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Apple’s iPhone Vs. Other Mobile Hardware Makers: 5 Revenue Engines

iPhone Engines
Daniel Eran Dilger
While pundits like to fixate on how Apple may possibly be making less than they first postulated, and then mercilessly torture their invented strawman like a voodoo proxy for the as yet bulletproof iPhone, the reality is that Apple has built a series of revenue engines that will not only make the company money, but will also support the ongoing development of the iPhone platform and keep it well ahead of rivals.

Auf Deutsch: Das Apple iPhone im Wettbewerbervergleich: Die Kraft der fünf Profitcenter
Übersetzung: digital express

Toni Sacconaghi Alert: Excessive iPhone Demand Reason to Panic

Toni Sacconaghi Alert: Excessive iPhone Demand Reason to Panic

There are five interrelated profit centers related to the iPhone that nobody seems to recognize as unique, trailblazing, and difficult to replicate; these factors will allow Apple to maintain its lead in a competitive industry with entrenched players. Phone handset makers have the potential to earn profits from manufacturing, from retail sales, from carrier service revenue shares, from accessory sales, and from software and media sales. Guess what company is making money in every area? It’s Apple of course.

Other hardware makers, including Nokia, Motorola, HTC, Palm, LG, Samsung, RIM, and Sony Ericsson, all face obstacles in earning the same revenues Apple can. The result is that Apple will be able to afford to invest more into the iPhone, maintaining a lead in smartphones just as it maintained a profitable, technical lead over the last two decades with the Mac over rival PC makers all stuck in a poorly differentiated, cutthroat commodity business.

I earlier observed that the iPhone was to existing phones as the 1984 Mac was to the various DOS PCs of the era. The difference is that this time around, there is no Microsoft in the smartphone business; no one cloning Apple’s unpatented technology as an inside developer and then reselling it to hardware makers as a recipe for cloning.

The worldwide phone market is dominated by the aging Symbian OS, which is a platform fractured into regions that all use incompatible software. Palm dropped its early lead and Microsoft’s effort to push Windows Mobile has failed spectacularly, leaving the game wide open to innovative companies with a unique product to offer, including RIM’s BlackBerry and Apple’s iPhone.

The Egregious Incompetence of Palm
The Spectacular Failure of WinCE and Windows Mobile
Origins: Why the iPhone is ARM, and isn’t Symbian

The Five Mobile Revenue Engines.

For hardware manufacturers, this level playing field could be an opportunity, but most are not in a position to compete. They’ve all entered into deals with the mobile service providers that limit what they can do and how much they can earn in the mobile phone market. Here are five areas where hardware makers are falling behind Apple’s iPhone:

1. Manufacturing profits come from being able to offer an integration of hardware components and software utility that are greater than the cost of the sum of their parts. Outside of Apple, smartphone makers are typically forced to design their phones to appeal to the mobile service providers rather than end users. That’s because mobile companies have set up a business where the value of phone hardware is minimized; their advertising makes phones appear to be free as an inducement to sell buyers on thousands of dollars of mobile service over the term of a contract, rather than emphasizing any value in the phone itself.

Nokia, Motorola, Palm, RIM, Sony Ericsson and others are all left unable to set fair market prices for their phones, because the entrenched mobile contracts business forces them to compete against free phones. Outside of a few high end models that some users will go out of their way to buy, phone makers have to depend upon mobile providers as their resellers and take whatever scraps they are given.

Mobile providers prefer to subsidize cheaper, simple phone sets that don’t cost them very much to offer for free as loss leaders. That leaves little profit potential for phone makers, as they have to develop phone models that hit very low price targets within a year or two on the market.

This is very similar to the PC business, where Microsoft has enslaved hardware makers into a role where they produce the hardware Microsoft recommends at cutthroat prices and razor thin margins while Microsoft earns vast revenues from software licensing that is automatically sold by the hardware companies. HP and Dell can’t really sell their hardware outside of Microsoft any more than Motorola and Palm can sell their phones without dependance upon mobile operators.

Apple can. Just as it sells Macs without paying the Microsoft tax, it sells the iPhone directly to consumers rather than through service providers as a subsidized unit. This allows Apple to set a hardware price that results in a sustainable profit, but also enables the company to add features that mobile providers have railed against.

The providers all want phones to depend entirely upon their paid network services, from pay per bit data to pay per photo MMS. The iPhone not only includes WiFi for direct network access off the mobile grid, but also introduced the idea of free desktop-style email with photo attachments that don’t incur fees for the mobile providers.

The rest of the iPhone was attractive enough to bring AT&T and other providers new subscribers, so those mobile companies accepted the loss of revenue from MMS fees in order to sell service for it. Additionally, they also gave up other features they insist that other manufactures support, including the junkware related to rental games and applets, overpriced ringtones, and on-demand paid video clippings.

