This 4. 8-ounce sliver of glass and aluminum is a bomb that ended up changing the face of the mobile phone industry, shifting control from carriers to manufacturers, developers, and users.
It was a late morning in the fall
of 2006. About a year ago, Steve Jobs challenged approximately 200 of Apple’s
leading engineers to come up with the iPhone. But here in Apple’s boardroom, mobile phone it was apparent that the
prototype was still a disaster. It was not just buggy, it was completely
non-functional. It was incapable of making calls without disconnecting, the
battery would not charge to full, frequently had problematic data and application
issues. The issues appeared to be almost countless. At the end of the demo,
Jobs made eye contact with a dozen or so people in the room and said, “We don’t
have a product yet. “
The effect was even worse than
one of Jobs’ temper tantrums. Thus, when the Apple chief screamed at his staff,
it was scary but familiar. This time, his relative calmness was even more
frightening. “It was one of the few times at Apple when I got a chill,”
recounts one attendee.
The ramifications were serious.
The iPhone was to be the star of Apple’s annual Macworld event that was due to
happen several months later. Every since his return to Apple in 1997, the event
became his stage to unveil his most significant products, and Apple enthusiasts
were looking forward to another grand reveal. Leopard, the new version of
Apple’s operating system, was going to be delayed; this Jobs had already
declared. Had the iPhone not been ready in time, Macworld would have been a big
failure, critics would be all over Jobs, and even Apple’s stock could have
plummeted.
But what will happen with AT&T? In the end,
there were many secret meetings, and after eighteen months Jobs was able to
secure the best terms with the wireless division of the telecommunications
company that became known as Cingular. For five years of exclusivity, around 10
percent share of iPhone sold through the ATT stores, and a small portion of
iTunes, ATT had given control to jobs. He had convinced AT&T to invest
millions of dollars and thousands of man-hours to develop the new so called
voice mail feature visual voicemail and revolutionize the cumbersome signup
procedure at the retail stores. He had also secured a special deal that would
earn him around $10 per iPhone user from AT&T customers’ monthly bill. On
top of all that, Apple remained solely in charge of the design, development,
and promotion of the iPhone. Jobs had done the unthinkable: Crammed a good deal
out of one of the biggest players in the well-entrenched wireless market. Now
at least he must meet his deadlines.
For those working in the iPhone projects, the upcoming
three months were going to be the toughest time of their lives. Profanity-laden
arguments escalated quickly to full-blown yelling in the corridors of the
hallways. Some of them are engineers who can only give up and leave, after
coding for many hours, to come back in the morning when they are feeling fresh
again. A product manager in one ruku slammed the door shut so hard it locked
and she was trapped inside her office; it took colleagues over an hour and hit
with an aluminum bat to get the handle to give way.
But by the beginning of that final push, just weeks
before Macworld, Jobs had the prototype to present to the bosses at AT&T.
In mid-December of 2006, he finally met wireless boss,
Stan Sigman in a Four Season hotel in Las Vegas. He demonstrated the clear and
colorful display of the iPhone, its fast-working web browser, and its entertaining
interface. Sigman, a Texan engineer of few words and many convictions forged by
the hierarchically disposed American long-distance telephone monopolies, could
not restrain himself and exclaimed about the iPhone as the best device he had
ever seen.
It was however released later on, specifically on June
29, 2007. As of this writing, the analysts were estimating that 3 million of
the handsets would be sold to the customers before the end of the year 2007
making it the best selling Smartphone ever. It may also be its most profitable
gadget. For each $399 iPhone, it earns about $80 in gross margins before
factoring in the $240 it earns for each AT&T two-year service plan an
iPhone customer acquires. As you know, approximately 40 percent of those who
purchased iPhones are new users to AT&T’s network, and the iPhone has
increased AT&T’s data load in such markets as New York and San Francisco
three times.
However crucial the iPhone is to Apple and AT&T,
the changes it has wrought are chiefly in the $11 billion-a-year US mobile
phone industry. Since the inception of wireless technology, carriers have
dominated manufacturers by controlling the type of phones that will be allowed
into their networks, their cost, and their specifications. Handsets were seen
mainly as low-cost throwaway bait, heavily cross-subsidized to sign up
customers and to make sure that they kept using the carriers’ value-added
services.
