Blinded By The Light

| Hidden Dimensions

“With a boulder on my shoulder, feelin' kinda older, I tripped the merry-go-round.”

-- "Blinded by the Light," Springsteen, Mann

Looking around the smartphone landscape just about every day, I can't avoid feeling that the results of Apple's plans to destabilize the smartphone industry are having an impact. Contrary to uninformed opinion, Apple isn't just another competitor with a fancy smartphone. Instead, Apple executives astutely analyzed what was wrong with the smartphone industry and attacked it on every level. That analysis is paying off.

What's happening now, in late 2009, is that Apple's competitors are doing every thing they know how to do to counter Apple's success -- without actually doing the hard work required.

I had dinner recently with an old friend, a fairly senior federal government IT manager. She told me that when she worked for Sprint, there was an emerging notion in the company that they should start developing software for their phones that would help customers. But senior management declined, and in her words, bowed out with the excuse: "We're not a software company." She left Sprint. She also told me that she has an iPhone for personal use, but the most senior IT managers in her government organization require the use of a BlackBerry. "The one they gave me is crap," she reported.

This just confirms by theories that old line senior executives have a bad tool set when it comes to increasing their competitiveness. Namely:

  • Jigger prices.
  • Lock customers in.
  • Exploit contract fine print.
  • Increase the ARPU (average revenue per user) via new services.
  • Partner with or acquire other companies to get bigger.
  • Build phones that are cheap, but look like the best ones.
  • Advertise on TV with pretty pictures, snazzy graphics, abbreviated finger gestures -- suggesting equivalency but not actually achieving it.
  • Focus on the carrier as the solution and the brand, not the phone itself.

Of course, none of these strategies does anything to overcome the competitive advantage Apple has built for itself with, as we know,

  • A world class SDK and Cocoa touch.
  • A beautiful classy, expensive piece if hardware.
  • Integrated software that's a joy to use.

All this makes for a phone that's easy to love. And that may be the key here. Apple's competitors seem to want to do everything on the first list above, because that's what they know how to do, rather than the second list, which is hard work. That requires senior managers to have enough technical talent to recognize talent for hire. Nothing on that list results in a product that people love. Instead, the customer ends up hating the carrier for its manipulative policies empty ads, and promises unfulfilled.

The Players

Palm. What Palm has reminded me is that even if a moderate sized company acquires an ex-Apple V.P., success isn't guaranteed. What Apple has shown is that not only must a company have a vision, but there has to be a boatload of loyal customers combined with some corporate strength (read: money) to back up delicate negotiations and leverage prior success. In a sense, the iPhone couldn't be shipped until Apple had benefited from the fruits of its labors with Mac OS X and Macs in 2001-2007.

As a result, it's not enough to have a vision. That ex-Apple V.P. often needs resources, money and talent that a moderate sized company is often unwilling or unable to deliver. Apple employees who've left the company to start their own or join another have found that out in spades.

Google. Google's Android smartphone OS isn't designed to make customers feel the love. It's designed as a vehicle to make money. This week, we learned that Verizon is going to form a partnershop with Google, and use the Android OS is a mobile device. This fits in with Verizon's corporate philosophy that the carrier is your god, not just a service infrastructure. Verizon's new ads, poking fun at Apple and AT&T, reinforce that thinking. (Even to using music similar to Apple's as a mockery.)

Even if this venture is financially successful, it's doubtful that the resulting product will be one that people will get excited about -- well, except for their Verizon coverage. But ask yourself how often you use your iPhone on Wi-Fi or stand alone for some useful task, and you're not even on the 3G network.

RIM. People do love their BlackBerries, but RIM, somehow hasn't been able to attract developers in large numbers. At the WWDC Keynote, Phil Schiller compared the 50,000+ iPhone apps (at the time) to RIM/BlackBerry's 1000.

In the U.S., RIM dominates the smartphone market, thanks to its catering to businesses. (Nokia is the leader, worldwide.) But, like a PC, many people grudgingly use the BlackBerry for work, but still have an iPhone for personal use. Apple knows how to exploit that corporate life dissatisfaction very well. The iPhone is used by many businesses, but for those who don't, they also know their employees lust for one.

Microsoft. Is Microsoft blinded by all the light? Windows Mobile 6.5 is out, and perhaps the best face put on it was by Michael Gartenberg. Even so, from what I've read, it'll take Windows Mobile 7 to make Microsoft a player, and it's going to be some time before it sees the light of day. Some data I've seen suggests Windows Mobile market share is on the decline.

Despite that, Microsoft has an incredible opportunity here. The company has the resources, the brand name, and the technical telent to build a superb smartphone OS. Unfortunately, their artificial divorce from hardware makes the situation more difficult. It's yet another brass ring Microsoft could grab, but probably can't or won't. [Actually, it's worse that we could have imagined.]