Apple redefined what mobile operators could ask from phone set manufacturers, and set up a business profitably selling hardware that consumers actually want to buy despite the availability of phones that appear to be free or seem to cost much less in advertisements. While other phone manufacturers may benefit from Apple’s lead in declaring independence from operator’s whims, they will find it harder to replicate Apple’s successful model because they lack other elements of the company’s game plan.

How AT&T Picked Up the iPhone: A Brief History of Mobiles

How AT&T Picked Up the iPhone: A Brief History of Mobiles
10 FAS: 2 – The iPhone’s Anti-Competitive AT&T Contract

2. Retail profits are a significant example of how Apple can maintain provider independence. Other phone makers rely almost entirely upon mobile providers selling their phones for them. However, service companies aren’t in the business of making hardware makers rich; they push phones that sell minutes of service, not which offer the best features to end users.

Mobile providers are uninterested in focusing any attention on phones that do things other than bill service minutes. Some providers have even restricted phones from being useful off their network. Verizon Wireless has long been opposed to WiFi and even USB desktop syncing; it even forced Palm to set up a complex HotSync system that pushed PDA data over its mobile network to sync with Verizon’s servers rather than syncing directly with a PC. Many phone users don’t sync their phone with their PC because they don’t know they can; providers emphasize using their own network rather than serving their customers’ needs.

The mobile providers’ self interests mean that hardware makers are not only limited in how much money they can earn through innovative phone design and manufacturing, but are also squeezed out of earning any retail profits. Not Apple; it maintains its own stores, and designed a phone that could be purchased directly from Apple and authorized at home over the Internet using iTunes rather than solely from a provider retail outlet.

Apple works to sell the majority of its own phones rather than selling them through provider partners. It was no accident or mistake that prevented Apple from selling iPhones through AT&T partner affiliates such as Radio Shack. Just as Apple earns both manufacturing profits and retail profits on all the Macs and iPods it sells itself, it also brings in the majority of the iPhone’s retail profits because it can market the unit itself.

Apple encouraged long lines and fanfare around its retail stores at launch, despite the iPhone’s ready availability at AT&T retail stores. This not only brought in free advertising as news crews filmed lines of excited buyers, but also established that the iPhone could be purchased outside of a mobile provider. That allowed Apple to erase buyers’ loyalty to their existing mobile provider by making the iPhone available outside of the context of a cell phone store affiliated with a specific provider.

Verizon and Sprint customers don’t have to go to an AT&T store and worry about switching details, they can simply buy the iPhone from Apple directly. Other manufacturers can’t really copy this strategy because most don’t have any retail presence–Palm is now shutting down its retail stores, while other makers have little or no retail outlets–and are already bound to every provider. They’re all stuck in servitude to the mobile providers and can’t pull out to offer any long term exclusive partnerships or independent offerings.

Apple isn’t. It can make more money selling more smartphones with one provider per region than its competitors who have relationships with every provider. That’s because being exclusive enables Apple to offer unique features that other manufactures can’t, such as Visual Voicemail. It also means Apple has to power to bring providers new subscribers.

Every new subscriber a provider gets is worth far more than some junkware ringtone sales; other manufactures can’t create such pull because they can’t afford to offer years of exclusivity to one provider. That’s because they aren’t making enough per unit on manufacturing profits and aren’t earning any retail profits. They’re all suck in entrenched, lethal business models under the thumb of providers. Apple isn’t. The company isn’t just ahead, but has pioneered a path other hardware makers will find difficult to follow because of their existing obligations and relationships.

Apple’s Adventures in Retail

3. Carrier service revenue sharing isn’t something Apple invented. RIM’s popular BlackBerry involves two related business models: the first asks for revenues from providers for supplying messaging relay services unique to the BlackBerry. The second asks for licensing revenue from IT shops running BES systems that relay corporate email to BlackBerry units. Other hardware makers have no ability to demand anything back from mobile service providers, and it shows in their stock performance relative to RIM.

Good Job RIM

Apple’s revenue sharing agreements are unique in that the company isn’t providing a service that providers are reimbursing it for as is the case with RIM. Instead, Apple is asking back a share of service revenue because it offers a phone platform that is far more attractive to users and therefore can influence switchers. In the cutthroat business of signing up subscribers, gaining new users and stemming the lost of defecting customers is extremely valuable. The iPhone does both.

Apple is asking service providers to support its business model by both lowering their fees and providing a rebate directly to Apple as long as the iPhone subscribers maintain their service contract. Other manufacturers can’t really demand anything similar because they are enslaved to serving every provider equally and can’t really offer anything that will dramatically cause long term switching in a way that benefits any particular phone service provider.

10 FAS: 3 – Apple’s iPhone Kickbacks vs RIM, and Verizon vs AT&T

4. Accessory sales are another profit center among mobile phones, and every manufacturer works to sell cables and other add-ons that add profit to their sale. However, only Apple has a significant retail presence that enables it to make significant extra profits from accessory sales. Apple now licenses “made for iPhone” accessories in the same manner as its iPod licensing program, and also earns retail profits on reselling third party accessories from its stores.

