The Calm Before the iPhone Arrival Storm: The Last Days of the Cell Phone Industry Cabal

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It is interesting how in the final days before the iPhone Arrival Storm, the other cell phone manufacturers and cell phones networks seem to think all is well. That, no, they haven’t really noticed that they are guardians of a decaying system – much like feudal lords thinking the serfs would never rise up and that the order of their world will always stay the same.

After all, this system has served them well for 15 years, a lifetime for bureaucrats. And long enough to fool many analysts who make proclamations such as the iPhone will not equal the success of the iPod … that is sort of like saying, the Moon is not the Sun – they are right but then they’re really not saying anything at all.

But why won’t the iPhone be a success according to “them?”

Of course, some people are just plain pessimists, anything new or different is scary for them so they hope it doesn’t succeed since that would require opening new pathways in their brain. I say anyone who thinks the iPhone will fail and who also thought the iPod or Apple retail stores would fail, please take a step back and I think you should take up another line of work that is less taxing on your brain – clearly you are not ready to cope with anything new.

Speaking of which, let’s start there – the 5% who dismiss the iPhone because it’s not really “new.” Apparently since it’s metal, plastic & a screen with batteries – well, that’s been done before – and a cell phone, please, how old school. Better or different is not good enough for them – they either have extraordinary high expectations of Apple or they set the bar so high … or perhaps they would sneer at anything from Apple as just the same old, same old.

Of course, that is really the cell phone industry. Really, how far have we advanced in the cell phone business? I’ve had a cell phone since the early 1990’s – I could not afford the Motorola brick but I remember a flip phone after that (pretty sure it was Motorola) and paying about $1 a minute for a call and the thing having a battery life of about 30 minutes. Now, some 10-12 phones later including the Palm, Handspring, Treo, Blackberry and the RAZR, have we really advanced that far? Surprisingly no. I had the Motorola Startac which was an excellent phone. It didn’t do much except have an address book and maybe one other feature and now, 11 years later, the RAZR is actually heavier … though it has a video camera, still camera and WiFi capabilities but beyond taking blurry photos and blurry videos, has it really changed? It has sync but it’s a dumb sync – insisting that if my contact has 5 numbers, every number should get an entry. So, it’s back to entering each name by hand with its wonky keyboard and “smart” feature that is about as smart as a tree on fire. Now, the PDA/smartphones do a better job with sync but then it falls down in other areas … like, why am I holding a pop tart to my ear? Or why jostling the phone will change the ringer to vibrate?

I also don’t think I’m alone. Show of hands (outside of people who work for Moto, Sony, Nokia, etc ), who here has a phone they think is flawless? Nearly flawless? Mostly perfect? Or at best, nice but has some serious flaws you skirt around?

And cell phones are not some fly by night or minor part of consumer electronics like wifi picture screens or something like that – this a $100+ BILLION dollar industry and this is the best they can do? They get to throw some 200 versions of their phones at us EVERY YEAR and after some 15 years and THOUSANDS of phones later, you have to ask – this is it?

That’s not to say there aren’t phones with great or brilliant aspects – the Blackberry is brilliant with email but the rest? What do 40% of the icons even mean – you have to stare at it – is that a guy holding a sickle or 4 rings on his head – WTF? What does that even mean in phone communications? Or a lock right in front with the iPhone – sure, you can lock other phones – it’s only 3 menus deep. Hell, it took Microsoft 10 years to copy the Palm OS whose last great innovation was a snap-on cover for the screen.

It also hasn’t helped that the cell manufacturers could care less or are powerless to let the cell phone companies destroy their brand value by dropping the price of their latest phone from $300 to ZERO in a year. Of course, you’re not really satisfied anymore – what you bought for $300 is now worth zero – who is happy with that? It devalues your choice and of course, makes you want to switch to yet another phone. And does that other phone deliver anything unique? – can anyone honestly tell a Nokia from a Moto or a Samsung or an LG outside of some design history?

Analysts seem to confuse sales with satisfaction – if your only choice are these choices and your second choice is no phone, of course, people are going to be on the hunt for something new – and yes, given the same price of something, who is going to turn down extra features if it’s “free?” Why not a camera phone, a video phone, wifi, etc, etc … but you’ll notice that when consumers have to PAY for that extra feature, they balk.

“No one wants to type on a touchscreen,” analysts cry … well, it appears that 97% of humans do not want to type on a phone keypad either – smartphone/PDA’s only hold about a 3% market share so clearly, while people use the phone for SMS, no one wants to PAY extra for a better keyboard because they don’t think think it’s worth it. They also claim that because they’ve once typed on a touchscreen and hated it, everyone will hate it forever and touchscreen will never be any good ever … well, that’s one way to not bother to try or invent anything new.

