An antidote to iPhone complacency

My posting last night on Apple vs. Nokia got picked up by Seeking Alpha. It’s gratifying to get the exposure and discussion, although (as with any online discussion) the quality of the posts was variable.

Most of all, I was surprised to see the suggestion that I was too pessimistic on Apple. Readers of the Seeking Alpha site don't know me the way that my blog readers do, so let me fill in a few blanks.

I bought my first Mac in January 1984 and have never owned a DOS or Windows machine. I wrote a book on Mac programming and wrote columns or articles for 3 Mac publications. I started a Mac-only software company in 1987 and ran it for 15 years. Before the Jobs II era, we would have said "I bleed in six colors."

Today I'm a little more dispassionate as an academic strategy researcher. I did my PhD thesis on Apple losing market share in the US and Japan. I published a book chapter about why the conventional wisdom on Apple's cloning decision was wrong. Now I teach technology strategy to MBA students and consult to software companies.

My long history with Apple is EXACTLY why I think the ahisotric Apple bigots (particularly the iPhonatics) are missing the boat. In the 1990s, Apple had great products and technologies and still almost died. I know, I was there, and it’s why in 1993 I started looking for a new career to replace being a Mac ISV.

Yes Apple has had enjoyed a good run of innovation success. As I’ve noted earlier, in MP3 players Apple is crushing Microsoft and sells the vast majority of standalone MP3 players in the US. It also has dominant mindshare (again in the US) in smart phones.

However, when it comes to innovation, past performance is no guarantee of future success. Look at Apple in the 1990s. Look at Sony. Look at Ford or Chrysler or GE.

OK, some wiseass thinks because I make a blanket statement "don't stand still or (fill in the blank) will catch up," I don't know what I'm talking about. Would you prefer (say as an AAPL shareholder) that management says to the troops "We are so far ahead that no one will ever catch up?" Of course not.

Exhibit A is the old bumper sticker (and T-shirt) "Windows 95 = Macintosh '89". The problem was, Apple’s innovation (with the exception of the first PowerBooks) slowed to a crawl after System 7. Thus, Macintosh 89 = Macintosh 95 = Macintosh 2000.

Exhibit B is that 10x as many people bought Windows 95 as Mac OS 8, even though the latter provided a demonstrably better user experience. For Windows 3.1 the ease of use difference was dramatic, but for 95 it was not, and Windows 95 had other advantages: cheap hardware, more hardware variety, a larger potential installed base, more applications. Ease of use is important but it’s not everything.

A decade ago, Apple got crushed by Microsoft and nearly died. Today, there’s an even wider range of companies that could do to the iPhone what Windows 95 did to the Mac. What would it take?

First, Apple’s competitors would need to recognize what Apple has, and that it’s selling better. Nokia may be in denial, but I don’t think Microsoft or any of the major vendors in the US have missed Apple’s success.

Second, it would require the resources to apply to catching up to Apple. Samsung, LG, Microsoft and Nokia all have the resources to do so, and I think Research in Motion does too. In the short term, I’m ruling out Motorola and Sony Ericsson because their recent record on innovation is more dismal.

Third, it requires the ability to execute, in this case on software and user interface design. Obviously Microsoft could copy Windows and the iPod so there’s no reason that they can’t copy the iPhone. The other firms haven’t done well on software, but there’s no reason why they couldn’t procure that expertise. Maybe the gPhone is halfway decent. Or someone buys the PalmSource team. Or companies use the market to find some other open innovation solution.

Once LG or Samsung (or Nokia) has a decent alternative to the iPhone — particularly a CDMA phone — thanks to Apple’s foolhardy Cingular exclusive, the iPhone knockoff will have the upper hand with a majority of the market. The Koreans and Europeans will also have an advantage in their home markets where the iPhone has had a much smaller impact, in addition to the global economies of scale that Apple currently lacks.

Finally, other firms catching up to Apple will only happen if Apple is still roughly the same place when others match Apple’s existing offerings. Sure, Apple is on a roll, and as long as Steve Jobs remains savvy and healthy, their odds look good. But it’s not a lock.

