Secrets behind the iPhone’s sizzle

What a difference a year makes. This month, the hip iPhone celebrates its first anniversary, following its riotous launch last June 29.

Its birth followed six months of prerelease hype that was ignited by Apple Inc. CEO and industry luminary Steve Jobs.

The company that brought you the Macintosh computer, and the fabulously successful iPod and iTunes, has jumped — well, dive-bombed, really — into the wireless phone business like no cell phone vendor before.

Consider that more than 1 billion cell phones were sold globally in 2007, with thousands of models introduced. But the model that had everyone’s attention for much of the year sold just 5.4 million units through March 2008, according to Apple. The company predicts that it will sell 10 million devices this year, partly because of innovations in the iPhone 2.0 version due this month.

No cell phone, nor arguably any electronic device, has ever generated so much interest so quickly.

“Few companies have managed to penetrate such buyer mind share with a single device in a year’s time,” says Michael Gartenberg, a JupiterResearch LLC analyst and a Computerworld columnist. “What’s significant is how iPhone’s impact has been far greater than the numbers sold.” (iPhone has even spawned dozens of YouTube videos.)

Among smart-phone devices (which basically combine computer and phone functions), the iPhone ranks second to Research In Motion Ltd.’s BlackBerry in terms of U.S. shipments, according to several analysts. However, Microsoft Corp. challenges this claim, saying that the Windows Mobile operating system, on 140 handsets from four manufacturers, leads the way. But the way that market leaders talk about the iPhone — and the way other vendors shamelessly imitate its touch screen, sleek design and pocket size — is testimony to its dominance.

Gartner Inc. analyst Ken Dulaney, who was initially a harsh critic of the iPhone because of security worries for IT shops, says that Apple’s device and the BlackBerry are the biggest innovations in all of communications and computing over the past decade. Read about iPhone’s push into the corporate market.

“The iPhone’s biggest impact has been to redefine ‘easy to use’ in the cell phone industry,” Dulaney says. In sum, the iPhone has capitalized on the biggest trends in computing: It has a small form factor, it works wirelessly for ubiquitous mobile usage, and it unifies

And, equally important, it’s cool.

Fashion Forward

The iPhone builds on a trend among cell phone and gadget makers to hire product fashion designers to help in the creative process. Yes, fashion matters, even to geeks. “It seems strange to say there’s a coolness factor with iPhone, but it does involve extraordinary attention to details in hardware and software,” Gartenberg notes. “It doesn’t feel like any other phone.”

Much of the market frenzy for the iPhone comes down to ease of use, but there are other factors. Among them are its sizable touch screen, its accelerometer (which allows images to rotate as the device rotates), its hip design and quality construction (featuring only metal and glass), its snappy Safari browser and its reliance on the solid Mac OS X operating system.

“It’s not one feature, but the aggregate of many features that has attracted people, and Apple has spent a lot of time marketing each one of the innovations separately,” Gartenberg says.

The iPhone certainly has its critics, and they emerged on Day One. The initial iPhone-bashing focused on its use of AT&T Inc.’s relatively slow EDGE wireless network, which Apple says it chose because it was so widespread in the U.S. AT&T is promising a faster 3G network upgrade this summer. (Read our blogs: Was the choice of EDGE over 3G for the iPhone genius on Apple’s part? .

Some early critics noted that it could take a full minute to download a Web page over EDGE — much longer than the almost-instant downloads depicted in iPhone TV ads. For the iPhone’s Wi-Fi users, though, Internet browsing has generally been much faster.

However, Apple’s five-year commitment to lock in the iPhone with AT&T’s network flies in the face of the other major trend of the past year in wireless mobility: openness, in both networks and applications.

Google Inc. and the Open Handset Alliance took advantage of concerns about the iPhone being locked in to a single carrier when they introduced their Android software last November. Based on the Linux operating system, it would allow users to work anywhere on any network. Google was also an instigator of a major push to have the Federal Communications Commission’s 700-MHz auction include a channel that required the auction- winning carrier to support any device.

Apple ignores such talk and staunchly says its iPhone is allied with AT&T and that’s that. But some analysts believe there is wiggle room. “Perhaps some future version of iPhone could be outside AT&T,” Gartenberg suggests. But Dulaney differs, saying, “Unlocking from AT&T won’t happen.”

In contrast, Apple’s commitment to openness centers around a multitude of applications, not networks. Its software development kit , announced in March, has attracted the interest of 500,000 developers, and analysts say it could lead to literally hundreds of new applications being distributed to users via Apple’s AppStore.

Based on Apple’s March announcement, what’s officially coming next week in iPhone 2.0 are features designed largely to impress business users, including support for device management functions and Exchange e-mail, an apparent response to concerns that the device didn’t support a business-class e-mail system. But there will also be plenty of new consumer-focused applications, including entertainment from start-up i.TV.

Ironically, while the iPhone is making a play for the enterprise , RIM has begun marketing its BlackBerry — a mainstay among business users — to consumers with slick TV ads and a new developers conference aimed in part at promoting consumer applications. And RIM is reportedly releasing a touch-screen BlackBerry called Thunder later this year.

Experts predict that future successful wireless devices will need to appeal to both consumers and business users at once, recognizing that there is a true “prosumer.” And at least so far, most analysts believe RIM and Windows Mobile devices are more secure.

