The Internet community is in a froth over the potential release of an iPhone from Apple. Reports coming from China indicate that production of handsets has already been contracted. Youtube has a wealth of videos purporting to show the iPhone - that in itself is some measure of how much interest there is in such a product.

I’m going to go against the flow and say that I don’t think an iPhone is something for anybody to be excited about - rather, I think that an iPhone could portend the beginning of the end for Apple. This is not a guarantee, but I don’t think that past successes in consumer electronics give Apple any assurance of success in this venture. In fact, past success may be giving Apple a dangerous overconfidence.

Main Points

This post runs rather long, so here’s the takeaway points if you can’t make it to the end.

1. The iPod is a poor predictor of success for Apple in the cell phone market
2. The iPhone is going to cause more problems for Apple than it solves
3. The competition Apple will face will be much tougher than it’s seen in the past
4. Advantages that are traditionally Apple’s, such as design, won’t be as strong as in the past
5. Failing will mean the erosion of the Apple brand
6. The cell phone market doesn’t want massive disruptions, such as VoIP
7. All these negatives point to huge loss in the “hearts and minds” department, and that’s important

That said, let the post begin!

Why the iPod doesn’t matter

Predicting success for Apple in mobile handsets as a result of it’s experience in portable media players is at best problematic - there is very little that can be drawn from one experience and applied to the other. One way to make this case is to point to the relative maturity of the mobile handset versus the portable media player market. The mobile handset market of today is very mature. Market leader Nokia had revenues of $43 billion last year and controlled about one-third of the mobile handset manufacturing market. By extension then the market itself is worth $120 billion. Compare this with the still immature market for portable media players which Apple dominates. The value of the entire market was set at $4.5 billion last year.

We can see that there’s much more at stake in the mobile handset market, and the numbers underlying the companies involved show that to be true. The market capitalization of Nokia alone is over $80 billion with a stable Price to Earnings ratio of 16. Another major manufacturer, Motorola, is worth nearly $54 billion with a P/E of a little over 13. The market cap of Apple is $70 billion with a far less stable P/E ratio of 37. Nokia and Motorola alone nearly double Apple’s value with far less speculation built into the stock price. They are solid, stable companies with sturdy foundations for their worth. Apple’s value is high but with less certitude in its value. Apple’s swimming in dangerous waters.

From a less technical perspective, what do these numbers mean? With the iPod Apple chose to enter a market that was small and susceptible to an aggressive move by a large company. The same conditions aren’t going to be the same in the mobile handset market. By entering the mobile handset market Apple is challenging a marketplace that is far larger and composed of manufacturers that are far more battle-hardened than Apple is used to.

Some will ask, “So what if Apple doesn’t succeed?” The implication here is that a failure in one arena simply means lost revenue for that one product line. Like the Cube or the Newton - neither of these failed products killed Apple. I’d say, “It’s different this time.”

Awakening the Sleeping Giant(s)

Apple is going to be facing significant troubles on entering the mobile handset market that it could have at least delayed by remaining out of the market. Two observations make this point.

First, the Apple brand will legitimize efforts that have been underway at Nokia, Sony/Ericcson, Motorola and everybody else for years, namely feature integration in the form of music players and stores. Many phones now include MP3 players though I don’t think many people use them. Given Apple’s legitimization of the cell phone MP3 player, those efforts will receive a boost.

An anecdote serves this point as well as anything. My brother related to me that he had taken a trip to an Apple store the other day and was gratified to see an external hard disk drive on the Apple store shelves that he had bought for himself some months back. My brother is a PC guy - always has been and probably always will be - so it was interesting to hear him talk about how he had gotten a sense of validation from seeing something he owned in an Apple store. The Apple brand carries weight.

So, whatever Apple does will bring with it a sense of validation. This will actually serve the established players in the mobile handset market because they’ve been trying to push (expensive) features into the market for quite a while. Apple’s offering is simply going to do the work of convincing the public of the necessity of those features for the incumbents.

The second point is that in entering the market, Apple is going to show the way for all others to follow. Apple will bring a fresh perspective to the industry and will present its technologies in a way that is guaranteed to be slicker than any others. That’s what Apple does.