And going back to the “extra” features – just look at the phones that can play music or link to a cell phone storefront – Nokia claims to have sold more phones than Apple has sold iPods but if NO ONE is using it, what is the point? That is like saying my phone can talk to anyone on Mars. The point being that cell phone manufacturers think people are actively choosing their phones because they want “that” technology … when the reality is that most people could care less because no one will turn down extra FREE features but if you’re going to charge to use it, you can see how much value consumers place on it. That’s why “advanced” services in the US comprise of about 6% of users. That’s the bottom line.

Sure, we’ll take photos but will we pay $3 a month to upload it to the cell companies site? Or will we go to a free place or just copy the photos off? Will we pay $15 a month to buy tracks while walking around plus pay $2.50 for the first track each month? Yes, you can blame the greed of the cell phone carriers but the point is that people are not buying new phones because they want to spend an extra $20 a month to access and activate the new features but instead are buying new phones because they hope it works better than the current one and why not – it only costs another $20 to $50 dollars – it’s cheaper than buying a new pair of shoes. But the technology bar hasn’t changed, it’s still the same old UI or OS and while they might add another whole number to the megapixel count of the camera, the lens is still plastic, so really, what has changed?

Make a list of all that you find wrong/missing or dumb on your phone now and match it to the list of what Apple will offer in the iPhone – until it’s actually released, we won’t know if Apple delivers but who has the better track record? AND if Apple delivers, what will be their excuse then? They only had a 15 YEAR head start …

Another belief is the price of the iPhone will limit the market – sure, yes – that is not saying anything. Even if are selling a gumdrop for a penny, that price might be too high for most people – do you drop a quarter into every newsstand or candy dispensing machine? Of course not, we make buying everyday for whatever reason – sometimes good, sometimes not so good but it’s all your perspective and your buying decisions. The iPhone is $500 which is not immediate disposable money for most people but then you can spend $500 on a round of golf & some drinks, or dinner for two or for some people, a month’s rent. $500 can buy you a diamond, shoes, a used car or a clothes for a year. $500 is just a number – whether it’s costly or cheap is completely your perspective, income and buying expectations. Would you spend $500 on feeding the homeless or dropping it on a table in Las Vegas in 30 minutes? Again, all perspective. The iPhone is not unreasonably priced for a phone in 2007 PLUS an iPod Video built in. The new T-Mobile Wing phone is $600 (though it comes with $400 in rebates) but it does not come with an iPod built in.

There are probably 100 million people just in the US who could afford $500 – whether they want to buy an iphone with it or not is another question but that’s like everything we buy. Whether we buy something because it’s useful, because it’s cool, because we want it, because we have to have it or just because it makes us feel good – everyone is different. You cannot just randomly say something is more expensive and that will make it a difficult sale – if anything, sometimes the higher prices makes it an easier sale so don’t go leaping to conclusion and those buying surveys are idiotic. If I ask you would you rather pay $25k for a Porsche or 50k, how are you going to answer? Or if I ask you if X is overpriced, how are you suppose to answer? That answers nothing because they presume people will always buy the cheapest no matter what. If that were the case, wouldn’t we all be shopping at $.99 stores and buying Yugo’s? People have DIFFERENT price points for different things. Just like old aging journalists were convinced no one would pay $300 for an Mp3 player …

Some people also bring up the cost of a contract – uh, in case they hadn’t noticed, we’re already under contract so how is that going to be different?

And for the analysts who boldly proclaim the iPhone cannot replicate the success of the iPod? Will they weasel out of their words in a year by saying they meant market share and not sales? Because that proclamation also means nothing – that’s like saying the Apple won’t replicate the success in the speaker market as the iPod did with Mp3’s – why, because even though they are both consumer electronics items, they are different market conditions … the mp3 player market was something like a $200 million dollar market when Apple entered it – of course, massive sales means you become the leader in more ways than one. Clearly, the cell phone market is much more mature BUT on the other hand, the selling infrastructure is in better shape – Apple literally had to explain to people what an mp3 player was AND then why you should buy an iPod. Now, Apple’s selling is much, much easier. It’s a cell phone and an iPod. 99.9% of your potential market gets it (the 20% of people without cell phones clearly do not care about either). You just have to look at the buzz the iPhone has built based on ONE keynote speech, TWO official websites (Apple & Cingular/AT&T) and ONE TV ad. So, in many sense, the iPhone has already won the mindshare market. Now, it will just have to replicate sales – and in many ways, it is easier because the percent of people who love music enough to buy a portable player to carry around is much lower than people who want a cell phone … so will Apple get to 100 million cell phones in 5 years? If Motorola can sell 50 million RAZR’s in two years, how many phones can Apple sell? Or maybe the measurement is revenue & profit? While there are two iPhones, let’s just $600 in revenue per phone presuming there will also be some sales in the bluetooth handset plus other accessories so for every million iPhones sold, that’s @$600 MILLION in additional revenues/gross. If Apple’s margins stay around 30%, for every million phones sold, that’s about another @$180 million in profits (give or take) per million sold – not counting new customer service costs. Obviously there are some startup selling costs BUT there is also a rumor based on what Verizon rejected that Apple will make @$300 per new customer … meaning if it’s true, for every million iPhone’s sold, Apple will add @$900 MILLION in revenue or @$300 MILLION in profits … so will dollar to dollar sales matching the ipod be good enough for analysts or are they not quite ready to concede that Apple has clearly moved into the top tier in branding, manufacturing, marketing & sales (to go along with technology, usability & design?)

