The future of Apple

/ Source: Business Week

If there was anything on the minds of higher-ups at wireless handset manufacturers on Jan. 9, it was very likely what to take for a headache — a pounding one caused by a new competitor, the company formerly known as Apple Computer.

In unveiling a device called the iPhone — the subject of rumors and speculation for years — Apple also officially changed its name, dropping the "Computer" that had been part of the moniker since the computer maker was founded in 1976. At the same time, the newly incarnated Apple stormed into new markets, turning the biggest names in cell phones — Nokia, Motorola, Research In Motion, and Samsung — into overnight competitors.

The new name and device represent Apple's strategic shift away from its origins as a personal computing company that has at points struggled both to survive and to set the computing world's agenda. The shift was enabled by the five-year-old iPod line of digital media products, which have produced enormous sales and profit growth, propelled Apple into the forefront of the digital media age, and now leave it poised to set the wireless phone industry on its ear. "This is a day I've been looking forward to for two and a half years," Apple CEO Steve Jobs told the capacity crowd at the MacWorld Expo trade show in San Francisco. "Every once in a while a new product comes around that changes everything."

It certainly reflects the change in Jobs' thinking from a half-decade ago, when Apple had embarked on a turnaround fueled by new iMacs. Asked by BusinessWeek in 2000 whether he'd stray into new areas, Jobs said it was possible — but not so far afield as the cell phone market. There were plenty of huge players that already had that industry wrapped up, he said at the time. Some of those players may soon wish Jobs had kept his promise.

In an address that easily overshadowed news from the much larger International Consumer Electronics Show in Las Vegas, Jobs revealed the iPhone, which combines a wireless phone, a music and video player, and a mobile Internet browsing device into a single handheld unit. He also announced a Feb. 1 ship date for Apple TV, an attachment for TVs that will wirelessly grab and play movies and other digital media purchased on Apple's iTunes Store via a Mac or PC.

Apple's stock added more than $7, or 8%, to close at $92.57 Tuesday. Meanwhile RIM dropped by more than $11, or 7%, settling at $131. Palm, which makes the popular line of Treo smartphones, dropped 84 cents, or more than 5%, to $13.92. Motorola and Nokia also slipped more than 1% each.

The iPhone won't be available until June, but its effects will be felt long before then. Eager consumers may hold off on buying new high-end phones in anticipation. And when it does launch, the phone will be available only from Cingular Wireless, owned by AT&T. The phone will be released in international markets including Europe and Asia in 2008. Jobs said in his remarks that Apple's goal will be to sell 10 million units by 2008, which would account for roughly 1% of the phones that will be sold this year. It's an aggressive goal, but hardly audacious, given that Apple will pass the 200 million mark in iPods sold sometime this year.

Embedded OS X
But it is Apple's effect on the somewhat smaller market for "smartphones"—phones that make calls, handle e-mail, and include organizational features such as calendars and to-do lists—that may prove particularly onerous for companies like RIM and Palm. Last year, RIM said 7 million people were using its BlackBerry wireless devices globally, and its latest handheld, the Pearl, includes a camera and music-playing capabilities. Palm's latest device, the Treo 750, was released on Jan. 8.

Market research firm M:Metrics estimates that fewer than 6.2 million smartphones were in use in the U.S. as of the end of November. Of those, 2 million were based on Microsoft software, 1.76 million were BlackBerries, 1.72 million were Palm devices, and some 669,000 ran the Symbian operating system from London-based Symbian Limited, which is jointly owned by several companies, including Nokia, Ericsson, Siemens, and Panasonic.

Unlike other smartphones, the iPhone will have no actual keyboard but will have a touch-sensitive screen from which users will type messages, launch various applications, dial phone numbers, and manage other tasks. The screen measures 3.5 inches diagonally, while the body is 4.5 inches high, 2.4 inches wide, and less than a half-inch thick. Its operating system software is a slimmed-down version of Mac OS X, which had been the subject of a final round of rumors that hit the Internet in the final weeks before the device's release.

Known in the computer industry as an embedded operating system — because it's not intended to run directly on a personal computer or serve r — this represents nothing less than a radical shift for Apple. An embedded version of Mac OS X could conceivably show up on any kind of wireless handheld device in the future, providing the guts to drive whatever newfangled user interface Apple comes up with for a given market. A wireless phone may be only the first step of a longer-term strategic thrust into all manner of consumer electronics devices, some more sophisticated and involved than the iPhone, some less so. "I firmly believe this is the first of many products," says Shaw Wu, an analyst at American Technology Research in San Francisco. "And I would not be surprised to see more products in the next few quarters and the next few years."

Of course, major challenges remain. Apple is used to controlling nearly every element of its products, but this time it will be dependent on the quality of Cingular's network and customer support. Also, by siding with Cingular, Apple is throwing its weight behind the Global System for Mobile Communications. The wireless standard is widely used throughout the U.S., Europe, and other regions, but is incompatible with phones sold by Sprint and Verizon Wireless. Moreover, while the device is the first to run a full-blown browser, Apple's own Safari, it remains to be seen how fast consumers will be able to surf the Net. And though Apple's iPod design was an instant hit, there's always the chance that consumers won't take to the nearly buttonless, software-dominated interface of the iPhone.

Apple raised eyebrows by using the iPhone name only weeks after Linksys, a division of Cisco Systems, unveiled a series of phones designed to make Internet calls under the iPhone name. Cisco has owned the rights to the iPhone name since it acquired a company called Infogear in 2000. Apple has been negotiating with Cisco for rights to use the iPhone name but hadn't finalized an agreement before today's announcement.

(Editor's note: The agreement apparently did not materialize. After this story was filed Cisco said it would .)

Sweet deal
Finally, there's the age-old question of whether Apple will limit its own horizons, through its closed business model, in which it creates devices designed to work only with its own iTunes software.

Still, just when rivals such as Microsoft are inching toward a walled-garden approach to selling entertainment-oriented products, Apple signed up key partners to ensure that the iPhone stands out when it comes to accessing the Internet. Google CEO Eric Schmidt, also an Apple board member, joined Jobs on stage in San Francisco. So did Yahoo! co-founder Jerry Yang, who announced a deal under which Yahoo Mail will be automatically forwarded to iPhone users.

The company seems to have worked out answers to other key questions as well. The five-hour battery life is within a couple of hours of many high-end smartphones. Most would-be customers are likely to be iPod owners who already sync their iPods each day. Then there's price. At $499, the iPhone costs a bit more than many smartphones, but it represents a sweet deal for power users who carry both a smartphone and an iPod and might prefer to carry just one device. Also, Apple has managed its product lines in the past in an effort to corral shoppers toward the products it most wants to sell. In 2005 it killed off the popular iPod mini to make way for the pricier iPod nano. Now, Apple clearly wants to sell phones — and it's going to have plenty of cards to play to do just that.