Remember Netscape Navigator? The Motorola flip phone? The Sony Walkman? The Chrysler minivan? (The Boeing jumbo jet?) In many cases, a revolutionary product is all about the concept, and a concept can be copied. It’s not just about innovation activities, but also about the potential for those activities (as Geoff Moore argues) to achieve separation. If you can’t achieve separation, we call that commoditization. (NB: MCI, AT&T, the airlines, banks, or enterprise software vendors).

So I wouldn’t short Apple, but I also wouldn’t bet any sizable sum that all of its competitors will be asleep at the wheel for the next three years. And if Apple management shows signs of being as complacent as the Seeking Alpha iPhonatics, then sell! sell! sell!

Nokia don't get no respect

On Tuesday my friend David Wood of Symbian published a passionate rebuttal to a Forbes article about how the iPhone has won the hearts and minds of Silicon Valley, while Nokia has failed.

The article by Brian Caulfield aptly portrays Nokia as the Rodney Dangerfield of the cell phone industry:

Welcome to the kangaroo court, Silicon Valley style. Nokia may sell a phone somewhere on this planet every 18 seconds, but among the digerati in the Valley, that doesn't get the Finnish handset giant much respect. Here, the natives are all toting iPhones and BlackBerrys and raving about new horizons on the mobile Web.
…
Tech blog impresario Michael Arrington [said] "I believe that Nokia and Symbian [the software that powers its smart phones] are irrelevant companies at this point," he pronounced from the stage.

Quite a verdict, considering that Nokia sells close to half of all smart phones worldwide (and 40% of all phones) and has 9,200 applications written for its phones. In early July it plunked down $410 million to buy the portion of Symbian it didn't already own.

Unlike David, I think the article is pretty fair — at least from an American standpoint, which is all it claims to be. The article notes Nokia’s global dominance and calls the verdict a “kangaroo court” (i.e. completely unfair).

However, the point of the article is Nokia’s failure to have much of an impact in North America, either with the tech industry or with consumers. Lord knows that it’s trying, by moving its CTO to Palo Alto. It’s also clear that Nokia as the most aggressive US university outreach program of any mobile phone company, with multi-man year efforts at Stanford, UCLA and MIT. But its handset share and mindshare are almost off the radar.

So it’s indisputable that Nokia’s (and with it Symbian) so far has lost in the US market, including the high-end smartphone market that they dominate in the global market. The iPhone and Blackberry are winners and Nokia is an also-ran. The question that the Europeans (and Japanese and Koreans) are asking is: so what?

The so what is that before the iPhone, efforts to kickstart the mobile Internet have largely failed, at least in the developed countries. Operators and manufacturers come up with all sorts of technologies and businesses but they’re not getting adopted.

The iPhone is getting used and is getting the mobile Internet adopted. It’s also winning the hearts and minds of third party software and services — both for the cool factor, but also because it has users that will try these technologies. I know both geeks and housewives that swear by it, just as the Mac is gaining share on Windows in the desktop.

Ease of use is a big deal, and Forbes gets it even if Nokia doesn’t. I will probably never own an iPhone until they end the Cingular exclusive. However, I do own a Nokia E65, which is a pretty good phone, a mediocre PDA and a useless web device. Overall, the S60 user interface lacks the consistency and regularity of the iPhone or even the early Palm PDAs.

The iPhone-like design is certainly the way forward in North America. It’s possible (but by no means certain) that it’s also the way forward in Europe and Asia.

In a standards war, we assume that winning third party developers feeds the positive feedback loop driven by network effects. However, winning third party developers is no guarantee of success. The Mac had cool apps in the 1980s and 1990s but later got crushed by Windows 95. In Symbian, the UIQ APIs had far more apps but S60 sells more than 80% of the Symbian phones (and thus UIQ is being phased out in favor of S60). Palm did a great job of winning ISVs which did nothing to solve its long-term slide in new products (and thus market share).