While the retail markup on Macs, iPods, and iPhones is actually not very high, accessories are typically sold at a significant profit. Apple prices iPhone accessories at artificial prices, typically from $29 to $39, regardless of the actual cost of the product. The company proportionally earns more profits from accessory sales than from higher revenue hardware sales; the combination of offering both in the same store fuels the sales of each. This is part of why Apple’s retail stores are outselling Tiffany’s per square foot of retail even while other hardware makers, including Gateway, Palm, Sony, and Dell, have failed miserably at breaking even in retail attempts.

While other makers offer cables and batteries and other accessories, Apple sells a huge amount of third party accessories in a way that subsidizes ongoing development of its hardware and builds an established ecosystem of developers and manufactures around its products. Because other phone manufacturers rely on service providers to sell their phones for them, they also forgo the majority of accessory retail sales, which are collected by service providers instead. Compare the amount of retail space devoted to accessory sales in the Apple Store with that on display in a typical cell phone retail outlet, and its clear which company is making the most on mobile accessories.

5. Software and media sales are also out of reach to most other hardware manufacturers. Apple hasn’t yet started selling software for the iPhone, but has established a business in low priced, $5 iPod games designed to sell in high volume. Additionally, the iPhone fits into Apple’s iTunes business for selling songs, TV shows, movies, and now renting movies. With the new WiFi Store, Apple is now selling media directly from the iPhone, too.

That isn’t a business Apple runs to earn huge profits, but it adds significant value to the iPhone in a way that induces hardware sales, accessory sales, and carrier revenue sharing income. No other hardware maker can put together a similar business because erecting an iTunes competitor is a huge amount of work with little profit potential. Additionally, hardware makers have curried the favor of their service provider masters by building in support for the junkware media sales that only profit the service providers. They can not now compete against them.

Apple’s iTunes business is so strong that the company could push AT&T to drop its demands that the iPhone support its video clipping service and expensive ringtone fees. Using GarageBand and iTunes, users can build their own ringtones and upload their own home videos and pictures without paying service providers any fees for the privilege of moving around their own personal bits.

Other hardware makers lack an iTunes or a GarageBand, and there isn’t any business model that allows them to line up a similar set of applications to offer the same kind of abilities as iPhone users have. They also have no capacity to build a software or media store that compares with iTunes, nor the ability to sign up commercial content providers.

They all face a Catch-22 of having no media audience to sell to and no media merchandise to offer. Building both simultaneously is far harder than Apple made it appear with iTunes, and finding another superstar vehicle like the iPod to fund the development of such a business is not likely either.

Rise of the iTunes Killers Myth

Rise of the iTunes Killers Myth

There is One More Thing.
While media pundits seem to all think that Apple’s hardware competitors will pull out an iPhone competitor real soon now, nothing close has arrived within a year of Apple’s original iPhone announcement. The above five factors will all act as barriers to prevent the sudden development of an iPhone killer clone.

Of course, over the last decade no hardware maker has been able to offer a popular iPod replacement either, which should cause at least some pundits to rethink their fantasy position on the imminent arrival of a far more complex product to take on the iPhone, and by extension, its sophisticated iPod Touch cousin, both of which make the original, unrivaled iPod look like a rather simple gadget.

Looking back further, no hardware makers have been able to introduce a Mac replacement either. The closest runner up has been the Windows PC, which was based directly upon a copy of the Mac’s software by Microsoft as Apple’s early development partner. That naturally raises the question: does the iPhone face a similar threat, and how will the iPhone stand up to phone software makers? The next article takes a look.

What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas.

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46 comments

1 Jon T { 02.27.08 at 7:08 am }

Wonderful stuff.

I just heard that Microsoft is the first company ever to actually break an EU ruling – it hasn’t complied with a 2004 ruling against it. And it has racked up a fine of $1.4bn for the priviledge!

Microsoft is a cancer on the world.

has been fined another Microsoft must now pay 899 million euros ($1.4bn; £680.9m) after it failed to comply with a 2004 ruling that it broke EU competition laws.

The ruling said that Microsoft had failed to provide vital information to rival software makers.

EU regula

2 onemilkid { 02.27.08 at 7:56 am }

Like Steve said during the introduction of the iPhone:
“… and boy, did we patented it.” :-)

3 WholesaleMagic { 02.27.08 at 8:42 am }

Apple clearly has a superior business model, and a superior product. Other mobile phone companies are digging their own graves in terms of product development.

In particular, Nokia have been extremely lax when it comes to R&D. They’ve had the same old Symbian OS (as you mentioned) since the dawn of time itself. It’s in need of a major revamp.

There are many extremely simple flaws that could be corrected with ease. There are problems with the dictionary prediction which cause it to remember capital letters in words like ‘don’t’ and ‘can’t’. It takes ages to get to anywhere, unless you can find room in the limited keypad shortcuts. Need I go on?

Motorola are in a similar boat. Sony Ericsson is slightly better. Their OS actually looks like it’s been tested by a human being.