The Copycats

Apple’s competitors, primarily the traditional cell-phone makers, have so far offered a set of competitive features wrapped in sleek cases that imitate the iPhone . Representatives of two competitors, Hewlett-Packard Co. and Palm Inc., acknowledged at a recent conference that when the iPhone was announced, their teams launched a series of focus groups and design meetings to wrack their brains to create something better.

“There’s no doubt that the innovative interface of the iPhone caught most industry stalwarts flat-footed and most are now aggressively trying to catch up to Apple,” notes Jack Gold, an analyst at J.Gold Associates LLC.

For example, Sprint Nextel Corp. and Samsung Inc. announced the new iPhone-like Instinct wireless device on April 1. Due to ship this month, it is designed to improve on the iPhone touch screen with the use of haptics, a technology that lets users feel a “buzz” when an icon or keypad is touched. (Some iPhone users complain that they can’t “feel” a button push.) The Instinct uses a different technology from the iPhone accelerometer, but it still allows a user to maneuver the device to navigate on a Web page. The Instinct also adds voice commands for making Web searches, and it natively supports GPS for mapping and location-related searches.

Some iPhone imitators are also trying to woo customers on price, offering devices for $349 or even less, compared with iPhone’s $399 (if buyers can find one) . That strategy might not pay off, however, if Apple lowers pricing on its new iPhone models. Predictions vary, but Dulaney and independent analyst Jeff Kagan claim that the current iPhone line will drop in price this summer, with newer devices on a 3G network selling at the current price.

Reports surfaced in April saying that AT&T might even subsidize that cost and offer a next-generation iPhone for an amazing $199. Still, iPhone imitators might also bargain with buyers by offering more flexible network voice and data pricing than Apple and AT&T do.

The biggest improvements that iPhone users want, based on message boards, blogs and other sources, are native GPS capability, increased storage capacity, more memory, longer battery life, support for Adobe Flash to run multimedia applications and, foremost, a faster cellular network. During an April press conference at CTIA Wireless 2008, AT&T Mobility LLC President and CEO Ralph de la Vega reiterated that 3G support for the iPhone and other devices is coming this summer.

What that probably means is that next-generation iPhone users will get HSDPA/UMTS 3G connectivity, which has already been deployed by AT&T in major metropolitan areas, with download speeds of more than 600Kbit/sec. — well above the existing EDGE speeds of 70Kbit/sec. to 135Kbit/sec. While Flash doesn’t seem to be coming anytime soon , mobile device consultant Glenn Edens and other analysts say third-party developers will have a plethora of applications for the iPhone in coming months.

Gold expects a “running battle for features” and “user interface improvements” from Samsung, Motorola, RIM, LG Electronics and Nokia, among others, for the next several years. However, Edens believes that the iPhone, and its future iterations, could actually relegate many competing devices to the gadget graveyard.

“As the innovation leader, the iPhone is currently facing fierce competition from look-alike and feature-alike products. Apple cannot let up on innovation, because its competitors certainly will not,” says Gloria Barczak, professor of marketing at Northeastern University’s College of Business Administration.

And while many gadget fanatics love the iPhone, they can be fairly blunt about what they perceive as its faults. Some users love the iPhone’s touch screen; others knock it. “It’s a real pain in the you-know-what to type on and gets all greasy on a hot day,” says Cat Schwartz, eBay Inc.’s gadget director, who notes that she prefers a real keyboard. (And analysts say there are probably many third-party applications in the works to provide support for a keyboard via Bluetooth wireless.)

Numerous critics assert that device competitors will have a hard time matching the iPhone’s hype, if not its features, in their initial product releases. Schwartz recalls that one eBay bid for an iPhone reached $12,000 at the time of last summer’s launch, prompting some in the media to escalate the hype further. “The iPhone was revolutionary, extraordinary, groundbreaking — not because it was the greatest invention in the world, but because of how overhyped it was,” Schwartz adds.

Another year in spotlight?

Whether the iPhone, with its 2.0 release, continues to be the sexy new thing for another year depends on many factors. Competition will play a role. For example, Nokia, the biggest cell-phone maker in the world, is marshaling resources around an iPhone-beater, code-named Tube , that could have an important influence on that company’s market share in the U.S. And Nokia is just one of a number of healthy companies vying for the same customers as Apple.

In addition, endorsements or quiet rejections of iPhone 2.0 by major corporations for business users will inevitably affect sales, although most prognosticators don’t believe there will be many outright rebuffs.

A wild card is how well other operating systems — including those from more established manufacturers, the coming Linux-based Android platform, or even open-source rivals Open Moko and LiMo — will do in the market. Android devices could be paired with hundreds of open market applications, even ones from garage-based developers who believe that the future of computing is in the palms of our hands.

Meanwhile, Apple, with its insistence on distributing applications only through its AppStore, faces a potential user backlash “that will make even Microsoft look like an open company,” Gold claims. Some corporate IT executives have already expressed worries about being locked into “the Apple way.”

Whatever happens in the next 12 months with the iPhone, it’s safe to say that the device has already made its mark. However, that place in history could be fleeting, given the astounding number of wireless handheld computing innovations on the table.

Yes, all parties agree that iPhone has altered the smart-phone landscape. A lot has happened in one year.

Now what?

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