Most marketing problems have a basis in fact. Successful companies usually assume that marketing problems are because the market isn’t getting their message (NB: Microsoft, Intel) — but often it’s because they’re not listening to the market. Nokia (and its soon-to-be subsidiary Symbian) can continue to shoot at the messenger, or they can respond to the iPhone challenge by making their products easier to use and more compelling.

My hunch is that Apple has at least another year or two before Nokia gets its software act together. (And if Nokia doesn’t, then Microsoft, RIM, LG or Samsung will). So, as when it faced Windows 95, Apple better have something up its sleeve to further advance innovations when competitors catch up to its first mobile phone act.

Good news for mobile phone industry

Two developments this week presage well for the mobile phone industry, despite declining consumer confidence in the US that seems to be spreading elsewhere.

Most concretely, Qualcomm and Nokia settled their patent dispute yesterday with a 15-year licensing agreement and termination of all existing disputes. Given the pivotal role the two play in the industry, I have to think that having the two companies working together will help the industry more quickly develop and deploy new wireless technologies.

More subtle is the broader implications Handango CEO Bill Stone sees in Apple’s July 12 rollout of its iPhone 3G, specifically the new App Store. In RCR News, Stone argues that the success of iPhone apps will help sell more applications for all smartphone platforms.

Normally, I’d be skeptical about his claims. After all, in August 1981 Apple took a full page ad in the WSJ welcoming IBM to the PC industry. Fifteen years later, facing the deluge of Windows 95 Apple was on life support en route to certain bankruptcy.

However, Stone makes three convincing points — so convincing that I wish I’d made them. (Actually, I did make one).

• Having more people install apps will raise the awareness of applications among owners of all mobile phones.
• As I’ve argued, competitors won’t sit still: Apple’s efforts will cause competing handset makers and carriers to redouble their efforts to create and distribute compelling applications.
• Apple’s success in bypassing the carriers will encourage more experimentation beyond just the carriers’ (largely failed) walled gardens.

Despite his blatant self-interest, I think Stone has it exactly right. There are only two ways to fight innovation: with price cuts or more innovation. In the developed world, the cellphone industry depends on replacement sales to maintain revenues: people don’t buy a replacement phone because it’s cheap, but because it offers something they don’t have in their current phone.

So both developments are good for innovation in the industry, particularly in pushing users away from cellphones as merely voice terminals and towards their ubiquitous adoption as converged computing and communications devices.

iPhone installed base up 17% in 72 hours

To the installed base of 6 million iPhone 2G phones, in the past three days Apple sold 1 million of its new iPhone 3G. An unknown number of 2G owners have also upgraded to the iPhone 2.0 software, including at least two of my loyal blog readers.

Of course, the big news is that AT&T and Apple created a new activation process that failed miserably under the flood of new users and brought a flurry of bad publicity. (Of course, this utterly predictable problem happened because they changed the activation process to make sure all the iPhones got activated). It’s TBD whether this bad experience will have any lasting impact, although those who waited in line over the weekend were clearly the hard-core true believers.

Between the new and existing iPhone owners, Apple this morning also claimed 10 million downloads of native iPhone applications from the App Store since it was launched Thursday. Since the SDK was released in March, Apple’s iPhone ISVs have created many compelling applications (although not much for business). They don’t specify, but most of the publicity is on the free applications which I suspect account for 90+% of the 10 million downloads.

What I’m finding interesting is what’s not there. Some 17 months ago, I proposed the iChat test. iChat is still not on the iPhone but a (text only) AIM is. (AOL also announced AOL Radio for the iPhone). I’m guessing AOL has noticed that AIM is no longer cool, and thus having the first native IM client on the iPhone might help it with the younger demographic.

But where is the VoIP service via iChat or Skype? Will these applications be funded (authorized) by Apple? It’s not as though there’s a lack of demand or interest. (Some would attribute it to Steve Jobs’ opposition).

