Steve Jobs' iPhone Gamble: Betting Billions To Beat RIM, Microsoft

What does that cost? Let's say Apple kept the old model, and sold another 5 billion iPhones by the end of 2008.

ya prolly meant million vs. billion

Too much coffee today Dan? The monthly kickback won't work. Just ask the Japanese and the Chinese carriers. The $199 pricing is just a good move. Btw, "going all-in" means if it doesn't work, Apple will be broke. You think?

ah "Killer" time for you to hit the hay.

Well, the kickback was dependent on a carrier having exclusivity. In many countries that's illegal or the carrier culture is so resistant to it that they'd rather compete with their competition on non-exclusive terms (fancy that) or go without it -- it was only going to work in the U.S. and Western Europe, and uptake hasn't been great in Europe because consumers don't like lock-in. Even in the slow-to-progress States, eventually carriers wouldn't see growth or the benefit of exclusivity, and it would need to evaporate.

So, no matter what, it was going away or was only going to be a small part of a larger worldwide strategy. It's not very useful to assume that it would apply to all sales for eternity at the same levels.

The bet is not as risky as Dan might think. The reason is that Dan is not privvy to the growth and turn over metrics that Apple has most certainly been compiling since the release of the first Iphone. It leads me to the inescapable conclusion that the price cut is one that they feel is enabled by the rate of adoption of the new product. Think , this time just over a year ago Apple had zero market share in smart phones, today they stand at near 27% that is astonishing performance in a market segment that many felt was completely saturated with not just effective players but 8,000 pound gorillas like RIM and all those Symbian phones. Apple's approach is so unique (and anyone who has used the IPhone knows the feeling) that it can truly revolutionize how every one builds phones from now on. If they can be behind leading the market by flooding the market with their phones and then using the glue of a large suite of established apps for sale on its store for the phone they in one fell swoop set up a Microsoft like domination of the smart phone space. The cool thing about this, is they would have done it by leading not with software but with brilliant hardware design. The super large touch screen, true web browsing, location sensitivity is the triple threat that gave it the edge it currently has....still other players are slow to realizing this...RIM just released a Blackberry and it still has that down right archaic roller ball and that tiny screen and tiny keys...it is obsolete on arrival now that the IPhone 2.0 is on its way. Now if Steve really wants to rule the world ala Microsofts control on Intel based pc's he would open up the hardware design of the Iphone itself to standardization and license the ability to design IPhone compatible smart phones to the other players...he could set up a monopoly across the architecture while still ensuring great dynamism in the creation of software for the platform (just as the pc software platform is so uber huge)..he would finally do with wireless device hardware what he was unable to do with pc hardware. I for one am willing to see the attempt.

27% market share --- that's some bogus numbers in the matrix world.

27% market share is based on US shippment --- in which more than half of them are exported overseas.

What about the drop in market share to 20% in Q1? That's also bogus numbers as well.

The study that said Apple had 20% in market also said that the US market was 7.3 million smartphone in Q1. Which means that in order for Apple to have a 20% share, AT&T would need to sell 1.4 million iphones.

But it took AT&T 4.75 months to announce an additional 500,000 iphones activation --- that's a quarterly run rate of 315,000 iphones.

315,000 out of 7.3 million smartphones --- that's a 4.3% market share.

betting on a model which ties you to one carrier is what I call risky!

As long as they do that, they ensure that the iPhone will not have more than 27% market share.

Here we go again. The Apple zealots spewing praise for another gimmick from Apple. Aside from looking cool for tweeners and extreme technocrati, its just another toy for these people. The other 99% of us that live in the real world look for function, not style.

I don't understand how so many smart people are taken-in by Apple's schlock. They don't do anything.

Its like they took the idea of the Sony Walkman and just keep coming out with prettier versions of it. Apple is garbage. No innovation, just smoke and mirros.

I think Apple is the epitome of Hudsucker Industries...you...for kids!!!!

Dan, I look at it a bit differently. With the benefit of time, the original deal just might come to be seen as the 'second greatest unintentional head-fake in tech history' since by setting the bar so high for what a mobile phone could be, and extracting such rich financial terms from AT&T, Apple seriously baited the hook for carriers desperate to get into the excuse-free mobile Internet game, but waiting for a vendor with more traditional economics (i.e., a heavily subsidized phone but no revenue sharing).