I think the OS issue is a major problem for many mobile phone makers. Fixing it is just the first step towards creating a product that can even hope to defeat the iPhone in terms of functionality.

4 John Muir { 02.27.08 at 9:08 am }

That next article sounds like a classic.

The only two things which keep Windows were it is are:

1. “Interoperability”, which is what people mistakenly call “being compatible with itself.” It can be found everywhere, ergo can work with just about anything. It is Default.

2. Giant software library – which is less relevant now with Parallels and Boot Camp than ever before – but still has a place in “Gaming”. Consoles will beat the costly PC enthusiast desktop gaming rig. Handhelds like the iPhone/iPod platform will soon enough have a lot to say in sales.

Indeed: I reckon the iPod/iPhone platform’s games will outsell the Nintendo DS equivalents within a few years … and whatever else comes along from Sony, Nintendo and everyone else. I see a lead. It’s simply too sweet a platform to resist.

5 lmasanti { 02.27.08 at 9:27 am }

quote:
“Apple clearly has a superior business model, and a superior product. Other mobile phone companies are digging their own graves in terms of product development.”

I think this is the smartest thing that Steve carry on in his “second coming”. I do not know if he has it in “initial incarnation in Apple” or if he learned it at NeXT or whatever.
He –or Apple– are not “selling devices” per se, they sell them as part of a full functional business model.
It like the “anti-Internet-bubble” in which “companies” had an idea but no clue in how to monetize it.

Apple put every piece of its puzzle with the money-making-machine right in mind.
Everything, from giving iLife free with every Mac purchased to charging for it for new/renewal users, to the OS and iTunes for Windows (and Safari W?) is aligned to make money… from the very begining.
Even .Mac has a –yet truly unknown– place in this “Apple environment”.

There was a poster back in 1984 that show a shelf of books… by Mao, Engels, Lenin, Marx, Trosky… and a Mac 128kB. On top: “It was time that a capitalst start a revolution”.
This is the second “capitalist” revolution ignited by Apple: “Make money selling your products for a profit!”

6 elppa { 02.27.08 at 10:27 am }

Nokia have started opening their own retail stores. I think they are trying to learn, although why anyone would go in and buy much from them when you can pick up most of Nokia’s phones for free with a contract is beyond me.

http://www.bbc.co.uk/blogs/technology/2008/02/nokia_still_learning_lessons_1.html

7 NormM { 02.27.08 at 10:44 am }

I would assume that Apple will also get revenue from licensing fees for its UI patents for the iPhone. Others will make UI clones and be forced to pay.

8 sebastianlewis { 02.27.08 at 11:22 am }

Damn, the closest I got was iTunes. Oh well, I’ll get to Economics in my Senior Year I think, actually by reading this blog (and other blogs) I’ve learned a surprising amount about market economics without realizing it until I started reading the Economics books in my Modern World class (teacher is also an economics teacher) when I have a few minutes to spare. No better time than the present to thank you so err… Thanks.

Sebastian

9 lmasanti { 02.27.08 at 11:34 am }

quote:
“Nokia have started opening their own retail stores.”

I think that they are “copying the form” (as with the buying of Trolltech) but they do not master the business plan.

“Copycat” is not more a lucrative model, I think, for Western companies. Maybe it still is for chinese companies.

10 qka { 02.27.08 at 11:51 am }

My only negative comment is that you focus on those markets, the US in particular, where there is lock-in of phones to providers. What about those markets where changing your phone is as easy as changing the SIM card? That is the technology that is driving the unlocked iPhones in all the markets that are not yet officially supported by Apple.

Other than that, an intersting read, as usual.

11 jfatz { 02.27.08 at 12:15 pm }

The iPhone is still popular in those markets, qka, and will still draw Apple revenue from direct sales, as well as additional revenue from accessories and media/software sales. (I can’t see them tying Store access to an exclusive carrier because you still have to be able to access it through WiFi even if you don’t have a solid carrier signal, but even if they DO tie it together through some other means, what they lose out on additional media/software sales they would gain from the additional interest in people connection through the official carrier, and the subscription-sharing revenue that would bring in.)

If it’s a matter of switching carriers while on travel, that’s a compatibility and portability issue, but doesn’t really affect revenue streams. As long as it’s present and manageable, it won’t detract from sales.

After a certain tipping point, the iPhone is likely to open to all carriers anyway, but that tipping point will be if and when they have enough influence to dictate terms TO all the carriers. You think Verizon wouldn’t cave on a few bucks a month, Visual Voicemail and other matters if it potentially means getting millions of subscribers back?

Until then, they can command unique appeal and get large benefits from one major carrier WITHOUT hampering demand, as well as creating more revenue streams for that benefit themselves and other players (like media publishers, Starbucks, and other entities who see promise in unique partnerships) rather than the carriers themselves.

In a way, Nokia and others SHOULD be grateful, because this at least creates the POSSIBILITY for them to escape the carrier stranglehold at some point; at the very least loosen it’s grip.