So in summary, the iPhone is a reset for the cell phone industry. People will buy it in droves because it’s probably going to deliver a lot more than every promise by the cell phone industry … I’m not saying it’s going to be 100% but it will be much more than what’s been delivered so far – we have 15 years of their best shot at advancing the cell phone for users … now, they’re pretty good about adding in tech features but usability? Pretty low on the scale. The report card will be how close to 100% Apple delivers. If it’s an “A,” then the cell phone industry has to revamp EVERYTHING because suddenly they are peddling horses and a carriage. Then the other big decision will be – should we be petty and point out all those who are called analysts but were so far off the mark? ;-)

ADDENDUM: Release Day – It’s June 29 and here are the new ads.

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18 Comments

Filed under Apple Mac, Computing, Gadgets, Internet, Marketing, Retail

18 responses to “The Calm Before the iPhone Arrival Storm: The Last Days of the Cell Phone Industry Cabal

  1. OS11

    Yes, just as the Apple ][ brought down IBM, the Mac wiped out many printers, NeXT brought us the www, and the iPod transformed how music is bought and sold… the iPhone will completely mangle the current Cell phone industry.

    If you think about it… AT&T made a deal with the devil. Where is the “i” Phone? it’s not there is it? It’s really a cPhone running off the old school “Cell” network.

    The “i” is Steve’s inside joke… just wait until Apple release the “i” software called iChat or iTalk for the “iPhone” and all those Cell Companies go “bye bye” within 18 months… since phone calls between iPhones will suddenly become “free”, just like how skype works.

    The Apple ][‘s spreadsheet wiped out Mini and Mainframes, the Mac laid waste to much of the traditional print industry, NeXT modernized how everyone communicates “world wide”, now the iPhone is poised to “rid” the world of “Cell Companies” and we should all be ecstatic that Apple is once again going to decimate an entire industry for the benefit of all.

    -

  2. Juniah

    Great analysis. Verizon execs Seidenberg and Strigl will rue the day they passed on the iPhone. They are already in a defensive mode by announcing a vaporware iPhone wannabe later this summer. It’ll be great to see the fallout a year from now…

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  4. tcnexus

    Okay, love the phone. But, the fatal flaw is having to do business with AT&T which has the slowest broadband network of all providers, and a record for heinous customer service. Also, on top of being a slow network, the iPhone is not a 3G phone, but 2.5G. I don’t understand why Apple made the decision to compromise on 3G capabilities. I want the phone, but think I will wait for V2.0.

  5. mark

    Great analysis! One more point: The iPhone will be the first phone to make it worth paying for unlimited minutes for web access on a contract. That will be a stunner to analysts and a windfall for both Apple and AT&T. (I believe OS11 is wrong about the i; Apple and AT&T have said the iPhone will not have Internet access without a contract. Though OS11 is right that iChat and a bunch of other iPhone web widgets is going to be announced real soon.)

    I can easily see Apple/AT&T expanding the contract for, let’s say $5 a month, to include unlimited nationwide wifi hotspot access for your Mac.

  6. mark

    Oh, and for those that say 2.5G is too slow, well, it’ll be fast enough because the widgets will allow the user to set it so most data will be pushed to the phone when it has a signal.

    Yes 3G is better and hopefully it’ll arrive by Christmas.

  7. Yeah, the iPhone is an amazing piece of technology, but it’s not the freakin’ cotton gin. Seriously, it’s one phone. On one carrier. The Mac and Apple II and iPod didn’t have to worry about being spread. There were no limitations. It was just “buy and use.” With the iPhone, you have to buy it, get all the plans (with tax is about 2 grand for the 1st year) worry about the minutes, manage the email connection to hook up, etc. It’s not that easy. People are put off by the price. Most people offline like the PS3, but they don’t buy it. I’m not saying it won’t sell, I’m just saying it’s not going to revolutionize the industry as soon as it comes out. Besides, do you think most people would sacrifice the ability to buy a cheap phone that just calls?