But in doing so, Apple is going to be giving away the keys to the (interface) kingdom, and it will be giving away the keys to competitors who could actually do something with them (unlike Creative and the others Apple trounced in the portable media player market). Nokia, Motorola, LG, Samsung and the others are much larger companies, with stronger competitive instincts, deeper pockets and more established markets for their products than Apple has faced before (save for Microsoft).

Once Apple has revealed the way forward for its competitors, they will take what Apple has shown them and not only copy it, but improve on it.

So in entering the market for mobile handsets Apple will have strengthened its competitors by validating their efforts with the influence of its own brand, while simultaneously showing those same competitors how to better satisfy the public with well designed interfaces. Then the question remains, “So, what? Apple enters a market it can’t compete in long term. This doesn’t mean the end of the company!” I think the damage to Apple doesn’t end at losing in mobile handsets.

Losing the Battle, Losing the War

Apple has gained something far more valuable than revenue with the iPod. Apple has become a brand that people want to be associated with. Apple is cool, and sales of Macintosh computers are rising in part because of the coolness of anything Apple. Mac fanatics who point to the technical superiority of the platform don’t understand this and don’t appreciate how tenuously Apple’s hold on this new group of users is.

If Apple forces Nokia, Sony/Ericcson and the others to compete directly against itself in design and features Apple is going to see its domination of the media player market erode as a result. How long will it be before somebody produces a device that’s as sexy as anything that Apple produces? How long will it be before white ear buds no longer work as a status symbol amongst youth?

The failure of the iPhone will not pass as easily as the failure of the Cube or the Newton. No competitors were able to use what Apple demonstrated to develop anything to threaten Apple when the Cube and Newton failed. This time it will be different. Apple will show the mobile handset manufacturers how to do “it” better and then will be subjected to devastating competition. The competition will attack not only the iPhone product, but the iPod product as well. The inevitable loss of iPod dominance will mean that the Apple brand will begin to diminish and that can only hurt the core of its business - Macintosh. Apple will fail because it brought the wrath of the wrong competitors upon itself.

Being Apple Won’t Work

Some have suggested that by being disruptive enough Apple will be able to gain a foothold in the market sufficient to become a competitor. Specifically, they suggest that Apple will include Voice of Internet Protocol in their iPhone and include complementary software with all Macs.

This is a great idea in theory, but not in practice. Consider the following questions: what cell service provider would want to partner with Apple given the likelihood that VoIP would deny that carrier much of its revenue? And not only would the carrier be denied voice traffic, with the integration of iPod features in a phone, carriers would also be denied game and ringtone revenue and that’s nothing to sneeze at. Without a service provider signing long term contracts the iPhone is going to be sold for full price - no bargains for a two year agreement. How many people will be interested in buying the full price iPhone just so they can have Apple coolness when a Motorola SLVR can be had for hundreds less?

Not as many as Apple would hope, I’d wager, and far fewer than will be necessary in order for Apple to gain more momentum than they will lose in making an iPhone.

Maybe Apple is being forced in this direction. Their market share of music players is declining, and competing music players are not solely to blame. Still, moving into mobile handsets is only hastening the degradation of their media player market dominance without offering any benefit.

That sort of short sightedness seems very un-Apple.

Compelling Conclusion

All this negativity considered, how does this spell the end for Apple?

The Apple product line is about image and platform as much as anything else. Apple is still a niche player in the computer market and its long-term health and well-being is by no means assured - stiff competition is in the offing from Microsoft and the various flavors of Linux. Apple needs to keep itself focused and its image/brand/platform strong in order to continue to carve out market share.

Being beaten, as Apple will be, in the mobile handset/portable media player market will not help Apple’s brand and image. The premium product that Apple produces needs distance from failures, but Apple won’t be able to distance itself from this one. The fortunes of Apple are too tightly entwined with the iPod.

In time the Apple brand will be diminished. The platform will take a hit as well, as the centrality of applications like iTunes will not serve the interests of many portable media player owners. What Apple has spent so much time and effort constructing will be in tatters. And mores the shame.