No one knows if the gPhone will support VOIP, and it’s safe to assume that the carrier-led LiMo will not. So perhaps Apple has months to worry about this because competing platforms are in no hurry either.

iPhone day 2 minus two

A little more than a year since the first iPhone day, people around here are getting excited about rollout plans for the iPhone 3G on Friday.

I found a few interesting articles: a CNET Q&A on the US rollout, and a Seeking Alpha post summarizes the rollout in nine countries. Of course, the old business model with AT&T is out the window, but Tom Yager of InfoWorld thinks the new business model is at least as lucrative for Apple.

Of course, my interest in the iPhone is unchanged: I hate candy bar phones, and it comes with my least favorite phone service. I was toying with buying a used (unactivated) iPhone to use an iPod Touch with a camera, but apparently the old 2G models are becoming prized on the assumption that the new ones will be harder to unlock.

At this point, I’ll limit myself to watching others play with their new toys.

Switching costs: who decides, who pays?

This weekend at a conference I ran into an iPhone-carrying CIO of a local tech company. Since he runs Microsoft Exchange servers but hates Windows (refuses to run it on his MacBook Pro), I imagine he doesn’t want to be identified. Let me call him “LT”.

LT made a very important point about the switching costs that the iPhone faces in hoping to get adopted by American enterprises. Because RIM has been providing a good solution for years, the most savvy companies have long since installed BlackBerry push e-mail. I speculated that the switching costs for the entrenched BlackBerry users could prove an insurmountable barrier for Apple.

LT was carrying an iPhone running a beta of the iPhone 2.0 software, and it will go live at his firm once the final 2.0 software is released July 11. Employees will then have a choice of using a BlackBerry or an iPhone — so employees will vote with their feet.

Why go to all the trouble? Two words: top management. In most small- to-medium sized companies, if the top executives want a new toy, the IS department has to support it, and that’s what happened to LT.

It reminds me of the pilot study I did for my dissertation: I was studying switching costs, and had to decide whether to study standards adoption by individuals or organizations. I ended up doing my diss on consumers, but I made a conference paper out of what I learned about organizational standards adoption and switching.

What I found — consistent with my later dissertation findings on consumers — is that for customer-facing technology, the psychic switching costs were more important than the costs of the software or the deployment labor. The reason people don’t switch is that it’s a pain (or you can’t make them), not that the actual cost of switching is a deal-killer.

So if top execs want the iPhone, the IS department can support an iPhone. One of the things my study (and subsequent academic work experience) has shown is that, in some environments, staff doesn’t have much say because powerful users make their own decisions. Law firms and legal partners are one example; universities and faculty are another. I could imagine at some tech companies, spoiled geeks would be a third. (Or, worse yet, if you don’t support something, engineers will spend all their time trying to make it work rather than shipping product).

So I want to thank LT for reminding me of this reality that CIOs face for switching costs: whether or not it's a good idea (i.e., economically rational), if your bosss(es) wants it, you have to do it. Thus far, the iPhone wannabes have not caught up to Apple’s software quality (particularly ease of use).

Latest iPhone Flash rumors

This week brings the latest iteration of the Flash-coming-to-iPhone rumors (based on an analyst question to Adobe CEO Shantanu Narayen). Adobe is allegedly developing its own implementation, despite Apple’s longstanding antipathy to the platform. Of course, the rumors of Flash on the iPhone were rampant in March, February and even last July.

Another rumor is that Apple is developing its own Flash competitor called “SproutCore.” It appears that SproutCore is an JavaScript/Ajax framework and a way to access Mobile Me (née DotMac). The rumors seem tied to a WWDC session last Friday, and claim that the solution brings Cocoa APIs to Windows and the Web using JavaScript.

This seems more plausible, given Jobs’ history. NeXT opted to bypass a licensed implementation of Adobe’s Display Postscript to develop its own. OS X has shipped its own version of a PDF reader so that Acrobat is largely superfluous for Mac owners. (Apple has also sought to bypass Microsoft implementations for its file formats).

