Hidden Dimensions - Getting a Piece of the iPhone Action

by John Martellaro
July 19th, 2006

Asking the Right Questions

Every thing I say in this article about Apple is a guess; I have no inside information. As for the rest, all I know is what I've read on the Internet by some really smart people. So what I'm going to do is stitch together some ideas about Apple's rumored iPhone that seem to make sense. As usual, it's not just about technology, but about the politics of multiple disciplines and interests.

In order to explain what I'm thinking, we have to go back to 1999. Just prior to Macworld New York in 1999, rumors were flying that Apple was going to come out with a wireless networking solution. And possibly a new notebook computer.

All of us analysts were extremely skeptical at the time about the wireless part of the rumors because we knew that the various city-wide networks and cell phone systems were pitifully and unacceptably slow for data. A few individuals, if they had the right PCMCIA card back then (now just called a PC Card) and just the right cell phone could attach their notebook computer's serial port to a cell phone and dial into the Internet. But it was awkward and inconsistent. Even though you looked like a computer wizard in the airport, it was a technical dead end.

Moreover, we knew that Apple was not in a position to build a nation-wide network so that, for example, I could walk around the streets of Denver, sit under a tree at the public library, and get on the Internet. And so we were puzzled as to how this wireless system would work.

Behind the scenes, Apple had figured it all out by asking the right questions: what was already in place that could be exploited and what did customers really want? The answer, of course, was the legendary graphite AirPort base station with a modem combined with beautiful new iBooks.

Suddenly, one could sit at the kitchen table or lounge in front of the TV and be on the Internet. It was an astounding change in the personal computing lifestyle. Plus, it probably saved a few marriages because guys were no longer holed-up up in their den hunched over a computer screen. They could come out, join the family (at least physically) and have complete freedom to roam around the house with an iBook. For those of us who had a deck or covered patio, the sweet luxury of being outside on a beautiful day and surfing the Internet was incredible.

Apple leveraged off what they already had: an Internet connection in most homes and what the customer wanted -- no longer tied to a phone jack with a few meters of wire.

Flash Forward

It seems logical that Apple will ask the same questions seven years later. Today, about 75% of Apple customers, if the family income is greater than $75K/year, have a broad band system: cable modem or DSL. How many of those Apple customers have WiFi in the house with some kind of wireless router (hopefully an AirPort Express or Extreme) I don't know, but given the popularity and low cost of WiFi routers, I'd guess 75% as well. And every Apple customer has a cell phone, do they not? So the infrastructure required is in place.

What Apple customers want, however, is to be released from the tyranny of the cell phone companies who fight over regional access rights resulting in uneven coverage. They want to use the Internet to make lower cost phone calls, and they don't want to have to buy two phones to do it. And they want a friendly, elegant cell phone GUI.

For example, where I live, T-Mobile has secured license rights to coverage in our geographical area. I had to ditch my Cingular phone and go with T-Mobile if I wanted to be able to use a cell phone in my house. No other system works reliably in my neighborhood.

Some have suggested that Apple become a mobile virtual network operator (MVNO). To me, that just doesn't sound like Apple. The reason is that Apple needs to have complete control over the technology in order to create a pleasurable and consistent experience. And avoid having their business affected by competitors. Riding on top of and competing with the other wireless carriers is risky and isn't a typical Apple business model.

Other discussions have Apple designing a phone and working with, say, Cingular (their own corporate provider) to just build a better phone. But the business models of the phone companies and Apple are vastly different. The cell phone companies give away the hardware in exchange for a one-year contract and collect money from services. Apple sells music (services) for little if any profit and makes money from the hardware. So forget that simple approach.

Merging Technologies to Create a New Market

So what I'm thinking is a hybrid cell phone. One that can connect on your home (or any) WiFi network and use VOIP technology. And when you're out of range of a WiFi signal, the electronics searches for a cell phone tower and acts as a conventional cell phone.

Whether it will also play music and video is anyone's guess.

Now this hybrid concept isn't a new idea. It's been described before. But these phones have been slow taking off because, I think, 1) the legacy phone companies are all working hard to kill free VOIP, and 2) no company has taken responsibility or provided a vision for the user side of the technology. As a result, we seem to be just about where we were in the year before the iTunes Music Store was announced. Several groups here and there were providing free (pirated) music, no one had the funding and vision to seize the market, and the analysts all scoffed because surely no one would pay for music when the could download it for free from, say, Napster, right?

From what I have read, it seems the Net Neutrality issue has elements in it that will allow the phone carriers to squash free VOIP and seize control of this market. In any case, let's be realistic. The days of free phone calls are numbered as all the traditional carriers move in with big-time marketing, political lobbying, and behind the scenes technological maneuvering.

Did you really think that Skype and Vonage would last forever?

Neither are the cell phone companies really thrilled with the idea of a cell phone that makes free calls. So there has to be some delicate technical and political maneuvering. There is great opportunity for Apple to cut through the politics, build a great hybrid cell phone, and make it work financially with a wireless partner... and, in turn, their partners.

What if Apple struck a deal with Cingular? When you use an Apple hybrid cell phone, (with its new, beautiful, break through user interface and iPod fashion-sense), you get charged for your minutes whether you're on WiFi or their cell network. (The iPhone has electronics to enforce this protocol. And it remembers your own AirPort access password.)

It's all transparent to the user.

The iPhone is so beautiful, the GUI is so great, you just have to have the hottest hybrid cell phone on the planet. And you won't mind paying for the VOIP minutes to get one.

In this mode, there are multiple interests at stake, and that could be the reason for the delay. For example, in exchange for Cingular riding along on, say, the Comcast network when you're at home, talking on your iPhone, offloading part of Cingular's network, they'd probably need to work out a payment scheme to reimburse the Internet infrastructure partners to make sure their VOIP packets don't get blocked. (No Net Neutrality here, folks.)

And this may well explain the rumors we've heard about Apple adding VOIP to iChat. It could be a corrupted interpretation of incomplete leaked data. Or perhaps a compartmentalized test bed?

Bottom line: Apple makes money off the iPhone hardware, Cingular continues to make money selling you your minutes, ring tones, sports clips, and whatever services they can dream up, and the supporting partners get a piece of the action.

Also, Cingular gets a leg up on the competition because the iPhone has wider coverage, works in every house and business with a WiFi network, and does their own part to put the clamps on free VOIP in the same way that iTMS brought pretty much brought an end to Napster.

And here's the best part. All Apple has to do is build a small piece of consumer hardware, like the iPod, sit back, and watch the profits roll in as we all dump our conventional access RAZRs. It's 1999 all over again.

Of course, everyone else will copy this technical approach, and some have already started. There will be announcements about iPhone killers. Formidable looking alliances will form. But if a company like Apple, with its great image, marketing and branding, gets out of the gate even second or third, it will be hard to stop their magic touch and iPod halo effect. Of course, this is all just a guess.

Now get Oxmyx and Krako on the blower and tell 'em we want a piece of the action.

John Martellaro is a senior scientist and author. A former U.S. Air Force officer,he has worked for NASA, White Sands Missile Range, Lockheed Martin Astronautics, the Oak Ridge National Laboratory and Apple Computer. During his five years at Apple, he worked as a Senior Marketing Manager for science and technology, Federal Account Executive, and High Performance Computing Manager. His interests include alpine skiing, SciFi, astronomy, and Perl. John lives in Denver, Colorado.

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