Is Apple in over its head with the iPhone?

What is happening at Apple?

(Credit: Declan McCullagh/CNET Networks)

Amazingly, almost every product Apple has released over the past decade has performed extremely well and there's no debating the fact that the iPhone is one of them.

But unlike the computer industry or the PMP business, the cell phone industry judges success by how well a device can perform over the long-term and keep a steady revenue stream flowing for both the carrier and the manufacturer.

And while the computing industry has become quite competitive over the past few years, driving prices down and forcing companies to make more compelling products, there's no debating the fact that the cell phone industry is the most competitive and strangely unprofitable of them all. After all, who would have thought that Motorola -- one of the proven leaders in the industry -- may be getting out of the handset business for good?

Knowing this, has Apple gotten in over its head trying to play the same game it always has with its other devices without realizing that the cell phone industry is an entirely different beast altogether? Sadly, I think it has.

There's more to a cell phone than its good looks and hype

If Apple has learned nothing else, the company now knows that in the cell phone industry, relying on good looks and hype won't get the job done. Let's face it -- Apple's Macs perform well because they're sleek, powerful and run an operating system that most people like. The company's iPods sell extremely well because they're easy to use and have always provided an end-to-end solution with iTunes that has yet to be matched. But what about the iPhone?

Sure, Apple may have already sold 4 million iPhones since June and that's a success story by itself, but in this business, longevity is difficult to maintain and competitors are always ready to release something better.

Unlike any other business Apple is in, cell phones become obsolete within a week. Think about it -- how many times have you gone into your local cell phone shop and seen a cell phone retailing for $149.99, only to find the same product going for $49.99 the next week? Competition in the industry is fierce and the chances of one product leading the way for too long are poor, at best.

More than anything else though, Apple misjudged the loyalty of cell phone owners. By forming a deal with AT&T, Steve Jobs and company obviously believed people would jump ship at the first chance they had just to get their hands on the iPhone. And while some did, Verizon Wireless just reported that it added 2 million subscribers to its service and handily beat AT&T in post-paid subscriber gains and revenue.

Along those lines, why was Apple caught off guard by the immense unlocking community that has done all it can to make sure the iPhone would work on any GSM network? Didn't the company know that unlocking is commonplace in the business? If it did, why did it fail to realize that by locking the iPhone down, an enormous group of individuals would blaze the path that ultimately led to about a 30 percent unlocking rate?

And despite Apple's attempt at stopping unlockers dead in their tracks by changing the way the iPhone loads software from flash memory, permitting only certain kinds of software from loading into the main memory, the hacking community is still strong and ostensibly growing in numbers. To make matters worse for the company, all of these anti-unlocking measures didn't work. According to estimates, iPhone unlocks were about the same during the third and fourth quarter.

Dealing with AT&T

Perhaps most vexing is the sweetheart deal Apple was able to coax AT&T into. Sure, the company may have won out through the revenue sharing, but now that it hasn't been able to stop unlockers and the chances of hitting its goal of 10 million iPhones sold this year would require a faster sales rate than it witnessed during the busy holiday season, what makes anyone think that AT&T or any future exclusive carrier of the iPhone would fall into the same iPhone trap? And considering Verizon Wireless isn't feeling the effects of the iPhone anymore, who can honestly say that Apple's device is as groundbreaking or Earth-shattering as we once thought?

The iPhone was easily the most advanced cell phone released in 2007. But in an environment where competition is fierce and hype dies quickly, Apple looks a bit lost at this point. Is the iPhone still a leader in the business? Sure. But if it can't coax people to switch carriers and the company can't stop 30 percent of its consumers from unlocking it, what can Apple really do to make this the first real groundbreaking device that changes the entire cell phone business forever?

My advice -- get out of the contract with AT&T and unlock the iPhone, allowing it to run on any carrier all over the world. Of course, the chances of that happening in the near-term are just about zero.

[cardfan1212]

I'm not a big fan of apple's computers, but this is goofy advice. The iphone is doing pretty well and they look to keep advancing it. Apparently the agreement between Apple and AT&T has benefited both quite well.

I'm not sure the author realizes what Apple accomplished in its first attempt at a cellphone.

[theoxygenthief]

Unlocked iPhones hurt AT&T not Apple. And some other mad rantings of a fanboy.

