FT : iPhone 2.0 Is Admission Of 1.0’s Failure To Change Business Model

Wednesday, June 11, 2008

The iPhone is amazingly amazing: Steve Jobs, Apple chief executive, had some substantive points to make in his address launching a new version of the mobile phone, not least that it will be cheaper (because of network operator subsidies); but he wanted to talk about its amazingness most of all.  The iPhone has changed expectations of smartphones, but while the introduction of subsidies is a sensible move, it is also an admission that the device has failed to change the industry’s business model.  The iPhone may not be amazing but it is rather clever.  Apple, along with another spectacular success in consumer electronics, Nintendo, has shown the importance of improving the user interface.  The iPhone’s touch screen makes mobile web browsing less difficult, and such interface innovations seem to have a direct appeal to consumers that whizzy new functions do not. 

For all its asserted amazingness, however, Apple has not sold all that many iPhones – notably in Europe.  Apple acolytes flocked to buy them but, as every technology executive knows, early adopters are easy.  It is bridging the gap to the mass market that counts, and in the past year competitors have begun to catch up with the iPhone’s technology while selling at a lower, subsidised price.  Apple is learning the difference between flogging iPod music players direct to the masses and flogging iPhones via large and powerful mobile network operators.  So hot was the iPhone when Apple launched it last year that, in exchange for exclusive rights, network operators agreed not only to sell it at a high price, but to hand over a share of their user revenues as well.  The normal tactic of mobile operators, however, is to subsidise the handset in order to attract high-spending customers.  The iPhone may be flash, but it has struggled to compete with other handsets that are given away at no upfront cost.  That is a pity because mobile phone subsidies are inefficient.  They prompt customers to change their handset every couple of years, when they come to the end of a contract, which has an economic cost.  The constant churn in handsets also makes it harder to design new applications to run on them.  Perhaps Apple missed an opportunity: had it sold iPhones with no link to a network contract then the cycle of subsidy might have been broken.  But that was always a long shot in a fiercely competitive market.  The question now is which will bother the iPhone’s painfully cool users more: that they had to pay a fortune for the gadget, or that, with subsidies, the general public may start to buy them as well.

Reference : http://www.ft.com/cms/s/0/d4c78a3a-371a-11dd-bc1c-0000779fd2ac.html

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