I have no horse in this race: I dislike Flash but am also unlikely to buy a SBC-provisioned iPhone. Still, if I had to bet, I’d bet on Apple bypassing Adobe again to provide its own mechanism for playing all those confounded SWF files.

Steve's new, new, new phone

I hear Apple introduced a new phone a week ago. I didn't see the announcement because I had a meeting at school, but I did watch the 90 second condensed version on YouTube (60 seconds of Steve Jobs and 30 seconds of self-promotion).

Since there has been an onslaught of coverage, let me just offer a brief reaction. What was introduced: a new phone, a new business model (with a new price), and a new software ecosystem.

On the phone, my friend Mike Mace captured it nicely: the announcement “was probably the minimum necessary to please the community.” The hardware changes include 3G, GPS, improvements in size and battery life; however, it still has a mediocre camera.

The remaining changes were in software, and the iPhone 2.0 update will be available free to old iPhone users ($10 for iPod Touch owners). This includes the Microsoft Exchange server access, some support for attachments, and of course the third party software apps.

For the business model, Apple has given up on its revenue share plan and has switched to a more conventional operator-subsidized handset price recouped via long-term contract. The standard subsidized price is now $200 (£100), but some operators (as in UK's O2 or Germany’s T-Mobile) will let you have the phone essentially free if you spend enough money on the service plan.

The good side is that Apple now has a much easier time getting its phone adopted by carriers — the old contentious rev share model didn’t scale, because few were as desperate as SBC AT&T. On July 11, the 3G phone will be available in 21 countries (according to the Apple website) or 22 (adding France, according to Steve’s keynote slides). Another 49 (48) countries are due Real Soon Now.

As the doomsayers predicted, we can now label the iPhone 1.0 business model a failed revenue share experiment. It was worth a try, but it didn’t work, because the industry was used to something else (and competitors are still using it).

The downside is that the hardware price cut from $400 to $200 is more than made up by the $240 increase ($10/month) in the required data plan. The other feature is that the phone will be activated before leaving the building, cutting out the gray market (and also the remote activation revenue stream of Synchronoss — as brilliant predicted last month).

I am interested to see whether the real price of the iPhone will drop over time, as it has with the iPod, or whether Apple will continue to only sell high-end smartphones. I can see the logic of not selling anything less than a 3G phone, because the attraction of the iPhone to carriers is that users have more mobile Internet use than any other device (and thus will take the expensive plans). Still, in the long run, will there be a family of products (as with the iPod and Apple’s laptops) or just a single product with different RAM specs (as today or with its Mac Pro desktop).

Apple’s announcement at WWDC emphasized the final point about the new phone — the software ecosystem with distribution via the iPhone App Store, due to go live on July 11 with the new phones. Apple will be selling and fulfilling the apps and taking its 20% cut along the way. Update 2:10 p.m.: John Boudreau of the Merc has a great story this morning on Apple’s successes in winning iPhone developer loyalty.

One survey of developers predicted that 70% of the apps will be free. This is like saying that 70% of the Macintosh apps are free — which is probably a low number. However, if the Mac model holds, all the major apps developed by multimillion dollar programming teams will have a price tag.

The free ones are usually simple one-trick ponies from a small (or single programmer) company trying to get PR. Under this model, the 1.0 will be used as teaseware and a paid 2.0 (or “Pro”) version will be offered.

The ones where the teaseware works will become modest little businesses like Bare Bones Software BBEdit (mentioned in the original paper about two-sided markets). The ones where it fails will either be pulled, or left as generic free publicity for a company seeking odd job contracting work, or as free sharing by a programmer who wrote the software for fun. The most famous Palomar Software alum, Glenn Andreas, gives away all sorts of OS X widgets to cross-promote his software products.

Overall, I think Apple this year will win the hearts and minds of US developers the way it won high-end iPod users last year. Native iPhone apps are not particularly easy to develop, but as with the original Mac days, Apple will attract a wide range of motivated developers wanting to push the envelope, which will produce lots of new apps (probably mostly consumer oriented) that will make the iPhone more valuable.

