By Jon Fortt
October 9, 2006


Over the past couple of years, the iPhone has taken its place as the most popular unfulfilled Apple rumor. And along the way, this assumption seems to have developed that a phone from Apple Computer would automatically be a super-cool thing.

I’ll be among the first to admit, Steve Jobs and company have an unparalleled track record in the technology industry when it comes to making really cool products. But at the same time, the phone business is drastically different from any of the other areas Apple has gotten into – and some of those differences can make or break products.

So here we have it: three reasons an iPhone could actually suck. (You could also read this as three reasons Apple hasn’t unveiled one already.)

1. Carriers control the U.S. marketplace

It turns out phones are ridiculously expensive to make – in many cases,
just as expensive as desktop computers. That’s why the Palm Treo 700
costs as much as $649 when purchased without a new cell phone plan.

Even though phones are so expensive, phone users in the U.S. generally
hate spending a lot of money on them. That’s because the major carriers
have set up a model that works pretty well: They use free or cheap
phones as bait to get consumers to sign one- or two-year service
contracts. They’ll gladly give away an entry-level $250 flip phone or
camera phone if it means they’ve got you on the hook to pay at least
$40/month for the next 24 months ($960).

What does this mean for an iPhone? It means that while it would cost
Apple millions of dollars to develop the product and hundreds to build
it, Apple might not be able to sell the thing on its own terms. This is
a nightmare for a company that has built its resurgence this decade on
its own carefully tailored retail strategy and its own tightly
controlled marketing. Because carriers subsidize phones so much – $250
to $300 per phone is a decent estimate – they’re the ones who handle
the bulk of marketing and distribution.

Try to imagine Apple letting Cingular or Sprint run the show when it’s
time to market and sell the next iPod. Yeah, I don’t think so, either.


2. Carriers try to control the cell phone interface

Ever wonder why most cell phone interfaces are junk? Why they’re a
tangle of confusing menus and hidden features? I’ll tell you why. It’s
because the carriers insisted they be that way.

It sounds ridiculous in 2006, but the way the carriers look at it, the
logic is simple. They spend hundreds of dollars in phone subsidies and
marketing costs getting you to sign up for a phone plan. So every time
you dial the phone, they want to own your experience. They want you to
feel like you’ve got a cool Verizon phone or T-Mobile phone, not just a
cool Motorola phone or Apple phone. So they insist that their logos
splash across the screen when the phone powers up, and that certain
features – typically the ones likely to make them the most money – be
front and center, whether the user likes it or not.

And the carriers usually get their way, because every phone maker knows
that without the carrier subsidizing between 40 percent and 100 percent
of the cost of a phone, practically no one will buy it.

Impact on an iPhone: Apple isn’t the type of company that likes to make
compromises in its software. Few companies are so bent on crafting a
user experience that’s simple and enjoyable. And once Apple does craft
that experience, it certainly doesn’t want some other company taking
credit for it.


3. Apple might have a hard time making the numbers work

It’s no secret that Apple has some of the best profit numbers in the
electronics business. Through smart engineering, marketing and design,
Apple has managed to build mostly premium products that people will pay
a little extra to own.

It would be harder for Apple to make those 25 – 30 percent margins in
the phone business, especially when it’s just starting out. (How hard?
Just ask Palm.) It’s especially hard when the carrier, not the phone
maker, often has the last word on how much a new phone will cost and
what the buyer’s experience will be like.

So to make the numbers work, Apple might actually have to sell some
kind of subscription service along with the phone, either by becoming a
carrier (which is prohibitively expensive), becoming an mobile virtual
network operator (and a lot of MVNOs are failing these days), or doing
some other type of partnership with a carrier. It’s not impossible
– Apple has proven with its retail operation and iTunes store that it’s
willing and able to birth new business models. But it’s a lot riskier
and more expensive than launching a radically different new Mac or iPod.


What does all of this mean?

Maybe Apple will launch an iPhone and surprise us all – the company’s
good at that. But if and when that happens, I’m betting it will be the
rare situation where the biggest innovation won’t necessarily be the
phone itself. It will be the way it crafted partnerships in a way that
it could keep control of the customer experience, and still manage a
profit.

Steve Jobs is good at that sort of thing. But considering how stubborn
the carriers are, and how many billions of dollars they’ve got on the
line, Jobs would have an even tougher time bringing them on board than
he had getting the major record companies onto iTunes.

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