[kabong]

I think the reality is that Apple is doing exactly what they planned. They signed with AT&T to get the device in our hands, and what we do with it after that doesn't matter to them. They've made some efforts to stop the unlockers because they don't want to be in dutch with AT&T and that's it. Things are only looking brighter for the iPhone. The SDK is going to hit soon which will allow 3rd party apps without jailbreaking (that alone will make the thing worth the price of admission) and the 3G iPhone has been all but announced. I think the only problem Apple is going to have later is unloading some 1st gen phones when the 3G hits. Apple has managed to change the whole game here AGAIN. and we are going to reap the benefits in a huge way.

[hardmanb]

Amazing how success can be twisted into fear, doubt and uncertainty.

Especially how the iPhone, even unlocked, is adding to Apple's profits, spreading virally around the globe, and changing the business models of everyone.

If the iPhone is so insignificant, how come the all these huge and so-experienced cellphone manufacturers, and carriers...with all their expertise...couldn't give it to us?

Why are people around the world paying a premium, jail-breaking, unlocking, smuggling, buying on ebay and black-marketing to get their hands on one?

Ever think that Apple (Steve Jobs) know what they are doing...or even have a plan?

[aztec92154]

When talking about the industry Don Says:

"there's no debating the fact that the cell phone industry is the most competitive and strangely unprofitable of them all."

Really? Is that what he meant to say? So, when they raise the rates for text messaging from 10 to 15 to 20 cents a year, is that because it costs more on a year to year basis to send text messages? That can't be correct. Can anyone back Dons claim up?

[Artkazi]

Does anyone think that the iPhone will open up to Verizon? That is the only think that is preventing me from getting one. Verizon is the only service that will work in my home!

[ChampagneBob]

It's all about the technology and the ability to deliver it and continue to deliver it. Garmin is now entering the fray and there is talk that Motorola is getting out. The changing of the guard is always present as technology moves forward and leaves behind those that can't keep up.

Apple over its head is a joke (multiple billions of cash reserves and an impressive history of innovation and new products.

Even the major carriers are undergoing change...Verizon and AT&T are growing and Sprint is being left behind....there will always be winners and losers over time....do you want to bet against Apple at this time?

[InformedDissent]

It is very strange that no-one has seen the iPhone for what it really is-- a stealth device. The "phone" part of the iPhone is just a way to get the rest of the package into users' hands so they will have a chance to appreciate all of its other functions. Within a few years the cell phone feature will become redundant as near-universal WiFi access enables these devices to be used as they are ultimately intended-- to make VOIP calls. After that it's bye-bye telcos (you blood-sucking leaches!)

[ecotopian--2008]

I couldn't have said it better myself. The author of this article is without a clue. Apple isn't about competing in the sorry-a$$ industry, it is about changing the game. Let's see, should I bet on Steve Jobs or clueless Don Reisinger? Hah! No contest here!

[MARKINNYC]

"... get out of the AT&T contract, unlock the iPhone for any carrier that can support it, and watch the sales go up through the roof!" What great advice. That would of course mean SJ will have to admit that he's wrong. Not something that happens often at Apple. The deal was great for Apple, great for AT&T and lousy for the consumers! Choice of carrier is based (for most of us) on how well a given carrier works in our home area - whether that's at home or at work or in between. Apple's greed made them overlook that important fact. AT&T is NOT the best carrier in most areas. In fact they're not the best carrier in general. Then their customer service is still about as helpful as a recording or a robot might be - and the combo is horrible for most iPHone customers. The Free Market will out, whether it is in Flat Screens, or Cell Phones. Apple had a HIT on their hands and blew it with their decision to milk revenue out of the consumer & the carrier on an ongoing basis. Maybe they should be content to sell 20 million iPhones in a year, and let the carrier and the consumer decide where and how to spend their airtime dollars. It's hardly news that customers want choices in the cellphone business. Mr. Jobs took those choices away and then played with the unlocked phones to make sure consumers had no choice. Fortunately the hacker community is brighter than his software engineers are. Bottom Line is that we're tired of paying a premium fee to AT&T just for the dubious privilege of lining Apple's corporate coffers. I spent enough when bought the damned phone. Thank heaven it works great on T-Mobile!

[dylan214u]

Don, back in October 07 you made a comment: "Enjoy your iPhone now. But soon enough, you may be wishing you bought that Treo." enough said for me. I used Treo's for 4 years and believe me I have never looked back for a moment after owning a iPhone. This segment of the business is changing and the iPhone has not even scraped the surface of what a REAL software driven device will be like in a few years. Thanks to Apple's entry, companies have finally kicked into gear about trying to innovate. The Treo is a dog and was a never out of a "work in process" mode and probably never will. Apple biting off more than they can chew? let's look at that one a year from now after the SDK is introduced and Apple has time to continue to refine their first born.