Most of these app developers will fail, eek out a modest living, or cross-promote some other business (doing ports for big companies). But if Apple creates some important winners, then this new ecosystem will become a major part of the iPhone value proposition and Apple’s business model. (Not bad for a company that started with a closed device).

Overall, this will help Apple’s overall strategy of growing the US consumer smartphone market, because most US consumers are not using smartphones. The business smartphone market seems to have much higher penetration and switching costs, and so I wonder how much upside is left there. Exchange support will allow access to the small fraction of sites that are using it as their mobile push solution. (Or, perhaps, the large number of sites with a small number of handsets).

RIM and BlackBerry are in Apple’s sights: I think this could stunt RIM’s attempted consumer crossover, but it would be a long time (if ever) that it impacts the business market.

As for overseas, the tepid response to the pre-3G phone leaves little to judge from. The apps may make the difference — if the iPhone apps are much better than those from the better established Symbian S60/UIQ community, and manage to stay ahead of Android.

Tons of 3G iPhones

ImportGenius has found evidence that Apple has imported 188 ocean containers worth of unspecified electronics from its key Taiwanese suppliers, Hon Hai and Quanta. The assumption is that these are 3G iPhones being announced on June 9 (although presumably another product could also be in these containers).

Forbes has a summary of the other evidence, including increased mileage by Steve Jobs on his Gulfstream V.

The scrutiny and speculation seem almost funny: Apple gets all this free advance publicity, just by saying it doesn’t want advance publicity. As in 2007, the 3G iPhone shows that Apple still is the tech industry leader in PR efficiency.

iPhone's world tour

Rumors of the June 9 announcement of the 3G iPhone keep building. Normally Apple (used to) pre-announce by 30 days to fill the channel, but because the 2G iPhones have disappeared from the channel, it suggests that the new phone will be available for sale within 24 hours.

Beyond AT&T in the US and its three partners in Europe, Apple has added Rogers in Canada and America Movil (owned by the man richer than Bill Gates) in Latin America. Its existing partners, Vodafone and (this morning) Orange, have announced plans to sell the iPhone outside their home countries in places like Australia, Austria, Belgium, India, Switzerland and now Africa/Middle East.

Not all of the deals are exclusive for the national markets, and it’s unclear what’s happening with the revenue share. That these are sales coming in the future implies they’re waiting for the 3G phone.

But still no major Asia deals, as I’d predicted back in January. Does this mean the Apple brand does not provide the buyer power necessary for cutting a favorable deal in Asia? That there’s no point of killing gray market sales until the 3G phone is available in quantity? Or that that part of the world is just not interested in Apple’s combination of iPod, web browser and Wi-Fi?

Understanding the iPhonatics

At CTIA this week, Rubicon Consulting released a survey of 460 US iPhone users. The 35 page study is signed by Mike Mace, co-author of my iPhone paper.

A few key points:

• the most time is spent on e-mail, but the device increases browsing too.
• a third of the audience carry a second phone.
• the iPhone increased bills by $228 annually, half of the users switched to AT&T, and AT&T gained an additional $2 billion in annual service revenue.

About 40% switched from other smartphones — which in the US are not surprisingly Blackberry or Windows Mobile — and 50% switched from another phone such as a Motorola Razr. 75% of the customers either own an iPod or Mac.

The report listed two major challenges. First, the WebKit-enabled iPhone browsing doesn’t work on certain websites. (The report doesn’t mention it, but Nokia S60 uses the same browser technology).

Second, the iPhone has won the most innovative users,† but can it appeal to a broader market? This was a question for the iPod and Newton, too — one made it and the other didn’t — although the Newton never even got close to early adopters, let alone the “chasm”.

My rough reading is that Apple is roughly on track — it’s achieved its beachhead, but it has a long way to go to become mass market. And (as with any innovator) its rivals are not going to stand still.


