iPhone: Apple's Market Disruptor
Posted Sunday January 14, 2007 in Business
So Apple launched their hot new iPhone last week. It’s sleek and sexy and it has a ton of hot new features. But then, what’s the last time Apple launched something that was that complicated? Apple’s biggest recent success is the iPod, which won by having fewer features than most of its competitors1; the most successful iPod is the Nano, which is tiny and relatively cheap. Why, then, would Apple launch a big,2 full-featured, expensive cell phone, when the obvious product is a lower-featured, smaller product that’s basically iPod Nano + phone? The answer tells us a lot about the technology and market forces in the cell phone arena and the pressure Apple feels to establish itself as the leader.
Why Launch the iPhone Now?
Steve Jobs told us that he had to launch the iPhone at this Macworld, rather than when the handset actually shipped, because the FCC approval process would put his new baby out into the public eye. But that’s sort of a fib; Apple has had the iPhone under development for at least two years, why did they finally decide to launch a product now? Why not a year ago, or a year from now?
I blame the Blackjack, the LG Chocolate, and the Treo 680. The Blackjack and the Treo 680 are both relatively affordable smartphones with good consumer features. The Chocolate is a phone that is focused on playing media. The Blackjack and the Chocolate got the big media pushes and are starting to work their way into consumer consciousness. The Treo 680 brought a very successful phone platform — PalmOS — to consumers. Altogether, phone consumers are getting a lot of high-end options, and are starting to show a real desire to use their cell phones to provide more entertainment value.4
Now, none of these phones have great usability. Reviews suggest the Chocolate is quirky, and the Blackjack runs a version of Windows Mobile that doesn’t allow basic functions like cut and paste. I love my current Treo, but one of the fun parts of the phone is that, when I hand it to my friends, they can’t figure out how to do anything with it.
So there’s a market opening — while all of these phones are good jacks-of-all-trades, somebody could still define the state of the art in smartphone interaction. Apple’s competitors are starting to effectively integrate a wide range of features in their phones and could potentially leapfrog iPhone prototypes in features if Jobs & co. waited too long to launch; but none of these competitors have a truly good interface. By launching the iPhone now, Apple served notice to all of its competitors’ design teams: quit with the new technology and figure out usability, or everyone will want to buy our phone and nobody will want to struggle with yours. But it’s a Hobson’s choice, because, while Apple’s competitors work on developing alternative interaction models, Apple can add in more features. If Apple waited, it would be the one playing catch-up in features while its competitors would have ironed out some of their interface kinks. Now was clearly the time to launch and set the standard.
Why These Features at This Price?
In many ways, the obvious market point is a $199 iPod Nano + Phone. This is a price at which the RAZR flew off the shelves, and hits the right price point for the MP3 player market too.4 So why are we looking at something more than twice that price? I don’t think the reason is that Steve Jobs thought we needed to have all of these features — he’s been more than happy to keep the iPod simple. More likely, we’re seeing something about the economics of phones. Once Apple got a slim enough radio and a big enough battery and a full-sized touchscreen and an Intel processor, they were probably within spitting distance of their ultimate $499 price point.
The challenge then became justifying that price point. Fortunately for Apple, they were able to do this by bundling applications, applications that Apple had already done a great deal to design for the Mac. The marginal cost of shipping another instance of an already-designed application is close to zero, so Apple can just pile on features until the $499 price seems fair.5 For the iPhone, hardware dictated price which dictated features.
What Chip Does the iPhone Use?
[Update: I’m wrong, the iPhone does not use an Intel CPU]
A lot of the discussion of the iPhone has centered around which processor it uses. Some pundits have looked at an Apple job listing for an iPhone person with ARM processor experience as evidence that the iPhone uses some flavor of ARM chip.6 An iPhone uses the ARM chip, but it’s unlikely that this iPhone uses an ARM chip (more on the other iPhone below).
Apple moved to Intel’s x86 processors shortly after Intel shifted its focus to providing full platforms, rather than just the most horsepower. It’s reasonable to think that this platform focus was the most attractive part of the relationship to Apple. For years, Apple took IBM and Motorola’s chips and built systems around them, but, by the mid-90s, Apple was the only major computer maker to design their own systems from the ground up; most other players were integrators of components made by other manufacturers. Not only did Apple get burnt as IBM and Motorola shipped much slower chips than did Intel, but Apple’s computers also suffered from unnecessary bottlenecks in other parts of their architecture. These bottlenecks existed because Apple couldn’t count on commodity products and already-proven designs for its memory, graphics card interface, etc.
With its new platform strategy, Intel not only solved Apple’s CPU speed problems, they promised to keep Macs’ overall architecture in parity with PCs’, at a lower cost. Now, Intel used to make ARM chips, but they discontinued development of that product last year. Using ARM would mean moving away from Intel, even while Intel offers mobile processors using the x86 instruction set.
With all of that investment in shifting not only to x86 CPUs but also to Intel’s platforms, why would Apple launch a high-end product using the completely different ARM architecture? Such a move would massively complicate Apple’s OS strategy, and add major hardware architecture design responsibilities,7 without providing dramatically better performance. It’s most likely that the iPhone uses an Intel chip. The lack of Intel branding on the demo units is most likely a consequence of either the lack of FCC approval or the fact that they’re using an Intel CPU that’s not shipping yet.