But the iPhone disrupts this equilibrium in some
manner. What is a surprise for carriers is discovering that having the correct
phone can help to attract customers and also provide revenue even if the phone
is expensive. Today, in the quest for the kind of contract Apple has with the
carrier of its choice, every manufacturer is striving to come up with a phone
that consumers will cherish rather than one that satisfies the carriers. “The
iPhone is already threatening the behavior of carriers and manufacturers,” said
Michael Olson, assistant securities analyst at Piper Jaffray.
IPOD WAS FIRST introduced to the market in 2002 and
immediately after the release of the first iPod, Jobs thought about making a
phone. He could witness millions of Americans carrying one phone, one
Blackberry and, lately, one, MP3 player: of course, consumers would prefer one
device. He also found that cell phones and mobile email devices were set to add
more and more functionalities, arguably overpowering iPods as MP3 players.
Jobist knew that to protect his new product line he would have to enter the
wireless world in the future.
If the idea was obvious, so were the challenges that
were going to have to be faced in the process as well. Data networks were just
too slow and not equipped to handle a full-blown handheld Internet device. An
iPhone would demand a completely new operating system; the OS in the iPod was
not advanced enough to manage multi-featured networking or graphics and even a
smaller and vernacular version of OS X would be beyond the capacity of a cell
phone chip. Apple would be facing strong competition, too: Consumers in 2003,
rushed to the Palm Treo 600, a digital gizmo that was a phone, PDA, and
BlackBerry all in one. That showed that there was need for what is referred to
as a convergence device but also created stiffer challenges for Apple’s
designers.
Then there were the wireless carriers that is the
cellular phone companies that broke into the communications scene like a
thunderbolt. They understood that decisions as to what to build and how to
build it were made by the players in the sector and that some viewed the
hardware as no more than a means of getting users online. Jobs, a notorious
control freak himself, was in no mood to let a group of suits – which he would
later dub “orifices” –design his phone.
Owing to the changing tides of the market, the iPod
business of Apple has become a more important business in 2004 as well as a more
critically sensitive one. The iPod contributed 16% to company revenue; however,
with 3G phones emerging, Wi-Fi phones in the near future, the price for storage
drop low, and increasing competition from other music stores undoubtedly
threatened its status as an unparalleled music player.
But that summer, when he said on camera, that he would
not build an Apple phone, he was plotting the beginning of his foray into the
mobile phone market. He wanted to work directly with Motorola in order to avoid
the inconvenience of working with the carriers. It seemed like an easy fix: The
handset maker had unloaded a smash hit in the RAZR and Jobs knew Ed Zander,
Motorola’s Chief Executive Officer at the time, from his tenure at Sun
Microsystems. A deal would enable Apple to take time and focus on the
development of the music software while the bother of the difficult hardware
issues could be left to Motorola and the carrier Cingular.
Of course, here Jobs assumed that Motorola would come
up with another device that could be classified under the RAZR brand, but that
never happened. These three companies bargained over virtually everything,
including details of how a song will be gotten into the phone, the capacity of
the phone for storing music, right down to the manner in which the company
names were written. And when the first prototypes showed up at the end of 2004,
there was another problem: As for the thing in question, which is best referred
to as a gadget, it was actually quite ugly-looking.
Jobs introduced the ROKR in September 2005
and modestly presented it as an iPod shuffle on the phone. Nonetheless, Jobs
probably understood that he was dealing with a lemon; on the other hand, people
abhorred it. Yet the ROKR which couldn’t download music directly and was
capable of holding only 100 songs, suddenly became the face of all that was
wrong with the US wireless industry, the offspring of the confused mix of
interests for whom consumers didn’t matter. WIRED summarized the disappointment
on its November 2005 cover: “WHAT DO YOU MEAN BY PHONE OF THE FUTURE?”
EVEN AS THE ROKR went into production, Jobs was
also beginning to figure that he would have to create his own telephone. Later
in February of the year 2005 they convened a partnership meeting with Cingular
excluding Motorola. It was at a clandestine meeting on a Wednesday evening in a
Midtown Manhattan hotel where Sigman was among a few Cingular senior executives
that Jobs began to share his vision. (When AT&T acquired Cingular in
December 2006, Sigman remained president of wireless. ) Jobs delivered a three-part
message to Cingular: Apple possessed the engineering to create something vastly
superior to what had come before it – a technology that was "light-years
ahead of anything else. " Apple was willing to obtain an exclusive deal to
have that enterprise too. Apple also aimed to buy wireless minutes in massive
and make the company a carrier to some extent.