Industry Thoughts (Delusions)

Recently Gartner predicted that Android wil eclipse the iPhone by 2012 thanks to the resources Google will pour into the OS. According to Gartner, a lot of new phones will be released in 2010 with an updated version of the OS, codenamed "Donut." And Donut will supposedly kick ass. It may be that the prospects for financial success have also blinded Gartner because, in the old days, success metrics were defined by business practices, not smartphone technology and consumer enthusiasm.

Ultimately, that goes back to the first list above. And while Apple and AT&T have made a lot of money from the iPhone, the ultimate test is how much people love their phones and want to buy one. In turn, that's dictated by all the infrastructure Apple has built in with the second list above.

In the final analysis, I don't see any of the measures taken by Apple's competitors to show signs of a fundamental understanding of what it takes to endure in the mobile phone market. They'd like to brush 80,000 iPhone apps under the rug by calling most of them crap, ignore 2 billion downloads, and continue with business as usual.

The one problem Apple may face, however, is tying its fate to AT&T. Apple would clearly love to get a future phone on the Verizon network, but that isn't going to happen with the current Verizon management. And the recent announcement mentioned above, Verizon and Google, is either slamming the door shut or hardball negotiation tactics, That means AT&T, with a small percentage of its customer phones being iPhones that use a disproportionate amount of network resources, will have to step up its game.

In general, however, as the various players squabble with each other, continue to deprecate very cool hardware, shy away from world-class software & development tools, and fail to make a smartphone people can love (and stand in line for on an early Saturday morning), they'll just fritter away opportunities. Meanwhile, the latest data suggests that iPhone market share is skyrocketing.

The Apple Payoff

Then, Apple, as it tends to do, will figure out how to capitalize on its technical lead by coming out with successor products (perhaps that tablet) that strip away the thin veneer of arrogance and incompetence by all the other players. The competitors with the deepest technical capabilities in house and vertical integration with hardware will be the best poised to cash in on future technologies.

Steve Jobs isn't done with this disruption project by any means.

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Comments

James

You nailed it John.

As I recall, Mr. Jobs stated during the iPhone’s unveiling that the main motivation for creating the iPhone was that he and his staff mates hated their cell phones (as in, the phones from all of the other guys you’ve name checked here), so they decided to offer a better experience all the way around. It is the combination of solid, elegant hardware, software, combined with the ease of the extended functionality offered by the app store, and the innovative integration of fresh tech (multi touch) that have made it such a show stopper and game changer, and the one device I simply cannot be without.

I also think it was very smart to be so considerate of the average consumer and executive equally with their software roadmap. Before the iPhone we had ‘corporate phones’ and ‘consumer phones’ and seldom did the twain meet.

And hey-it also works flawlessly with my Mac. Am I the only one that remembers what a nightmare it was trying to do anything resembling useful with pre-iPod mp3 players and pre-iPhone (*cough* Palm *cough*) cells with our Macs?

John Martellaro

You aren’t alone in remembering Palm Sync from the Mac OS 9 days! *cough*

Nemo

What separates Apple’s management and particularly its CEO from the management of the other smartphone OEMs on Mr. Martellaro’s list, supra, is their devotion to making great products.  For Apple, revenue and profits are constraining parameters on its goal of making insanely great products.  Apple’s management respects those parameters but is devoted to maximizing revenues and profits by making outstanding products and, of course, by establishing and enforcing its proprietary rights in the intellectual property that distinguishes its products from its competitors’ products.  Whereas, the other smartphone OEMs are trying to maximize profits as their goal.  The irony of this is that it is Apple’s relentless devotion to producing excellent products that is maximizes long-term profits, while the focus on short-term profit will result in minimizing profits in the long-term.

If you’re HTC, Motorola, et al., you will never make a great product by slapping together a collection of parts and doing that in the least costly way.  Greatness starts in this way:  There is a meeting in the CEO’s office, where the CEO says to his Executive Vice President (let’s say his name is Cook) and his other assembled lieutenants:  Gentlemen we are going make not merely a better smartphone, for that is damning with faint praise, we are going to make a smartphone so great that presents its users with elegance, ease of use, and innovative capabilities and features that delight them, and that redefines the category; that means that we are going to have to develop the whole smartphone from the ground up using our resources and the best available third party components and ideas; let us begin and make it so.

At other companies, they are relying on some sort of customer lock-in or slapping together borrowed parts as cheaply as can be done.

Which of the approaches in the two immediately preceding paragraphs is likely to produce a great smartphone.  Of course, it is the former.

xmattingly

Verizon: “The carrier is your god.”

I think you summed that company up pretty well. Nay-sayers have been wrongly accusing Apple of vendor lock-in with iTunes, but Verizon is definitely the poster child for that sort of thing, which is partly why I left them.

