Original URL: http://www.theregister.co.uk/2009/03/20/apple_iphone_analysis/

Apple proves: It pays to be late

...And ignore the mobile networks

By Andrew Orlowski

Posted in Mobile, 20th March 2009 13:02 GMT

This week Apple threw the kitchen sink at its iPhone/Touch software stack (details outlined here), removing most of the most irritating nuisances at a stroke. It's a stunning achievement.

So Apple now finds itself where everyone else in the mobile handset business wanted to be 15 years ago. Large companies full of clever people devoted years of planning and expenditure to fail to get here. If the iPhone continues to flourish (see below for the many obstacles en route) - then both rival manufacturers and the networks have to tear up some long established strategies.

For the established handset competition, if Apple takes the lucrative high end, that leaves them scrambling around for gimmicks in a cutthroat market that's increasingly low margin. For the networks, they'll need to find devices that people actually want - or pray that Apple drops its carrier exclusivity policy and partners with any network that wants to sell its gear.

So how did someone with no track record in a notoriously difficult business find itself walking away with the laurels? What can explain this paradox?

For Apple, coming late to the phone business has actually been a huge advantage. The success of the iPhone is down not just to great engineering, but profiting from several years of desperate and outright stupid behaviour by the mobile phone networks, who set the terms for the manufacturers. The received wisdom of the industry - that you had to know the wiles of the mobile networks to succeed - turned out to be completely mistaken. And to explain this we find another paradox, which looks like this.

The mobile phone business is actually the most "customer friendly" or "customer responsive" in the world. This might seem a strange thing to say. Have a read of Brendon McLean's splendid rant from two years ago - Why we hate the modern mobile phone, for a summary of customer unfriendly business. But it's true.

That's because the customer isn't you or me, or the billion and a half other phone users in the world. Phone manufacturers have only 800 customers, of which only around 200 really matter: these are the gentlemen from the networks. And one of these stroppy customers can demand changes that cost the manufacturer millions, or cause the cancellation of product lines in which tens of millions have been invested.

For example, it's these gents who in their wisdom decided that we're too stupid to use the "butterfly" design Nokia introduced with the 6800. Networks killed the third phone in this line, the E70, leaving Nokia probably just one iteration away from making a classic. The reason? The fold-out keyboard would confuse us. In their wisdom networks have done all kind of similar things over the years - disabling Wi-Fi, for example, or blocking ports. But most of all in their pricing policies for data.

Apple simply ignored all this. Such was its confidence in its own product, and its own steamroller marketing, that it was able to capitalise on the networks desperation. But being late to the party also had another advantage.

Large Tier 1 phone manufacturers such as Nokia and Samsung pursue a strategy of market segmentation, where differences between products are reduced to tickboxes on a spreadsheet. Analysts weight the relative strength of the "portfolio" on the play in a "segment". This means that the care and attention paid to the final product (and remember who the customer really is) are minimal. It's better to be mediocre in different areas than strong in one but weak in another. And it shows in the quality of the end user experience.

As soon as the iPhone arrived it was clearly different. While the original iPhone was slow, and lacking in features, it had clearly been nurtured with thought, care and attention. The hype didn't initially enamour a sceptical British public (recall the tumbleweed that blew through empty stores when O2 and Carphone first launched the iPhone in the UK), but it deservedly became a word of mouth hit. You can't keep a good product down.

As a indicator of the iPhone steamroller, today, you can now pick up an iPhone on pre-pay and for a tenner a month you'll get 500 minutes, unlimited 3G data (the Comes With Asterisks version of "unlimited") and unlimited Wi-Fi for a year. The catch is that you plunk down a large amount of money to get this deal. But unlike an investment in a regular smartphone, the iPhone keeps its value very well. So while the sticker price tops £400 for the 16GB version, in a year's time you'll probably be able to recoup $250 to £300 for it on eBay. It's better than any deal on postpay.

Rivals would love this kind of deal for their smartphones, just as they'd love to have instant eBay, Facebook and PayPal apps available. (They'd love to have more than a handful of users downloading the inevitable bugfixes, too.) But they only have themselves to blame for years of neglecting the right customer - us - in favour of the networks.

So is Apple home and dry? Not quite by a long shot, as we'll see.

A few phones short of a masterplan

Market segmentation still has enormous strength for a manufacturer. Traditional economies of scale also benefit the established players. Look how quickly Nokia could turn the innards of its premium flagship N96 into the budget 6220 classic.

Marketing one phone doesn't satisfy all kinds of people. Old crusties like your reporter (alternating between a seven-year-old design and a five-year-old design as the main voice device) like simplicity, big buttons and a long-lasting battery. The iPhone only checks one of those boxes. The poor camera and lack of 30fps video are a bit embarrassing on a high end device. It also takes too long to switch between tasks - something Palm noticed, and designed around with its Pre.

So the classic technique for a successful manufacturer is to differentiate, so that it looks like you are the entire market. Apple should be thinking about an "iPhone Photo", an iPhone Pro (with extended battery and a QWERTY, or at very least, a good alphanumeric keypad) and a budget iPhone Nano. It needs to ramp up speed and usability (particularly task-switching), and it should drop its hostility to run times such as Java, Flash and scripting engines. If you're going to be the market, you can afford to tolerate development environments you don't completely control.

This week shows Apple as a kind of mirror image to Nokia. The Finns still have arguably the best hardware engineers in the business, but are chained to a user interface that should have been canned a long time ago. It's lost the mindshare of enthusiasts and developers. "Pretty much the only community around S60 is the community we pay to be there," Nokia admitted last year. As the demise of EMCC and others shows, Symbian stalwarts have gone elsewhere. One former staffer describes it as more of "picosystem" than an ecosystem these days.

Maybe Nokia really should concentrate on its key strengths, and license the iPhone OS?

In the end the only thing standing between Apple and ruling the phone business may be not making enough phones people actually want. ®