Prediction: carriers will sign up en masse, customers will see $199 as a relatively easy impulse buy, and once a couple 'have to have' iPhone apps start flooding into the market, Apple is going to do some crazy volume.

Check out the post I wrote on the topic, if interested:

Jobs and iPhone: The (second) greatest unintentional head-fake in tech history?
http://thenetworkgarden.com/weblog/2008/06/jobs-and-iphone.html

Mark

Millions/billions screwup my fault. Ditto with the inappropriate use of "all in", as well as any hyperbole. However, I still think the main point still stands: Steve Jobs is giving up a lot of money, that he could book as recurring revenue over the next several years, in the hopes that he'll have a bigger payoff down the road.

It's would be more of a risk if Apple did not do this. If they can built a platform where they can provide a window to what people buy, what they search for, where they are via gps, they will control the advertising pie, not Google. But in order to be taken seriously they must have market share. Once they have market share they will be able to make more lucrative deals for a long and prosperous ride.

Here is the deal. People talk endlessly about the iPod "halo" effect, yet anyone who has used the iphone understands the potential iPhone halo effect is much greater than the ipod ever was. The iphone is a portable computer and will integrate well into the macintosh causing it to be a gateway drug for windows users to be future macintosh buyers.

If Jobs averages less than one mac sale for every iphone purchased, he easily makes back those monthly kickbacks. If those iphone buyers are turned into mac for life buyers, he blows those kickbacks out of the water. Not to mention the 30% apple will be taking from each and every iphone app sale. Can you imagine if Microsoft had a similar setup on the Windows platform?

Under the new model, analysts are saying that Apple gets $200-300 upfront for each iPhone subscriber (at least from AT&T, who put out a PR about a revenue hit).

Compared to the old model, Apple is giving up out-months revenue, but that money is only there if the customer stays with the contract for two years, and after two years, doesn't get a new phone (and new contract).

So I think you're overestimating the impact to Apple of switching business models. And totally so, if Apple was unable to partner with some carriers in some nations with the old business model.

Is it just me wondering if Steve Jobs is completely healthy? I know he's a thin guy but he doesn't look 100% right now.

PS: I agree that he wants to build the worldwide iPhone tent before RIMM does.

>>>>>>Under the new model, analysts are saying that Apple gets $200-300 upfront for each iPhone subscriber (at least from AT&T, who put out a PR about a revenue hit).

Under the old model, Apple was getting $200-300 in hardware profits PLUS $200-$300 in revenue sharing.

Time and time again, these writers keep forgetting what makes the iPhone such an amazing product over its competitors. OSX, eliminating fixed keys, 3G and GPS and SDK with a well thought out applications distribution program. Watch the video and see how the developers are just giddy on what they can do with OSX on the iPhone. Thats the killer combination that differentiates iPhone from the rest of the pack. Like voice commands is one of them. I wish more writers can clearly see what the most important aspects of the iPhone platform.

I cant wait and I am glad I havent bough the current Iphone yet.

I have to laugh when people like DavidE claim that Apple isn't innovative, or credit its success to "smoke and mirrors."

David, are you available for kids parties, and other venues? What are your rates, you have a hilarious act!

Seriously, there's a reason so many people took to the iPhone so quickly. It's because it delivers very easy, intuitive usability....far more so than its competitors.

You can compare endless specs between the iPhone and other devices, and on paper, the iPhone may not measure up in every case (2MP camera, Edge internet speed, no copy and paste, etc). But in general, the iPhone marries cool technology (like a 3.5" multitouch screen) with a very thoughtfully designed interface, and the result is a product that people actually use broadly and deeply!

Case in point: the first iPhone was harshly (and unfairly) criticized for its supposedly slow EDGE connection speed. And yet, independent studies showed that more people used the iPhone to surf the internet than any other mobile device (3G devices included!)! If 3G was SOOOOO important, how is it that the iPhone became such a favored web browser? The answer has a lot to do with Apple's big 3.5" screen, the incredibly intuitive Safari web browser, and the iPhone's Wifi connection.

And this serves as a perfect example of how Apple's design choices can trump what appears to be an uninspired technology (ie,the slow EDGE protocol).

Really, I've noticed people who believe Apple's success is "smoke and mirrors" are usually clueless about the role of great DESIGN in the world.