Bosco (Brad Hutchings)

John, I think in the next year or so, Apple will launch its own data network. When you buy an iPhone, you’ll buy voice service from a traditional carrier and data service from Apple. Google will probably do something similar. And then they’ll have the carriers by the short and curlies.

Constable Odo

It’s funny that when the iPhone was introduced and Steve Jobs mentioned about aiming for 1% worldwide cellphone market share in a year, pundits were astounded and what he said was pure arrogance and it was so unlikely to happen.  Now that’s a long done deal.

Yet now, Ballmer is claiming that WinMo will grab these outrageously high amounts of market share in a short time and other pundits claiming that Android will just clean sweep the field in market share in a couple of years and people actually believe this to be true.  Apparently pundits still don’t believe the iPhone capable of grabbing majority smartphone market share due to it’s limited carrier offerings or because Apple doesn’t license it’s OS to other companies.

However, the iPhone just keeps steadily gaining market share month after month and these companies don’t even seem to notice this.

John Martellaro

Bosco:  I think you’re right.

Neil Anderson

Bosco: Now that makes sense!

Bosco (Brad Hutchings)

Someone told me that Gene Munster is expecting Apple to do that. Heh.

Nemo

Bosco and John:  There are two problems with Apple launching its own network, whether its data or voice doesn’t matter because it’s all data over IP.  First, Apple has already studied and rejected this idea because it is vastly expensive to build the infrastructure.  The expense is so great that it is a bet the company strategy. 

Then there is the other problems that comes from the vast expense of building a network.  To wit, Apple would become a network carrier that would, just like Verizon and AT&T, have to make its new network pay.  That means adopting the same kind of principles, strategies, and techniques that have made the business practices of Verizon et al. so odious and rapacious to their customers.  Would you like to see Apple limiting the features of the iPhone to protect the stream of revenue necessary to pay off the debts or recover the tens of billions of dollars invested in building out a network?  Apple would become a house divided against itself.  The devices side would be pushing for excellence and innovation in Apple’s devices, while the network side would insist on maximizing the revenues and profits from Apple’s network, and the network side of Apple would prevail because of the overwhelming imperative of making Apple’s vast investment in its network pay.  And remember that iPhone users use orders of magnitude more bandwidth, so Apple’s network would of necessity be considerable more expensive, because it would need to be more robust to handle the greater demand.  As one of our greatest and wisest presidents once said:  A house divided against itself cannot stand.  Nor would Apple stand, being so divided against itself.

And the final deal killer is that Apple doesn’t own any spectrum for a network.  Having declined to participate in the last auction for spectrum, neither Apple or Google have any proprietary spectrum, and I think that it would be safe to say that none of the established network carriers would sell sufficient spectrum to Apple.  That means that Apple would have only two other options for doing a data network, neither of which is viable.  Apple could try to rent spectrum from the network carriers, but, as Steve Jobs once commented, Apple explored that option and discovered that everyone to try it has failed, because the networks charge too high a rent for too little spectrum, so that you get the costs of network without the capacity, flexibility, and control of owning a network. 

The second option fares no better, that of using unlicensed WiFi spectrum for a data network.  While the iPod Touch and iPhone can use WiFi, such networks are not sufficiently pervasive to provide satisfactory coverage for a network, and building out an unlicensed WiFi network incurs a large measure of the costs of constructing a network, while failing to capture the benefit, because that network is of restricted range and must be shared with others.  Thus, Wifi isn’t practical for a network, because of its limited and inconsistent coverage.  At best, WiFi is like a rather large phone booth, but there just aren’t enough of such phone booths, and Apple can afford build enough of such phone booths for the meager, if not nonexistent, returns.

So gentlemen, I wouldn’t look for Apple to build a network for voice or data or both.  However, I do expect that Apple will put its new data center to good use by providing new online services and, perhaps, applications for its computers and mobile devices.  And to promote its devices and services and, perhaps, applications over the carriers? networks, I think Apple will be a good and great friend of the efforts by the FCC, Congress, and/or the Obama Administrations to open the carriers’ proprietary networks so that they function as common carriers of voice and data, without discriminating against particular type of content, except in so far as is necessary to manage their networks for the benefit of all their customers.

Nookster

Clearly selling unlocked phone is out of the equation, that would be way too easy and beneficial to consumers.

adamC

Wouldn’t it be fun if Apple buy 20% of ATT and then use its technology to innovate it to be the best telco and shut the hell up of VZ.

Lee Dronick

Wouldn?t it be fun if Apple buy 20% of ATT and then use its technology to innovate it to be the best telco and shut the hell up of VZ.

I would like to see Apple makeover AT&T’s horrid websites.

Islandgirl45

Google. Google’s Android smartphone OS isn’t designed to make customers feel the love. It’s designed as a vehicle to make money.

I’m not sure I understand this statement. Android is as infinitely customizable as the iPhone OS. As it continues to develop, why couldn’t it be as enjoyable to use as an iPhone?

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