iPhone at 10 Apple didn’t invent the smartphone. The iPhone wasn’t as good as many of the other phones the likes of Nokia, Sony Ericsson and Motorola were selling to the mobile networks. The real breakthrough was that Apple circumvented the buying process.
There has always been a battle between the mobile phone networks and the handset manufacturers. The networks see phones as a necessary evil for selling airtime. Anything which sells more airtime or chargeable services is a good thing. Anything which reduces the customers likelihood to buy – such as a high handset price – is a bad thing.
And the network wants to own the customer. We’ll get back to Apple in a moment but first a bit of a brief history lesson.
Back in the early 2000s, before 3G the mobile networks had the purchasing of handsets down to a fine art. They would look at the cost of the components, know what a handset cost to build and then offer the manufacturer a little less than the total. I saw this when I worked for both Motorola and Sony Ericsson. We’d propose a new handset to a network with a price of $80, and a cost to us of $60, and the network would offer us a huge promo, millions of units at $58. They’d argue that their volumes would let us get the cost down to under $50 and then when we sold to other people at $80 we’d make more money. Sometimes we took the deal, particularly if the order spanned a number of models and some of the other models were more lucrative.
For Motorola “more lucrative” meant clamshell phones such as the V60 and 3G phones such as the A830 (codenamed Talon) and the A920 smartphone (Paragon).
The important thing that was going on here is that 3G shifted the power balance. In 2003 the only manufacturers who could ship in quantity were Motorola and NEC. Vodafone was so desperate for 3G phones it had set up Orbitel, a joint venture with Ericsson to make 3G handsets. Unfortunately these were made by people used to building high spec military equipment so while the manufacturing was superb and they worked well, the production rate at the factory in Nottingham was relatively weak.
Suddenly the handset manufacturers could up the ante on what they sold phones for. They could play the volume game the other way. If a network wanted some A830s they would also have to buy some GSM phones at a sensible price.
It set the scene for Apple to make a move – even though I suspect Apple never realised this.
The incumbent manufacturers all worked within the framework the mobile network buyers laid out. They had a consumer segmentation model, which classified types of consumers – Stay-at-home-mom, smart businessman, blue collar worker and the like. They’d have snazzy names thought up at ideation sessions with lots of Powerpoint and post-it notes.
The segmentation model would then be translated into phone specs. The stay at home mom might be called “Ellie Ballet”, and the specs would say she wanted better headphones, a 2MP camera, bar phone with a five day battery life, and a retail price of under $50.
The business phone could be $300 but it needed to be 3G and offer lots of services which would drive more revenue to the network.
All phones had to support the current obsession of the network: Vodafone Live, Orange Signature, T-Mobile My Faves. As ever all driven by usage and loyalty.
So when Motorola touted the ill-fated Odin, Ericsson offered Pamela and Nokia any one of a number of concepts, the networks demurred. They didn’t fit in to the consumer segmentation planogram, were too expensive and most importantly moved the ownership of the customer from the network to the handset manufacturer.
Into this war came Apple, with a frankly inadequate phone. It was $300 and 2G, didn’t have MMS and the Bluetooth was rubbish. It would never have made it past the handset buyers. Apple wanted customers to use side-loading of music from iTunes. The networks had rebelled against Nokia trying something similar with Ovi. Apple also wanted the networks to re-engineer their voice mail to support Visual Voicemail, something Motorola failed to do with the P1088.
But Apple didn’t sell to the handset buyers. Apple had a secret weapon: Steve Jobs, and he met with Ralph de la Vega, the big cheese at AT&T. And de la Vega welcomed the new rival to the evil handset manufacturers he’d been doing battle with. It also had cool. So even though the iPhone had a commercial model which included revenue share and a dozen red flags that would have seen any of the established players shown the door, AT&T took the iPhone.
And Apple was right, customers didn’t want Live, Signature or My Faves. Customers did want email, music and open internet access. So the iPhone became an nifty customer acquisition tool. Networks were faced with two options, take the iPhone and give all your portal revenue plus a chuck more cash to Apple or lose customers to a rival who did take the iPhone. The proposition was so powerful, O2 which had decided to go from 2G to 3G and bypass EDGE (kind of 2.5G) reversed the major engineering decision and rolled out EDGE just to support the iPhone.
Even though sales have started to dip, the iPhone still currently dominates, and history has been re-written to say that Apple invented the smartphone. Apple didn’t, but the real irony is that when the networks went with Apple to defeat Nokia, Ericsson and Motorola they ended up handing the vast majority of the profits in the mobile phone business to Apple. ®