Apple’s iPhone Business Model: An Uncertain Future for Cellular Phone Users?

As usual, January’s MacWorld crowd was abuzz with giddy excitement about Steve Jobs’ latest announcement. This time it was the iPhone, a stunning and potentially revolutionary phone/computer combination. What was Jobs up to with this latest offering?

Details about this revolutionary new “smart” phone were strategic and somewhat scarce. The iPhone would connect exclusively to Cingular, one of the prominent carriers in the United States. It would be available in June, following FCC approval.[1] Jobs specified target sales of 10 million units sold by the end of 2008.[2]

Amidst the media frenzy came the grumblings. Among them: iPhone is not usable as a modem, the battery is not replaceable by purchasers, the “computer” part of the smart phone doesn’t have much internal storage and does not connect to an external storage device, and the device has not been–and may not be–opened for development of third-party applications.[3]

The nature of the “revolution” that this new device represents is also a subject of some speculation. Dreams by industry analysts of Apple becoming a competitive cell phone carrier (or MVNO, a mobile virtual network operator)[4] may have been dashed by Apple’s five year partnership with Cingular. However, details of the relationship are beginning to float to the surface. The traditional model of current cell phones, subsidized by the network carriers, is not present in the deal between Cingular and Apple. This gives hope to some phone and device hardware manufacturers.[5] The trade-off is that Apple is demanding a much higher level of interaction with, and control over, its customers. This includes “a percentage of the monthly cell phone fees, …how and where iPhones could be sold, and control of the relationship with iPhone customers.”[6] Apple is proposing a similar deal with Rogers in Canada.[7]

What exactly is Apple’s business model behind their “revolutionary” new device? What does this mean for the cell phone-toting business community of the future, if anything?

Two major concerns have come to the fore, related to Apple’s history and established practices. First, Apple has indicated that they want a role in managing network safety and security. “You don’t want your phone to be an open platform,” meaning that anyone can write applications for it and potentially gum up the provider’s network, says Jobs. “You need it to work when you need it to work. Cingular doesn’t want to see their West Coast network go down because some application messed up.”[8] What this really means to the Apple iPhone business model is as yet unknown.

Second, Apple’s version of DRM continues to control what goes in and out of this new device. This level of control has two vectors: control of content to external, non-Apple devices and a lock on the network between Apple and Cingular.[9] Dubbed “the roach motel business model,”[10] commentators have noted that “customers check in, but they can’t check out.” Apple continues to “lock” content to their devices. With respect to the first vector, the ability to lock a device to a network is currently under scrutiny in several district courts across the nation. With respect to the second vector, the jury of public opinion is still hearing the case for DRM.

What the future business model of Apple’s iPhone will be is, on many levels, up in the air. Steve Jobs may be certain, but his official future is not yet written in stone.

FOOTNOTES:
[1] See iPhone Introduction video with Steve Jobs; also bits of transcript from the keynote floor.
[2] ibid.
[3] How Steve Jobs blew his iPhone keynote
[4] Tech Trader Daily – Barron’s Online : Apple To Introduce MVNO Wireless Service In ’07, UBS Says
[5] How Apple could rock wireless
[6] Verizon rejected Apple iPhone deal
[7] Cingular/Rogers Not Subsidizing iPhone Cost?
[8] Apple Computer Is Dead; Long Live Apple
[9] Want an iPhone? Beware the iHandcuffs
[10] iPhone – the roach motel business model

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Only connect (to Comcast)

What happens when the infrastructure of the net becomes oligopoly-controlled? Services become limited, prices go up. I’m hardly the first to point this out.

Larry Lessig wrote in his book The Future of Ideas about the possibility that given a few subtle changes to the Internet’s infrastructure it would be relatively easy for the cable companies or another small handful of telcos or other large businesses to take control of the Net, turning it into the kind of closed systems TV or the old telephone networks used to be. This dire prediction may be upon us.

Comcast has been progressively turning on functions to block VPN traffic for the last four or five months. If you fight through the Comcast site to find the terms of service you discover that’s only the beginning. Under their rules prohibiting you from using your Internet connection for ‘any business purpose’ you are arguably in violation if you so much as buy a book from Amazon.com.

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