12 tlbandito { 02.27.08 at 12:43 pm }

I agree with jfatz. Four of the five revenue generators don’t have anything to do with “lock-in.” In fact, Apple still makes money off of all those terrible, unlocked phones in China through manufacturing/retail sales and might even make money on accessories and software/media sales at some time in the not-to-distant future.

13 tlbandito { 02.27.08 at 12:48 pm }

One more thing, this really is eerily similar to the iPod phenomenon. Competitors and pundits were whining (and still are whining) about the iPod “lock-in” giving Apple some kind of competitive advantage. Apple made a more desirable product and sold boatloads of them in the form of iPods and now iTunes. That was Apple’s competitive advantage, not the lock-in. I’m convinced that Apple could have ditched the DRM “lock-in” early on—if the record companies had let them—and Apple still would have trounced everyone else.
Same story with the iPhone.

14 nextcube { 02.27.08 at 1:02 pm }

Elppa:

The other thing to note about Nokia is that they are ‘full line’ handset makers. Yes, you can pick up a Nokia 6085 ‘for free’ with your two-year AT&T contract, but no one will confuse a 6085 with an iPhone or an N95 ($700, unlocked, direct from Nokia).

IMHO Nokia are the closest to being in a position to learn from Apple’s example, since they are already there to some extent with their higher-end phones. Clearly, they won’t be able to simply duplicate what Apple have done, but I wouldn’t count the largest handset maker in the world out just yet.

15 Robb { 02.27.08 at 1:53 pm }

The Joy of Tech has an alarming piece on Apple’s stock problems and it’s impact on Apple’s future.

http://www.joyoftech.com/joyoftech/joyarchives/1075.html

16 gothgod { 02.27.08 at 2:50 pm }

Great article, about the competition: It wont be the traditional mobile sellers like Ericsson or Nokia, my guess is Nintendo and Sony (if they break away from Ericsson, which is very unlikely). I mean, they have their own very popular handhelds just as Apple had with the iPod, why not make a phone? And I can guarantee that it will be at least ten times as good as Nokia’s or Ericsson’s present ones. Aren’t nintendo already afraid of what will happen if Apple opens up for games? Cheaper, easier to make and distribute, multitouch games?

Well, little far fetched perhaps but Nokia and Ericsson has had “since the beginning of time” to make a decent phone and they have managed with what? Perhaps they have been held back by the service providers, but I think they don’t make good phones because they don’t have to (people buy and use them anyway).

17 John Muir { 02.27.08 at 3:06 pm }

@ gothgod

My thinking too … Nintendo are the nearest thing to “another Apple”, doing very well for themselves with some radical designs, and as the iPhone / iPod opens to software downloads it’s all too clear their DS is in the firing line.

Nintendo must have a phone project quietly in the works, just as Apple did before Macworld 2007. They presumably have an operating system developed since the DS’s appearance, and with their well thought out foray into online activities with the Wii I wouldn’t put a decent store past them.

Still not as much on their side as Apple have right now. But Nintendo are a dark horse to be looked out for. Sony meanwhile … if they can ever wake up from their content owner mentality!

18 Rich { 02.27.08 at 3:07 pm }

Motorola, Sony Ericsson, Samsung and LG all lack any real focus beyond the device itself. I don’t see how they’ll ever compete successfully with the iPhone. You only have to look at Sony Ericsson’s desperate Windows Mobile announcement to see that.

Nokia, on the other hand, already has most of the components needed to compete with Apple in place. They already have a music service (Ovi), a games delivery system (N-Gage v2), a very successful accessories business and an ever growing number of flagship stores. Nokia also seems to be the only one of the traditional manufacturers with the conviction and clout to go against the wishes of the carriers. France Telecom in particular was very displeased with Nokia’s OVi strategy but knew that dropping Nokia’s product line would have cost France Telecom a lot in revenue. Let’s not forget that they have 40% market share and keep announcing record profits. They must be doing something right.

I think it will take a while but Nokia are in the best position to compete with Apple. They might not be a big name in the US but Nokia have rock star status in most of the world.

“The worldwide phone market is dominated by the aging Symbian OS”

Why do you call it aging? IIRC, the current kernel only debuted in phones 2 years ago. Some of the recent changes have been excellent too (demand paging, for example). The S60 UI definitely needs a refresh though and hopefully the iPhone will be the push that Nokia needs.

19 Realtosh { 02.27.08 at 4:29 pm }

This time it won’t be Microsoft as back stabber.

This time…

it will be Google.
/screams of shock and awe from the gallery/

No one out there right now has a viable competitor to Apple’s iPhone ecosystem.

So cozied-up Google who has several contacts on Apple’s Board of Directors, including Google CEO Eric Schmidt. Google is being friend and software development partner, in the same way that Microsoft was providing valuable add-on software to Apple’s early Mac back in the 80′s.

Right now Google’s best mobile software is on iPhone, just like Microsoft’s best software originally was on the Mac, before Microsoft ported their software over to Windows. Then, the Windows software got much more attention; Mac software from Microsoft always seemed to fall behind after Windows was widely adopted.

