Original URL: http://www.theregister.co.uk/2006/12/23/iphone_will_fail/

Why the Apple phone will fail, and fail badly

It's the Pippin all over again

By Bill Ray

Posted in Phones, 23rd December 2006 05:02 GMT

Comment The hype is reaching fever-pitch, and the odds are still stacked that Apple will announce a device combining the functionality of an iPod and a mobile phone in January next year, but whether such a device will actually sell is another question.

There seems little question that an Apple phone product will be launched in 2007, and that it will work with the iTunes service and have a very pretty industrial design and a smooth interface. Strapping an iPod to a mobile phone is not a great technical challenge, which makes it all the more remarkable that Motorola did it so badly with their ROKR handset. Maintaining the features which made the iPod so popular in a mobile phone will be much more of a challenge.

The iPod brought with it amazing industrial design, a well designed interface, and a new usage paradigm. Portable music players already existed, but the iPod was better looking and easier to use. It also came with the promise that you didn't just carry music with you, you carried all your music with you. That factor alone changed the way portable music was perceived, and was central to the adoption of the iPod.

The iPod has moved away from that paradigm, with the Nano and Shuffle only able to store the most diminutive music collection, and recent rumours suggest that an Apple phone will have 8GB of flash-based storage; comparable with the Nano. But it was that function which sold the concept to many people, with the style and simplicity of use keeping them hooked.

It is important not to underestimate the importance of the iPod industrial design, or its scope. I recently had to sit in a pub as two iPod fans reminisced about feelings when opening their first iPod box, and their overwhelming admiration not for the product, but for the box in which it came. It was sickening, but demonstrated the loyalty iPod fans feel, and the expectations that will need to be met.

The clever design of the iPod stretched into the software - the clean and simple interface is indeed easy to use, and users seem very comfortable with iTunes on their PC. But creating a simple interface for a single function is one thing. Replicating that experience to manage all the functions of a mobile phone is another thing entirely.

Mobile phones are not complex to use because of bad interface design, they are complex to use because they are complex devices with a myriad of features. The fiercely competitive mobile phone business has driven interface development at an astounding rate: it has become de rigueur for every new handset to feature a revolutionary new interface mechanism.

Apple is extremely good at creating simple interfaces, and it is likely that the Apple phone will have a pleasing interface which is relatively easy to use and recognisably iPod branded, but it won't need to appeal to the iPod users, it will need to appeal to the network operators.

Who buys mobile phones?

When a manufacturer launches a new mobile phone handset they take the specification, or prototypes, round to the network operators and try to convince them that this phone will be the next big thing. In most markets mobile phones are sold to customers with an enormous subsidy provided by the network operator, who intends to make the money back through additional service use.

The operator will have a list of features they like and will compare that list to the newly-developed phone to calculate the subsidy: a camera might be worth a fiver, while a one-touch-to-send-MMS button could be worth £20. The idea is that easier access to more premium features leads to greater revenue, and thus pays off the subsidy.

In this way a phone that might cost hundreds of pounds can be given away for free, depending on the tariff, and the industry is sustained by customers paying off the cost of their handset over several years.

It's not just features which contribute to the negotiated subsidy. Big advertising by the manufacturers also contributes as networks want to offer popular handsets at low prices, particularly in markets where network choice is often decided by handset availability and price.

Exclusivity will also enhance the subsidy - as little as a month's exclusivity on a handset will massively increase the subsidy, and the amount the network operator will spend promoting deals involving the handset. Few manufacturers will agree to this, but some can be convinced.

Mobile phone manufacturers know this, and have copies of the network operators' features lists, as well as a clear idea of what kind of deals are available. The industry is competitive, but tightly organised and pretty incestuous as staff move between operator, manufacturer, and supplier while maintaining their contacts and golfing partners.

Who will pay for the Apple phone?

A new player coming into the market is either going to have to offer the phone unsubsidised, at its true retail cost, subsidise it itself, or find a way to convince network operators they can gain from subsidising the handset.

A few companies have tried to offer phones without subsidy; relying on stylish design and branding to off-set the high cost and lack of features. Most notable was Xelibri, a range of good-looking phones which Siemens tried to sell direct to the public before giving up in 2004. It is possible for very high end handsets such as the Vertu range from Nokia, but when your handsets start at $4,500 a couple of hundred quid subsidy is neither here nor there.

The Apple phone will be able to charge a premium for style, but put a £330 iPod phone on the shelf next to a Sony Walkman handset with similar capabilities which is free and it will be a tough sell for anyone.

Some have suggested that Apple will simply set up their own Mobile Virtual Network Operator (MVNO) and just fund the subsidy; making the money back on calls and use of the iTunes service. However, iTunes has always existed to sell hardware, not subsidise its production. The service isn't supposed to make money, and while it might or might not lose a great deal of money it certainly can't be called upon to cover the cost of a stylish handset any more than it could cover the cost of handing out iPods for free.

So we are left with Apple trying to sell its phone to existing network operators using the same tactics as its competitors. It might make play of its simple interface, and easy access to operator services, but far more likely Apple will use network exclusivity to sell the idea to a single operator in each territory.

The iPod is now a valuable brand, and one associated with the youth market operators are so keen to attract. This alone could make the Apple phone attractive, especially if only one operator has such an association.

By limiting the distribution of the handset in this way Apple will be spared the need to negotiate with dozens of different operators, and can share the promotional costs with the operator of choice - who will be hoping customers will switch networks just to get one. Such a deal would reduce the number of handsets Apple would be able to sell, but that might be no bad thing as it would reduce Apple's exposure while (hopefully) demonstrating its ability in the market.

But it would also make Apple dependent on that operator, and on that operator's commitment to the project; particularly when the first flush of publicity is past.

It's business, not pleasure

Apple will launch a mobile phone in January, and it will become available during 2007. It will be a lovely bit of kit, a pleasure to behold, and its limited functionality will be easy to access and use.

The Apple phone will be exclusive to one of the major networks in each territory and some customers will switch networks just to get it, but not as many as had been hoped.

As customers start to realise that the competition offers better functionality at a lower price, by negotiating a better subsidy, sales will stagnate. After a year a new version will be launched, but it will lack the innovation of the first and quickly vanish.

The only question remaining is if, when the iPod phone fails, it will take the iPod with it. ®