Of course, great design isn't something that you can easily summarize or measure in a spec sheet, but that doesn't mean it doesn't exist. It certainly does, and I'd say it's one of the most important ingredients in a hit electronics product these days.

I would completely agree with Ellis. I know of many people (non geeks!) who don't use any feature besides the actual phone on the current line of smartphones (Windows Mobile/Blackberry) but when they got the IPhone they started using other features such as text messaging, web browsing. This speaks to good design that makes the functionality intuitive and approachable.

I have an iPhone. It is by far the best phone I have ever used.
Making it faster and cheaper is guaranteed to give a bunch of corporate executives at NOKIA etc. real unhappy sleepless nights last night.

I don't feel "ripped off" because I have had a year of wonderful experience with great technology. The nationwide price decline in real estate has been far far more expensive that the two hundred dollar drop in price of an iPhone. And many people reading this spend more taking your families out to a nice dinner. A nice set of tires for your car is much more expensive.

The price cut is brilliant, as is the opening of the platform to other applications. And remember, Apple will get 30% from sales of the other applications. This, I predict, will more than offset the price drop. And the last time I checked, the rest of the "smart" phone makers don't have Software Development Kits available. Hm. Funny how that works.

And as all the new software comes out for the iPhone over the next six months, iPhone sales will begin to look like Secretariat winning the triple crown. Twenty seven length lead and smoking the competition.

This is a worthy bet. If you recall, Apple lost the PC market by pricing machines so incredibly high that businesses and price-savvy consumers went to the IBM PC and compatible clones by default. Jobs probably never wants to be in that situation again.

Here we go again with these people chanting "design" and how great "design" is. Yeah, you can go buy a Le Corbusier and know what its like to "sit" in art. The iphone is a smaller version of a Le Corbusier.

I'll give Apple supreme credit for the ipod and itunes. That was truly genius.

The iphone though...its a freaking phone!!! I'll bet on Nokia, Samsung, LG, Motorola, who have partners like, oh, I don't know, Verizon, Sprint, T-Mobile, have carrier bases that span the globe over Apple.

This reminds me of the Motorola StarTac. A "flip phone." Ooooooooh. How did they think of that?

How far do you think they'll be able to take this touch screen technology. We all saw a snap-shot of Windows 7 with their touch screen, screens. The first criticism from Alley Insider...."How much screen cleaner are we going to need to buy...Who really wants to touch their computer screen?"

I find it hysterical every time people swoon when Apple comes out with any product. There's only so many more design cues they'll be able to take from Mork from Ork.

Google, Amazon, Facebook, Craigslist, Microsoft...these companies innovate for function.

I could only imagine what Craigslist or Google would turn into if one of these delusional Apple disciples got their hands on it. Oh, wait, its called Yahoo. A mishmash of trying to be everything to everyone.

Apple is a joke in the real world. Tweeners and technocrati. Like I said before...the real world version of Hudsucker Industries. You know...for kids!

David E, you seem to be confused. When people talk about Apple's advantage in design, they're not just talking about the hardware. They're talking about the total usability of the product, which includes both the hardware and the software. The iPhone design that people praise encompasses both the physical large screen as well as the innovative multi-touch software and the robust Safari browser.

Apple is such a joke in the real world that they are experiencing tremendous growth, making huge profits, earned the title as one of the most admired and respected firms worldwide, and own some of the most highly valued brands on the planet. David E, you don't seem to be living in the same real world as the rest of us.

When we discuss about smartphone, we should care not only the hardware design, most important is the operation system that goes inside.

Most smartphone manufacturers only know how to design the hardware and left the software to other, for example: Nokia, Motorola, Samsung, LG, Blackberry etc. They all need Microsoft to provide OS to make it work.

Apple probably is the only smartphone company that design both hardware and software for their iPhone, for engineering concern, it will produce a completely matching of the final product.

From what we see the launch of the 3G iPhone, there are already hundreds of company interest in design software to run on the iPhone that cover business, science, games etc.

Beside, the touch screen operation as well as some three hundred design standards of the iPhone had already been patented by Apple. In the future, other mobile phone company want to use those design will have to pay to Apple.

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640-802 Steve Jobs' iPhone Gamble: Betting Billions To Beat RIM, Microsoft Yeah right. I don't believe it. you had it coming.

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