In time, Google will develop their Android platform. People will get their Google apps on iPhone or whatever other Android-compatible handheld device they own.

Just like Microsoft back in the 80′s, Google will advance the software for Android ahead of iPhone software. People will buy Android phones because they are the compatible ones.

Apple will sell the “better” phones. Over time their market share will drop from close to 20% of all cell phone sold to the single digits marketshare. Each iPhone sale will be a profitable one to Apple. But another company, in this case Google, will create the platform upon which all other smartphone companies will eventually standardize.

And yes I realize that Apple just started their cell phone business, and their projected 10 million units will be just 1% of total worldwide cell hone sales this year. But Apple is firing on all cylinders, and will successfully build the iPhone franchise to close to 20% of worldwide cell phone sales, before Google takes away a chunk of the business.

Google will never build a phone. Their goal will be to run the OS and the crucial software on the rest of the 80%. It may take 5 years for all of this to happen.

Think the Microsoft-Apple break up was nasty. Wait and see what the Google-Apple divorce look like.

Unless Google and Apple combine their equity in one of the largest mergers of all time; their corporate interests will over time drive them apart.

Daniel, you’ve been great at looking backward in time. And you’ve been great at analyzing the present better than the so-called “analysts”. Think you can build yourself a forward-looking story. Stick your neck out. Predict how the Titans of Silicon Valley of the 21st Century will cooperate and clash.

I’d like to hear your views.

20 John Muir { 02.27.08 at 5:00 pm }

@ Realtosh

Nice retelling of the Microsoft story. There are however a few problems with just substituting one name for another.

1. Google are a back-end company. They don’t have any native apps on the iPhone: they provide the infrastructure for Apple’s own Cocoa front ends. Their web UI’s meanwhile are well behaved, good-citizen, standards compliant. It’s hard to see the threat from there! I honestly don’t think they have the same DESTROY ALL COMPETITION ethic as classic Microsoft.

2. Microsoft had an inside track in the development of the Macintosh. They had early prototypes, lots of one-to-one and even hires from the original Mac team, and were given the royal treatment by Apple as their most trusted software partner. It’s sad in retrospect just how easy it was for them to abuse that. Google meanwhile don’t have a line of iPhone OS X source code. They don’t need it for their dealings with Apple. They have to make Android from scratch.

3. Android is being run by a consortium. It’s not actually Google’s pet project with a simple line of command. In fact it bears a lot more in common with the way Linux is actually put together (think IBM and other well funded commercial contributors, instead of the kid-genius-in-the-basement legend) than say … Windows. Microsoft even went to the bother of buying other operating systems in order to launch their own: QDOS for MS-DOS and the VMS team for NT. Google’s not been up to any of that. I think we’ll see some interesting things from Android, but Linux style interesting instead of iPhone interesting.

4. One more crucial detail from Microsoft history: they wouldn’t be where they are in the world today if it weren’t for a fluke in bad scheduling. IBM went out to meet the owner of CP/M (of which QDOS was an unlicensed clone) and he happened to be out flying his plane for the day. His receptionist couldn’t keep the IBM delegation around for long enough, so they met up with the enthusiastic young Bill Gates instead, who misled them into thinking he had just what they wanted … while they signed away perpetual control the PC platform forever. I’d like to hear where Apple and Google fit into a modern day version of that!

21 nextcube { 02.27.08 at 5:12 pm }

Rich:

As you mentioned, the Symbian 9.2 Kernel is about two years old; Symbian 9.5 was announced about a year ago. The S60 application platform (“User Interface”, in Symbian parlance; FOMA, UIQ, S40 and S90 are other Symbian User Interfaces) also gets revised every nine months or so for newer phone models.

From a Symbian developer’s standpoint, this is good-news-bad-news. New versions of S60 or of the Symbian kernel break existing applications; there has been a major discontinuity in development tools for Symbian (the recent switch from CodeWarrior to Carbide) which has also added headaches for developers. Nokia has had to retrofit application security, user privileges and code signing, and it’s been a painful process for all involved. I think that’s where DED was going with his “aging” remark. For Nokia, though, the good news is that Symbian is actually addressing these issues and making progress. Pity poor Palm!

22 travelscott { 02.27.08 at 9:17 pm }

You could call this article 5.5 ways they will drive revenue…

The retail traffic (and halo/switcher effect) will create more Mac customers, as people get their first hands-on experience with an iPhone.

• I have one friend who went to the apple store to buy an iPhone, and bought her first apple computer then and there (she had intended to buy a Dell laptop)

• I recently met a busy executive who raved about his iPhone and said he was contemplating switching his whole office over to Mac – he said about his iPhone experience “I did not know what I was missing, now I know why people like Apple products, they really do ‘just work!’”

23 Realtosh { 02.27.08 at 9:46 pm }

@ John

I don’t disagree with anything you say. And I hope you’re completely right in that there is nothing to worry about from Google.