Update

Here’s something from Youtube with some additional views. Apple is apparently going to rule the Galaxy with the iPhone. I was way off - not drinking enough Kool-Aid…

They say that the cell market is $200 billion but I’m assuming that includes the wireless carriers as well as the equipment manufacturers.

The IT industry can be separated into two aesthetic camps/schools/philosophies. There is the less is more camp, dominated by Apple and increasingly Nintendo and there is the Microsoft and Yahoo camp.

A good example of the differentiations between the two camps can be found here. Also, if you haven’t already seen it, you should watch the follwing video:

It seems a not too difficult formula to emulate - keep things simple, keep things focused, but Microsoft and others seem not to be content to let their products stand on their merits. And plenty of us snap up their offerings.

Thanks to NBEHTM for drawing my attention and wrath to this article.

I would dismiss this if it came from somebody other than Gartner. If this came out of John C. Dvorak, someone inclined to incite rather than inform, this would be laughable. Gartner, however, is supposed to be a reputable research company. Well, was supposed to be, at least.

This Gartner report makes it clear that the authoring analyst has fallen victim to something common amongst people who lack vision - this analyst is trying to define success for Apple by making comparisons to Microsoft or Dell. The blog Daring Fireball makes the point very well that Apple’s business practices aren’t to be compared to its traditional tech industry competitors. Apple is fundamentally different from its traditional competitors because Apple truly strives to be better rather than ubiquitous - therefore, lower market share is of less consequence to Apple than it would be for Dell or HP.

And that’s exactly what the Gartner analyst didn’t get - Apple is a rare entity in the marketplace. Because Apple truly tries to do better, Apple can justify following a different process with regard to production, charging a (slight) premium for superior design and integration, eschewing the processes and trends of the masses.

While the rest of the industry will scratch and scrape to eek the very last fraction of a penny out of the production channel, cutting R&D and sacrificing the consumer experience, Apple will continue toward its vision of actually making an awesome product. Customers will respect Apple for it and Apple will be able to continue to serve its own ethic of producing products that Apple employees would love to use.

After all, when was the last time you heard anybody say that they loved Windows? Or thought that Bill Gates had a handle on what was really cool? Or lusted after the sleek designs of Dell desktops?

Gartner needs to review its hiring practices.

Muslims are reported to be unhappy about the 5th Avenue Apple Store. Take a look for yourself and see if you can figure out why:

Apparently, the Apple Store’s big offenses are 1) being a cube (as is the Ka’ba, the holiest shrine in Islam) and 2) being open 24 hours, also like the Ka’ba. Oh, and 3) alcoholic beverages are served at the Genius Bar.

It’s clear to me, if to nobody else, that Steve Jobs obviously has it in for Muslims. What possible reason could he have for green-lighting a cubical building, other than to stick it in the nose of peace-loving Muslims? The problem with tolerance, as I’m sure many Muslims are realizing right now, is that people will abuse that tolerance. It’s only because Steve Jobs was given too much play on his leash that this sort of nonsense is taking place.

Oh, and apparently Apple fans are calling this store the “Apple Mecca.” Despicable! I’m sure Israel is behind that one, at the urging of George Bush and Co.

Isn’t there an aphorism that says those looking for conspiracies at every turn will find them?

I killed my cable several years ago now and I don’t miss it. Netflix and iTunes have filled the void quite well.

There was a time, many years ago (before my wife and I had children), when paying more than $60 a month in cable fees seemed like nothing. I know of some who pay over $100. One day it occured to she and I to ask ourselves whether we thought that the product we were paying for was worth it. We thought about it and came to the not-too-shocking conclusion that we felt we were getting ripped off. After all, together we watched SCIFI channel and Turner Classic Movies, I watched Wings on Discovery and she watched cable news.

So we canceled our cable, not down to the basic package (because those wouldn’t have left us with the channels we watched anyway), but all the way. Simultaneously, we started a Netflix subscription.

Many people are unaware that Netflix offers TV series on DVD. We began to get shows that we enjoyed, like Stargate, and movies of all sorts. What news we wanted we could get from the Internet.