† The report says “early adopter”, which is a technical term in innovation diffusion research that specifically refers to a market penetration of 2.5-16%, but is often misused by practitioners to mean anything in the first 15-20%. With a 17% share of new North American sales in 2007 (not installed base), early adopter (“visionary” in Geoff Moore terms) is a plausible categorization for the US. But in Europe, it’s clearly at the innovator (Rogers) or enthusiast (Moore) stage of 0-2.5%.

Mobile phone cuts

Just a few tidbits of news today.

Deutsche Telekom is cutting prices of the iPhone, from €499 to €99 (or to have a monthly bill of €29 with a €249 up front charge). This has all sorts of implications. It might reflect an abject failure of the iPhone in Germany, or it might be clearing out inventory for the 3G phone. Or it might reflect a shift of Apple’s strategy to have a range of price points and make the iPhone more widely dispersed.

Motorola is making another round of job cuts, axing 2,600 today. They will have 63,500 at the end of the cuts, versus 147,000 in 2000. Among the casualties is their Birmingham design centre (née the startup Sendo); alas, instead of half (60) of the workers, they are dumping all 120. Motorola has yet to bottom out: as with Apple a decade ago, it needs to come up with a way to increase innovation and top line growth, not just cutting costs.

Finally, (on an unrelated note) Microsoft has modified its plans to dump Windows XP on June 30. While that’s still the planned end date for the developed world, it will be keeping XP for cheap PCs in the third world.

Smartphones: where we are

Monday I reprised my appearance at the Smartphone Summit, held in conjunction with the semiannual CTIA trade show. In addition to moderating a panel, I got to attend the rest of the conference.

The most new information came from the opening panel of mobile phone industry analysts:

• Mark Donovan - Senior Vice President & Senior Analyst, M:Metrics
• Pete Cunningham - Senior Analyst, Canalys
• Andy Castonguay - Director - Consumer Research, Yankee Group
• Bill Hughes - Principal Analyst, In-Stat
• Jonathan Goldberg - Senior Analyst, Deutsche Bank Equity Research

I’m used to having panels with stars and duds, but this was one of the largest panels I’ve seen at any show where everyone was first rate.

There were a lot of interesting presentations of data. One was the Canalys summary of the 2007 smartphone OS market share in North America and EMEA (Europe, Middle East, Africa):

	EMEA	N.A.
Symbian S60	34.8m	0.5m
Windows Mobile	5.0m	4.9m
Blackberry	2.3m	9.2m
Symbian UIQ	1.5m
iPhone		3.4m
Palm OS		1.4m
Other	1.3m	0.3m
Total	44.8m	19.7m

This gives more specific data about US vs. Europe and full year statistics that were not available in the Q42007 data released in February. Canalys is expecting a 50% CAGR for smartphones from 2004-2010.

There were other interesting comparisons between the two regions:

• Smartphones in the US are 2/3 enterprise while Europe is 2/3 consumers. Sales in the US are distorted by American addiction to handset subsidies: consumers don’t buy phones without subsidies. so cheap smartphones (think Palm Centro, RIM Pearl) sell but expensive ones do not.
• In the US, users (including teens) with PC experience want keyboards for e-mail and text, while European teens are quite happy with T-9. (At least one of the panelists shared my view that everyone wants good input and small form factor suspect others are like me and want both a small phone and a keyboard).

The In-Stat data on US users was also really interesting:

• Did users install any mobile phone apps (i.e. themselves, not their employers). The mean has creeped up from 1.54 in 2005 to 1.83 to 2007, but the histogram more interesting: none (30%), one (17%), two (19%), three (10%), four or more (25%).
• Phones are used as PC extension (53%), laptop replacement (17%), desktop phone replacement (17%). (The most interesting is that 30% of the users are just using it as a feature phone — the Smartphone OS is used by the manufacturer as a way to software-configure features, but the users don’t treat it as a smartphone.)
• Average ARPU per customer: $81 corporate-liable (company direct pay), $59 business-personal (reimbursed by company), $48 personal and unreimbursed business, and $26 pure consumers.

