Finally, the real iPhone by Philip Elmer-DeWitt @FortuneMagazine July 9, 2008, 11:51 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons There’s a theory favored by savvy Apple watchers that the first generation iPhone — greeted with such hoopla last year — was not actually the real thing. That iPhone — the one that hundreds of thousands of Americans queued up to buy for up to $599 apiece, the one that Time magazine named the Invention of the Year, the one that six million people purchased before Apple finally stopped making them in May — was just a trial balloon floated by Steve Jobs to test the airwaves. According to this theory, the real iPhone — the one aimed at the broadest possible market here and abroad — would start at $199, the magic price point at which consumer electronics devices seem to take off and become mass market phenomena. It would have built-in GPS location tracking, “push” e-mail, and wireless syncing with corporate enterprise networks. Most important, it would run hundreds of third-party applications available through an online App Store and operate over so-called third generation (3G) cellular networks that are two to five times faster than the one used by that first, prototype iPhone. If this theory is true, then the real iPhone era begins on Friday, July 11, at 8:00 a.m. That’s when the iPhone 3G goes on sale at Apple AAPL and AT&T T outlets in the United States and at the stores of Apple’s cellular partners in some 20 other countries around the world. (Strictly speaking, the era begins early Thursday, when the device goes on sale at 12:01 a.m. New Zealand time. Given how the Earth turns, that corresponds to 8:00 a.m. July 10 at Apple’s New York City flagship store and 5:01 a.m. at its Cupertino headquarters.) Some things about the new iPhone haven’t changed. Physically, it’s almost identical to the first. Same touch screen, same dimensions — except for the back, which is slightly bulgier and made of black plastic instead of metal. Conceptually, it’s still one device that combines three of today’s most popular technologies — cellular communications, portable digital music and wireless access to e-mail and the World Wide Web. And the fundamental breakthrough is the same: unlike most devices that combine several functions and do none of them well, the iPhone puts together three must-have functions and does at least two of them better than they have ever been done before. Early reviews suggest that the one thing the first iPhone was not particularly good at — telephony — is much improved in the second version, thanks to a redesigned audio system and, perhaps, improvements in AT&T’s network. There’s still no physical keyboard, so devotees of RIM’s RIMM BlackBerry who were turned off by the lack of tactile feedback when dialing or texting on the first iPhone are not likely to be turned on by the second. The battery is still not user-replaceable, a shortcoming that may be even more important this time given the power demands of operating at 3G speeds. (One early reviewer who was getting nine hours of Internet use on the first iPhone clocked less than six hours on the second. See here.) The built-in camera is the same under-2 megapixel device that can’t do video. There’s still no way to cut and paste text. And you are still married to AT&T’s cellular network for the life of a two-year contract, at least in the United States. In fact, the bonds of that matrimony may be even stronger this time around, given the way AT&T has set up the in-store activation procedure, and will cost U.S. customers at least $10 a month more. There are many small improvements. You can search address books, delete e-mails en masse, set parental controls and save e-mailed photos. (These improvements will also be available to owners of the original iPhone as part of a free software upgrade.) Investors will note that Apple has made major changes in its business model. Rather than testing the waters with a handful of exclusive contracts — first with AT&T, then with O2 TEF in England, T-Mobile DT in Germany and Orange FTE in France — Apple has gone global this time, with deals in six of the seven continents and more than 70 countries. To do this, however, it has had to largely abandon the arrangement — unique among cell phone manufacturers — by which carriers sold the iPhone for full price and kicked back a share of their monthly revenue to Apple, which was accounted for in monthly increments over the life of a cell phone contract (usually 24 months). Steve Jobs was able to dictate these terms — quite advantageous to Apple — because the carriers recognized that being first to sell the iPhone would win them thousands of new customers. In most of the new markets Apple is entering this year, it is acting more like a conventional cellphone manufacturer, taking its (sizeable) profits upfront and letting the carriers subsidize the device with voice and data plans as costly as local market conditions will allow. (See Canada’s Rogers Communications RCI , here for example, to see what kinds of problems this can lead to.) The price of the iPhone itself also varies widely, from as much as $888 for pre-paid phones in Italy to $75 in Mexico and free with certain data plans in the U.K. Except for those costs, none of this affects the experience of the users. For them, what will really distinguish this iPhone from the one that preceded it — and from every other smartphone out there — is the flood of software expected to be unleashed when the App Store opens on Friday. Apple has already demonstrated more than a dozen third-party programs for the iPhone, and over the next few months you can expect to hear about hundreds more: business apps that take advantage of the iPhones ability to “push” data down the network when it’s available (rather than when it’s requested); games that use the device’s accelerometer to navigate virtual space; shopping and social networking programs that use satellite tracking to tell you what shops or restaurants and which of your friends (or enemies) are near the spot where you are, right now. In the end, every successful computing device is ultimately a software “platform,” a vehicle for the programs that give it its true value. This is where the real iPhone will stand out, and judging from the interest among the 4,000 third-party developers who have already signed up to write for it, it’s got a good headstart.