However, keep in mind that

1) Android exists only to clean up the mess that is smart phone OS’s, and all the incompatibilities that exist in that space. Creating a cohesive platform will shift quite a bit of power and control in Google’s direction.

2) That Android may be a consortium based on Linux and may have contributions from the open source community, but that does not remove any and all potential fangs from the platform. Remember that even OS X is based on Darwin, which has been open sourced. And more on point, Apple built their own browser, Safari, on top of open source Konqueror. You can see how far Apple has gotten by building on top on open source, especially in the browser space. Google created Android, and is clearly it’s leader.

3) You must admit that it is possible for the interests of Google and Apple to be divergent.

4) Google has a responsibility to deliver for Google’s shareholders, not Apple’s shareholders. If ever their corporate interests diverge, having Android available as a viable platform will give Google a powerful tool.

5) Google Apps (like Google maps and Google search) will be Google apps whether on OS X or Android. If Android ever does take off the ground, it is possible that it may in Google’s shareholders best interest that Google give more attention to Android, that serves many consortium members/ cell phone manufacturers, than to Google Apps on only one vendor’s platform, namely OS X on Apple’s iPhone.

I’m not accusing Google of anything. Just reminding everyone that 2 big gorillas in the same room may not always agree on the best way to split the bananas between them.

Still hoping you’re right. Just wondering how this dynamic could play out.

24 John Muir { 02.27.08 at 10:09 pm }

@ Realtosh

Consider why Google are making Android for a moment. It’s to sure up the mobile space.

Google’s business is to keep people using their services. Their bread and butter is advertising revenue. Their whole strategy is based upon maintaining their lead in back end services which they first won with search. They even have public API’s so that developers can use their stuff like Google Maps and the very promising Google Docs in their own software, irrespective of platform, inside or outside the browser.

Android isn’t about owning the phone. It’s about keeping it open and standards compliant, so that Google’s desktop lead can thrive on it.

Open source can be used as bedrock for closed source platforms. Mac OS X is the best example of that. But look again at Safari and WebKit … notice who’s using them besides Apple? Nokia for one: a direct competitor! Apple were looking for a browser of their own and chose the KHTML project because they liked the potential. They hired Dave Hyatt from Netscape to put in charge of the operation, and he’s been leading their efforts ever since: publishing WebKit for all interested parties to use, as per its open source license. It’s a positively good thing Android too will have WebKit at its base as it ensures that what web technologies work with Android will also work with the iPhone, no fuss.

I think Google’s involvement with Android will be much like Apple’s with WebKit. It’s particularly interesting to see that WebKit itself is so central to both their mobile platforms.

As for your fundamental premise: what happens when Apple’s and Google’s needs collide? I’ve yet to hear a case where they do. Are Google making an iPhone killer? No. Android’s just the opposite. Is the iPhone a threat to Google? No, Google publicly welcome it and its providing them more custom than even they expected. Have Google some sort of world domination strategy which Apple stands in the way of? I can’t see any. That’s more Microsoft’s expertise!

Apple and Google are thoroughly complementary companies. It’s rare they even come close to tripping on one another’s toes. I’m sure if and when they do, Daniel will have an article on it before I’ve even noticed.

25 Realtosh { 02.28.08 at 12:08 am }

John,

Thanks for your thoughts. Your last paragraph is hilarious. Thanks for the chuckle. Dan is great that way.

Your ideas sound good to me. In fact, at the moment the two don’t overlap at all. They are so complimentary that I’d guess there would no regulatory objections to a combination of Google and Apple.

This is in sharp contrast to a hookup between Microsoft and Yahoo. Those two would create nearly monopolistic control of both the portal and the free webmail markets. A combination of these two would be anti-competitive, and I don’t believe that such a hook-up could be allowed.

I’m just wondering out loud what might happen if Apple and Google went the same way as the Apple and Microsoft of yesteryear. Your comments at least give me some relief, hopefully justifiably. Thanks.

26 whmlco { 02.28.08 at 4:43 am }

As I wrote in The Apple Ecosystem, too many phone manufacturers are looking at the iPhone and trying to figure out how to out-Apple Apple. Problem is, they don’t have all of the related revenue streams and support systems in place to do it.

A better solution would be to focus on the niches that Apple isn’t covering, and by providing something that a given set of users may want more than a phone with an iPod.

Gamin is doing this by marrying their best-of-class GPS technologies with a phone. Nokia created the N93 with strong photo and video elements, hoping to appeal to photographers and others who want or need a camera with them at all times.

See: http://www.iSights.org/2008/02/the-apple-ecosy.html

27 lowededwookie { 02.28.08 at 5:52 am }

Nokia are so far behind EVERYONE it’s not funny.

I used to have an Ericsson T39M on Vodafone and I could use bluetooth to upload my calendars etc to my phone, with notes and everything using my Mac.

With the Nokia phone work gave me I can sync my phone to my calendars (although not on my Mac) but it will only give the subject field not any of the notes.