  8. OS11

    Just a point Mark, I think a lot of people won’t even sign up for a “contract”. It has 802.11g, so most of the time geeks are in range of a free wireless connection, so there would be no reason to pay AT&T for “internet access” in the first place. Steve is just using AT&T for the brand name, then once the iChat or iTalk feature is turned on, bye bye Cell Providers.

    Also too, a lot of people will just buy it for the iPod and email portion. No need to pay AT&T for any of that, sure it’s $100 extra than a top of the line iPod, but that wide screen and syncing photos, movies, etc will attract people far beyond the “cPhone” part.

    And lastly, will people please mellow out with all the 3G comments. The problem is, most of the US does not have access to 3G, so it’s a pointless feature for a “national” rollout.

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  11. Invictus

    I believe the iPhone will be a runaway success. However, I take issue with your revenue figures, or at least the way you account for them.
    Apple has properly (in my opinion) chosen to book revenue for iPhone sales over the two year period of the mandatory contract. Their chosen method of accounting for the revenue will prevent the company from seeing a huge spike in immediate revenue since all income must be divided by 24 months.
    It’s a smart and fiscally sound way to book the revenue, but anyone betting on Apple stock price responding to huge income gains, is likely to be disappointed.

    (METROXING COMMENT: I was not talking about revenue in terms of quarterly or accounting numbers but in terms of “measurement against the iPod revenues” – as some analysts are saying that the iPhone cannot measure up – just pointing out the revenue stream from a million iPhones sold looks to be greater than a million iPods sold – but of course, I am not factoring the startups costs of a “new” venture within Apple and all that it entails. Just throwing it out there as a reminder. Thanks.”

  12. Good post. I just wrote about the new comments from AT&T’s President of Distribution, who has been using an iPhone daily for quite some time now.

    More here.

    Good post.

  13. golly

    2.5 G instead of 3G?

    Why?

    tcnexus didn’t you just read that article?

    No one cares.

    Why on earth would I pay more to watch football on a phone, when I can watch it for free at home or in the office?

    I’ve never used any of the additional services, because I think they’re all wasting my money.

    I get to buy music and place it in my phone, but I use an iPod, not my phone to listen to music.

    If I used my nokia to listen to music, I need to get into a minimum of 3 screens before I can select the music I want to play. Making a playlist is incredible difficult.

    Oh and what about the video calls. I’ve never made a video call. It’s stupid, a waste of bandwidth… I can understand if I was speaking cantonese which uses 9 tones and the phone only allows a max of 3 for english… but the fact is, cantonese comes out clearly. Why would you want video calls? They cost too much and wasting bandwidth space for others to use.

    I would select 2.5 G anyways, just to stop the telcoms from selling me any extra stupid services.

  14. Tom B

    ” But, the fatal flaw is having to do business with AT&T which has the slowest broadband network of all providers, and a record for heinous customer servic”

    ATT is essentially a new company, with a new CEO, having bought up SBC, Bellsouth, Cingular. The new guy is pretty “techie”. I hesitate to make ANY predictions about ATT as a provider at this time– but I HAVE made a bet. I bought some stock (along with Apple…..).

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  16. Nick B

    “ATT is essentially a new company, with a new CEO, having bought up SBC, Bellsouth, Cingular. The new guy is pretty “techie”. ”

    Actually, the old guy is pretty techie. AT&T invented the cell phone technology in the 1960’s and along with competing Motorola, were tied up in the 1970’s by the federal government before they could actually release their products to the masses (which is why Europe got a jump on the cell phone race in the 1980s).

    What gets more confusing is the fact that in the 1980’s, Southwest Bell (later SBC) was a subsidiary of AT&T and later on, the feds told AT&T they could no longer be in the cell phone business due to the monopoly (which is why I few years ago Cingular bought up the AT&T cell networks) and also broke up the subsidiaries. Fast forward to today and we find that SBC bought AT&T, changed the SBC name to AT&T and then acquired Cingular.

    So the AT&T of today is actually SBC with Cingular’s network and the old AT&T cell network. All of these guys have been around and in a way, it’s once again a monopoly, but the advantage is, they have a huge network (largest in the U.S.) and the power to back it up. And with Apple’s tech innovation and influence (I mean, who else but Apple can convince a company as old and as powerful to change their network so Apple can offer visual voicemail!), this should be a very successful launch!

  17. Johnny D

    it’s only a phone.

    among other phones.

    by August we’ll have moved on to the next models.

    apple though will still be struggling mods for this one and barely starting 2 year development for iPhone 2.0

    chill out

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