But there was a slight hitch that has now been fixed by iTunes. If a show came out that we wanted to see, we’d have to wait for a really long time until its release on DVD. A perfect example of this is Battlestar Galactica. Friends had suggested it to us, but there was no way we would get a babysitter to watch the children while we went to a friends house to watch episodes.

iTunes offers Battlestar and hundreds of other shows 24 hours after they air on network television (cable). We can satisfy our fix for the one or two shows we want to watch that we can’t get on regular broadcast by buying them on iTunes. Later, if we’d like to see the show again or watch back episodes, there’s Netflix to fill that gap.

I have a feeling that this formula will work especially well for many who are like my wife and I. I’d say that most people only really even have time for a limited amount of media consumption, so hundreds of channels with thousands of programs just doesn’t make sense. A la carte media consumption is the wave of the future, but it’s already here in the form of a Netflix/iTunes hybrid.

Intel is running a competition for the sexiest PC. Moderately good loot is involved for the winner.

Intel must realize though that encouraging sexy design won’t result in viable products for any manufacturer. Apple has shown that sexiness must be combined with attractive applications on a modern OS to create a “platform” - that platform then builds an image that has sexiness only as one of many features. Sony has shown how sexiness alone can fail - I consider Sony computers, especially the Vaio W, to be extremely attractively designed. Yet Sony, without any differentiator but sexiness, found that few were willing to pay a premium for sexiness alone. It’s all about the platform.

Surely Intel knows all this and is simply running this contest as a form of marketing. Still, it seems to me that even if Intel is so enlightened, the rest of the PC industry hasn’t yet woken up to the fact that simply running Microsoft on Intel or AMD won’t allow any single company to trump the competition - even given sexy design. Rather, the only formula in the PC industry that works (lacking platform and brand) is cost. The big manufacturers seem to be content trying to undercut the other and when that cycle begins everything suffers - innovation especially.

The Columbia Apple Store sports a new look so, seeing as how I live less than a mile from The Mall in Columbia, the wife and kids and I headed over. Here are some photos that I put on flickr.

* I took some videos and posted them, along with the hi-res versions of the pictures above, in a torrent. I’ve taken the torrent server down now, so if there is interest place a comment and I’ll post an archive link *

Apple isn’t going to come to rule the world through the iPod or the Mac mini and they’re fine with that. I think that the iPod is simply a device to drive activity to the iTunes music store, as far as Apple is concerned, despite the fact that it currently offers a higher profit margin for Apple. Similarly, the mini is intended to drive user interest and participation in the offerings of iTunes, particularly how the Mac platform can enhance the iTunes experience.

Why do I think this? After all, the numbers would seem to point out that the iPod is making Apple more money than song sales. Apple has sold, to date, 60 million iPods. Take this Forbes article for a dose of reality. Margins on the iPod, while good, are lower than in their other product lines. Apple is making, on average somewhere around $35 per iPod if the sales of all models are averaged together.

$35 profit on 60 million units is pretty good. That’s over $2 billion that can be attributed straight to the iPod. So why do I assert that iTunes is ultimately more important, and the real wedge for Apple dominence? Simple - just as you buy a car once in a great while, but fill it with gas quite often, Apple will be rolling in long term dough thanks to iTunes.

Apple has sold over 1.5 billion songs through its store. This, despite easy access to free (albeit illegal) media on the Internet. Apple is now the #5 music retailer in the entire United States and it’s gotten there in less than five years. Apple predicts it will be the #4 retailer by the holiday season.

Various analysts have been quoted as saying that Apple makes $0.04 per song downloaded, which would result in an astoundingly low $60 million in profit from the running of the iTunes store. That’s 33 times less profit than the iPod. But here’s the thing - iTunes is going to keep on accelerating in its’ growth, even while iPod sales slow down. Apple has added TV shows to iTunes and just added movies as well. The more that iTunes comes to dominate the music retail space, the better deals they will be able to cut with music distributors, leading to higher margins. Owners of iPods who feel no need to buy the latest model will still be returning to the store to get new tunes, TV shows and movies.

And with more content to sell every day - new studios and distributors - iTunes is becoming something far more than a simple retailer. It’s becoming a distribution channel and that puts it in competition with the likes of the cable companies. Unlike cable companies, iTunes is providing a significantly greater amount of consumer choice and that should help to endear, and even further accelerate, Apple’s rise through iTunes.