Nokia phones are poorly built as well. When I was doing cellphone sales back in the mid-90′s we pretty much sold only Nokia and Motorola (because those were the only phones Telecom sold) and the Nokias were the ones that came back frequently. The Nokia 918 was built in such a way when it dropped it ALWAYS landed on the screen breaking it.

Conversely the Motorolas were bulletproof. We had farmers bringing them in to have them checked after the phones had slipped from their pocket into the water trough and they worked perfectly. We had one builder drop his from a 4 story building and there was nothing wrong with it bar a couple of scratches and the only design flaw of them that of the battery clip keeps breaking.

Nokia needs to give up as far as I’m concerned. Their phones are crap and so are their ads.

28 Rich { 02.28.08 at 7:35 am }

“With the Nokia phone work gave me I can sync my phone to my calendars (although not on my Mac) but it will only give the subject field not any of the notes.”

What Nokia is it? My N95 8GB happily plays with iSync – contacts (with photos), calendar and to-do items. There’s also an iTunes plug-in for it.

29 PerGrenerfors { 02.28.08 at 8:55 am }

@ lowededwookie

I still think that Nokia’s hard to beat on the low-end. 3210 and 3310 were built like tanks. Of course, this is completely irrelevant to the iPhone discussion :-)

30 jfatz { 02.28.08 at 11:50 am }

@Rich

Obviously Nokia has too enormous a variety of offerings to make a universal statement about ALL their phones. The N95 is about as big and complex a package as they can muster (and about $700 unlocked for the 8GB version). lowededwookie mentioned the Ericsson T39m specifically, which is obviously a much more low-end phone; I would have to assume he’s complaining about the quality, support, and features of Nokia’s low-end (possibly mid-range) lineup. …or at least anything that resembles the T39m closely.

31 Rich { 02.28.08 at 11:57 am }

@jfatz
I only mentioned that N95 8GB because that’s the phone I’ve had experience with.

Even mid-range business phones like the E51 should support iSync.

32 jfatz { 02.28.08 at 4:50 pm }

It certainly says it does: http://europe.nokia.com/A4299040

I wonder if his old phone is on the list too, tho. Hehe…

33 REB { 02.28.08 at 10:24 pm }

The biggest advantage Apple has is OS X. When the SDK comes that advantage will be clearer. This is a classic case of the value of innovation, excellent human interface design, and superior engineering. The iPhone may well become the major revenue source among Apple’s product lines, and soon. Their amortizing sales over 2 years will mask this for a while.

34 lowededwookie { 02.28.08 at 11:41 pm }

@Rich

What Nokia is it? My N95 8GB happily plays with iSync – contacts (with photos), calendar and to-do items. There’s also an iTunes plug-in for it.

I have the Nokia 2855 because my company is so cheap (don’t get me started on how crappy the tech is we use despite us being a tech firm) and there are no drivers on the Nokia site for iSync.

It’s a CDMA phone because our company won’t move everyone to Vodafone so we have half on Telecrum and half on Vodafone and I’m not one of the lucky few who are on Vodafone. There aren’t many CDMA phones supported by iSync they mostly seem to be GSM phones which are all on the Vodafone network here. Typical.

35 WholesaleMagic { 02.29.08 at 12:27 am }

I have a Nokia 6288. It’s a pretty cheap phone, using the Symbian S60 UI. The Nokia 6280 is compatible with iSync, but the 6288 isn’t. Why? The phones are almost identical, apart from a few bug fixes in the 6288. It stumps me as to why Nokia can’t release a simple plugin for the 6288.

@REB: Yeah, Apple’s biggest advantage is OS X. Putting it onto the iPhone and iPod Touch was a masterstroke. People tend to lose sight of the fact that OS X is the most advanced and most user friendly OS in the world. To put it on a phone and compare it to even Symbian’s most advanced UI is like comparing a Gulfstream with a Cessna. OS X completely trumps anything anyone else has done.

36 Rich { 02.29.08 at 8:24 pm }

Ah, the 6288 (and 6280) aren’t Symbian phones. They run S40, which is based on Nokia old proprietary OS. I assume that’s why they don’t play nice with OS X.

37 elppa { 03.01.08 at 12:26 pm }

@REB Sun’s Solaris is very advanced as an Operating System and as good as if not better than OS X in some areas, but in terms of user friendliness it doesn’t come close.

38 John Muir { 03.01.08 at 12:45 pm }

@ elppa

When discussing operating systems now – at least desktop / server ones – we’re long past the day when it was seriously about how complete or functional they were. Apart from problems peculiar to Microsoft, most everything is mature now and can be used to fulfill whatever technical needs come to mind with the appropriate software.

However, so very true, it’s the last part which nails it. If everyone were a Linux or Solaris guru and had infinite time on their hands: usability would be irrelevant. Unfortunately, this is obviously not the case. Now would someone mind passing it on up!?

39 WholesaleMagic { 03.01.08 at 8:24 pm }

@Rich: Even so, I still can’t understand why one supports iSync and the other doesn’t.

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