Apple was mainly selling personal computers during
this period and Jobs had every reason to be confident. He knew Apple’s HW
engineers were working on a touchscreen for a tablet pc for nearly a year and
had convinced him they could do an equivalent for a phone. Moreover, with the
appearance of cell phone ARM11 chip, the processors became fast and capable to
manage a device that has the abilities of a telephone, a personal computer and
an iPod. Wireless minutes had declined in cost much to even enable Apple to
resale them; companies such as Virgin were already doing so.
The Apple Touch
Apple has released two music phones that incorporate a
phone feature into an iPod. The ROKR from 2005, developed with Motorola,
maintained the traditional roles of manufacturers and carriers. The iPhone,
which got introduced in the summer of the prior year, turned them upside down.
Rockr
It also doesn’t have the capability to store more than
100 songs, no matter how many spaces are available in the memory.
Downloads through iTunes Music Store must be made and
synchronized from a PC.
The interface is unpolished and unintuitive and feels
sluggish when one is switching from one tab to another.
Design shouts "A committee did it”.
iPhone
It can store approximately 1,500 songs—up to the
maximum capacity of the 8-GB drive inside the unit.
iTunes Music Store purchases, on the other hand,
download the music wirelessly and directly to the phone.
It’s as simple as tapping the device and processing –
no need for instruction booklets.
C'Mon. Look at it. It's gorgeous.
Sigman and his entire team were hooked on the very
idea of the iPhone from the word go. Much like its competition, Cingular’s
strategy involved encouraging more and more consumer use of their mobile phones
for browsing the Web. The voice business was set to decline; price combination
had reduced margins. The iPhone with its potential as a music and video
download device and as a Wi-Fi enabled Web surfing phone might lead to more
data customers. And life, not language, was where juicy profit margins hid.
In addition to this, the Cingular team could observe
that there was need for a shift in the model of wireless business. Carriers had
adopted the habit of valuing their networks as strategic assets while
downplaying handsets as insignificant objects. This strategy had been useful to
them. Through this the carriers also ensured that cheap phones could be offered
to customers who in return signed up for long-term contracts, thus guaranteeing
profitability. But wireless access was no longer a luxury, but a necessity. The
single biggest issue that the carriers had to deal with was not identifying
new, unique consumers, but capturing those that already belonged to the world
of mobile communications. Just providing tacky handsets to customers would
never make the cut.
Sigman and his team planned to provide indispensable
devices which were not available in any other network. Who better to create one
than Jobs?
Thus, for Cingular, Apple’s goals were exciting and
potentially problematic at the same time. Having a close association with the
manufacturer of the iPod would give the company brand a touch of sex appeal.
And some other carrier was sure to sign with Jobs if Cingular turned him
down–Jobs made it clear that he would shop his idea to anyone who would listen.
But no carrier had ever given anyone the flexibility and control that Jobs
wanted, and Sigman knew he would encounter difficulties in trying to convince
the remaining executives and members of the board to green-light the deal that
Jobs had envisioned.
Sigman was right. The negotiations would take over a
year, and Sigman and his team would find themselves asking if they were giving
too much up. At one time Jobs went for a meeting with some executives from
Verizon and they bluntly rejected him. It was rather difficult to fault them.
Carriers had been billing the customers and suppliers for using and selling
services over the closed, carrier-owned networks for years. Thus, by providing
so many powers to Jobs, Cingular exposed itself to the danger of transforming
into a “dumb pipe,” an expensive brand name that merely delivers content
instead of producing it. Sigman's team made a simple bet: The iPhone would
increase the data traffic enough to compensate for the loss of revenue on
content deals.
Jobs was not going to let the finer details of the
deal be negotiated. Specifically, around the Thanksgiving of 2005, eight months
before a deal was sealed, he told his engineers to begin work on the project
with utmost vigor. And if the negotiations with Cingular were tough, they were
nothing compared to the engineering and design that Apple had to come up with.
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