.

But the iPhone will revolutionize the industry. For years I have contended that devices must change to reflect the visual capability that wireless broadband networks can deliver. We have been stuck with either handsets with tiny screens or bulky laptops whose great screens come at a heavy price. Apple has provided a clear blueprint for the rest of the industry.

At this point, many of you are likely thinking, “But LG had a phone with a similar form factor.” You can point to Sony's Mylo, PSP and countless other devices as harbingers of the iPhone. However, this is what separates Apple from its competitors. Apple begins with the end in mind, creating an intuitive and elegant device with applications to maximize the user experience. The rest of the industry is governed by a silo mentality in which innovation is not linked to customer value. But Apple's competitors will rapidly retool to pursue the markets that Jobs illuminates.