Like a lot of folks, when I first saw the iPhone, I was blown away with its potential. But my job is not to look at what everyone sees, but to see what is being missed both in terms of opportunities and threats and this thing has a great deal on both sides.One thing is clear, however, it will probably transform the cellphone market and the MP3 market. What many may not yet have realized is that it may transform the PC market as well. However, because we are treating this as a real product and not like the prototype it is, we are also forgetting that actually getting this thing to work right is not a given in this case. And Apple is more exposed with this attempt than they were before their transition to OS X.
Finally, Apple rarely announces things in advanced and they were supposed to be working on two phones. There may be a surprise still up in the air.
The UMPC done right?
How many of you have fully grasped that this is not really a phone?
This is a PC based (it runs a version of OSX) appliance that focuses on communications and multi-media. This is a new class of product and one that already has been named "UMPC" by Microsoft and Intel. This may, in fact, be the UMPC done right. Recalling the problems with the UMPCs, these devices have generally been too big, too expensive, and not appliance like enough. On spec, the iPhone is small enough, it falls within the $400-$600 range we believe is ideal for a UMPC device and it is very appliance like.
In effect, this device, on spec, bridges three product categories: Cellphones, MP3 players, and laptop computers. Because of its size, however, the full potential of this product is reached through accessories and while this is similar to the iPod (that is often connected to car audio systems, docking stations and other accessories) the full breadth of potential accessories is massively increased because this device does far more than just entertain you. This device could evolve into your digital partner integrating with virtually everything you currently use to communicate, create, entertain, and secure your life activities. With a little imagination, this thing could be bigger, by far, on spec, than the iPod could ever have hoped to become.
The birth of modular computing
The underlying concept, when you take into account the accessories, is something that IBM actually predicted nearly a decade ago, but targeted at corporations. It was the concept of a small modular computer that could be accessorized to take the place of a variety of devices. A decade ago, corporations were buying the technology and consumers were substantially lagging in their own purchases.
But as CES is showcasing the action is now in the consumer market and that is the market Apple targeted. So, while IBM came up with the idea, it is Apple who has made it real and you have to think there are a lot of companies suddenly wondering how to come up with a competitive product. It must be somewhat embarrassing for IBM, Intel, and Microsoft that Apple, on spec, appears to have the Modular Computer, UMPC, and Origami right. As an interesting side note, there is a company called Integral Computing that has been shopping around a concept that is based on the old IBM modular computing approach that probably will be getting a lot of interest very suddenly based on the iPhone.
Read on the next page: Apple's gamble with lead time, price, name - and the iPod
Apple's gamble with lead time, price, name - and the iPod
OK, now on the downside, this product is largely vapor right now. Yes, they have a working prototype but there is so much we don't know and some of what we do know could be trouble. Let's start with what we do know that could be a problem.
Lead Time: Apple has given both their competitors and Cingular's competitors a lot of lead time in a market (cellphones) that actually can change in months. Cingular's competitors in particular will be desperately looking for ways not to lose a lot of market share and may be suddenly willing to cut deals they wouldn't have even considered as a result. This is the second time Apple has pre-announced a product apparently to move their stock price but they may have sacrificed substantial competitive advantage and created a risk, if they cannot actually meet the date they have set - which could prove problematic at launch time. Now Steve Jobs' comments indicate he thinks he has a five-year-lead, but I could point to a very similar device that Philips showcased in the late 90s that would show this probably isn't the case. The UI work is excellent but the technology isn't that advanced and appears to be at a similar level to embedded Linux.
Price: Phones sell in volume in the sub $200 price range and haven't done (in terms of iPod like volumes) particularly well in the nose bleed $400+ range. Apple is carrying a lot of margin and but, once in a Cingular store, buyers could be pulled on to any number of lower cost phones that may be "good enough." And clearly, the competing carriers will be motivated to finally market aggressively their price advantages with these other phones. This phone will pull store traffic, but like other flagship products, it may not actually drive expected purchase levels, because it is priced too high for the targeted volume.
Name: Apple does not own the name "iPhone". This means that a lot of the coverage on the product won't be on the product but on the battle for the name with Cisco. The Cisco brand is trademarked and Apple has demonstrated they knew this before moving. This is incredibly dangerous, because it appears arrogant and makes them look like they feel laws don't apply to them and judges tend to have little regard for such behavior. More problematic, given their iPod brand and HP's iPaq brand, the very tactics they use against Cisco might be used against them at some future point.
Cisco iPhone (left) and Apple iPhone
Intellectual property: It has taken Microsoft and Linux years to get where Apple apparently is. While it is unlikely they copied Microsoft, OS X and Linux are actually very close. To meet what was an incredibly fast time to market, the intellectual property (IP) to make this phone work had to come from somewhere. There is a good chance it came from Linux and that community has rules that they enforce about taking their stuff and not giving back (the BSD community used to complain that Apple rarely contributed anything valuable back to their efforts).
iPod: If you were in the market for an iPod, you are now much more likely to wait until the Apple iPhone ships. This could cause a slowdown in sales until the iPhone hits the store shelves. Keeping demand up on iPods will be more difficult for the first half of this year as a result.
I'm expecting a number of surprises in June. The first is a second, lower cost, phone that will be smaller and likely sell in higher volumes. This phone would be more similar to the Nano in terms of size and much more limited in terms of capability but it would also better hit the sweet spot and address at least some of the risks noted above. My guess is that this phone would also come from Cingular but it wouldn't have to and, remember, Apple is one of the riskiest partners in the segment. The second is connectivity to Exchange and or Lotus Notes. While I would expect this software to come from a third party, this is the one thing that really keeps this product from attacking the RIM/PALM/Microsoft smart phone segment and there is a lot of technology out there that should allow them to address this need.
The final surprise won't come from Apple but it will be the competitive response to this phone. Apple has just scared a large number of very powerful companies half to death. This is one of the few ways you can get big companies to move and, be sure, they will move. Whether or not the iPhone is a success, it dramatically changes the playing field. This change goes well beyond any single vendor.
I don't think any of us realize just how big a change this new product class is likely to make in the world.
Rob Enderle is principal analyst for the Enderle Group. He can be reached at firstname.lastname@example.org.