So When Will the iPhone Nano Come?
The iPhone that uses the ARM chip is the iPhone Nano. This future product is designed to begin the replacement of the iPod with the iPhone, transitioning Apple’s dominance of the MP3 player marketplace into dominance of the premium phone marketplace. This product is based on the iPod, and runs the iPod’s OS, which already sports contact and photo management and thus is partway to being a cell phone already. Now, the iPod has an ARM processor; Apple’s hiring for architects for this position because they want to have an iPhone Nano out in the next couple of years.
The hold-up here is, as mentioned above, price. Apple needs a $199 product, and that’s not happening yet. But prices fall every year, and so it’s only a matter of time. The RAZR had a market share over 6% in the US and Europe for a time, and Apple wants to launch a product that can attain that level of dominance in the iPhone Nano.
Why Can’t I Run My Own Applications on the iPhone?
This brings us to the biggest geeky gripe about the iPhone: that you can’t install and run your own applications on it. Now, if the iPhone ran on ARM architecture chips, that would explain why; you can’t just install a program written for OS X on Intel or PowerPC on an ARM machine. But, as explained above, I highly doubt the iPhone is an ARM machine.8 More likely, the OS X version on the iPhone has some important differences from the OS X version on Macs. These differences probably center around screen size and the unique input system.
Apple has always been vigorous in its usability standards, and it hasn’t even published Human Interface Guidelines for the iPhone. Heck, it’s quite possible that the APIs to take advantage of all of the iPhone’s unique traits haven’t even been fully frozen yet. Jobs’s biggest worry is that people will install tons of applications on the iPhone that are essentially unusable on the small screen and with the finger-based input system. Such a bad user experience could doom the iPhone with its target market of style- and usability-focused consumers, [9] just the way the early Newtons’ poor handwriting recognition could never be overcome by better-working systems. Keeping the iPhone completely closed for the next 6-12 months is possible because it’s new and hot, but neither possible nor desirable in the long term.10 There are currently no third-party applications just because Jobs wants there to be good applications on the iPhone, and, frankly, that’s what every consumer wants too. This will end well in a year when the next version of the iPhone ships with an open API that has been available to developers for six months, allowing Mac developers to ship applications that work elegantly and well on the iPhone 2.0
Never expect to see any real ability to add applications to the future consumer-level iPod-based iPhones, however. And that’ll be fine with consumers.
Altogether, the iPhone is an exciting new product. Apple has succeeded in setting the standard for all other smartphone manufacturers; it’ll be fun to watch everyone else play catch-up. Most won’t succeed (I wouldn’t buy Palm or RIM stock now). Just as Apple has done enough to keep its MP3 player dominance with the iPod, I expect Apple to gain and keep cell phone dominance, although that will translate into something more like a 15-20% marketshare than the current 70% iPod marketshare. These kinds of disruptive products are always good for consumers, and, whether or not you ever buy an iPhone, Apple’s market entry will mean you can expect a better mobile phone in your pocket for years to come.
1 And executing those features better — but then, feature quality is often a function of focus on that feature, and having fewer features allows more focus on each one.
2 Slightly larger than an iPod, see Kottke’s comparisons
3 Here I speak of US and, to a lesser extent, European customers; the Japanese have had all of this for a while. Apple is an American company and will always think of US customers first (fortunately the US market is big enough to make this an idea that works).
4 Apple doesn’t want to cannibalize iPod sales, but it’s always better to cannibalize your own sales than it is for someone else to take your customers away. If they think that it’s time for one product to rule the pocket, then they shouldn’t hesitate to make it the iPhone, even at the expense of the iPod.
5 This assumes that Apple already had many of these applications designed, a reasonable assumption. I wouldn’t be surprised if Apple had contemplated doing SMS in iChat earlier, but sending SMS isn’t free and pay texting doesn’t fit into the whole on-computer IM experience. The Photo application is probably based on iPhoto, and it’s clear that the music player is the next-generation look for the iPod. Very little conceptual and basic architectural work had to be re-done for the iPhone’s apps; most of the changes were probably to support the smaller screen size and the innovative touch interface.
6 A lot of companies make chips based on the ARM architecture.
7 Many other cell phone companies have ODMs — OEMs with substantial design capabilities — basically design and build the entire phone. Apple is too focused on providing the whole platform to do that.
8 It’s possible that, since the iPhone was rushed to market to set the standard for other phones and force everyone else to play catch-up, that the shipping model is actually an ARM-based unit. However, that would only be because this older design was already complete and well-tested. An ARM-based iPhone would be a dead-end version 1, to be replaced in a year by an x86-based version 2. In this case, the current shipping iPhone design would pre-date Apple’s romance with Intel.
9 You know, Mac users.
10 Jobs knows this. When Apple was designing the LISA to work with a full suite of Apple applications, Jobs built the Mac around greater simplicity and didn’t assume that Apple would ship all the programs you needed to run the machine — just enough to make it useful and show off its capabilities (MacWrite and MacPaint, but not a Lotus 1-2-3 competitor, a terminal program, etc.).
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