However, the In-Stat slide that got everyone's attention was the discussion of correlating platform strategies to vendor profitability. (I tried to grab my camera phone but was too slow). Hughes claimed that of the top 13 vendors, all of the vendors with simple platform strategies (2 or less) are profitable, and all those with complex ones (3+ platforms) are not. (For #14, it's so small that it doesn’t make money even though it has a limited number of platforms).

The first mention of the iPhone was Hughes asking if the iPhone is a “smartphone” — even with the recent SDK, the audience was evenly divided. (It is certainly a good web surfing device, extensible by web apps, so I think it would be silly to claim it is not “smart”). No one expects the iPhone to succeed in the enterprise, except perhaps in a few vertical markets like advertising.

Everyone agreed the iPhone is having a major impact on the industry. As Goldberg said: “In the U.S., consumers are suddenly interested in smartphones and aware of smartphones in a way they weren’t before.”

The crystal balls were otherwise cloudy. Are sales disappointing in Europe (France, UK, Germany, Ireland, Austria) due to the price? The form factor? (The lack of ITunes store penetration?) Or because it’s not yet 3G?

Still, I thought it gave a really good overview of where smartphones are today in the US. The one thing I’d add is the Rubicon Consulting iPhone study, which is being unveiled today at the main CTIA conference.

Flash in the phone

Flash is coming to Windows Mobile devices, and now Engadget speculates Adobe will develop it for the iPhone even though Apple has said no and remains unenthusiastic. Adobe later backed down on their prediction of imminent Flash for the iPhone.

The most compelling explanation for Apple’s reluctance is that Flash would open a new site of APIs with new applications that Apple doesn’t want. However, Flash would also require a change to Apple’s ban on interpreted languages, which are a potential security hole.

Many Flashaholics have said that Apple now can’t resist the inevitability of Flash for the iPhone, but that’s hope and not economic reality. Apple’s biggest rival in North America is Research in Motion, and the BlackBerry also lacks Flash.

The one place where I do think Apple needs Flash (actually Flash Lite) is Japan, where 80% of the current Nokia phones run some form of Flash. Of course, if Apple adopts, endorses or enables Flash for Japanese websites (or even bundles it), then it would be hard not to make it a use download worldwide.

Will it blend?

I am heading up the science fair committee for our local elementary school, and we had a meeting today about planning our April 11 event for a hundred kids ages 5-10. (Yesterday I served as an IEEE judge for the Santa Clara County science fair, the championship for kids ages 11-18).

Today I heard that one of our fourth graders is doing a project about blending money — which brought the observation from another parent that he must spend too much time watching “Will It Blend?”

Sure enough, browsing to the “Will It Blend?” website, the featured video clip is “The iPhone. Will It Blend?” This was an absolutely fascinating video — eliciting a wide range of feelings from curiosity, ghoulish humor, and scientific reflection. The ending — when they pour out the results of the iPhone smoothie — is not to be missed.

The videos hosted by Tom Dickson (a crazy combination of Mr. Science and cable TV ginzu salesman) are segregated into two categories: try this at home and don’t try this at home. The latter category (which includes the iPhone) features the most outrageous and popular of the genre.

In addition to entertainment, it’s also a brilliant business model — as clever an advertorial as I’ve ever seen. The site is run by Blendtec, a maker of consumer and commercial blenders, which promotes the website (and vice versa) for both types of blenders.

They swear they use one of their consumer blenders (the “Total Blender”), which is the low end of their consumer product line (let alone commercial), but at $600 list ($400 street) would be considered a luxury blender by Wal-Mart or Costco standards.

There’s no explicit ad, but everything is an implicit testimonial: the videos can be embedded in websites, reposted to YouTube, or otherwise promoted via word of mouth. If ever there was a way to position a premium-priced product, this is it.

Like YouTube and most other short clip services, it uses Flash — good for Macromedia, bad for iPhone users. Dickson said the iPhone smoothie was by request of his YouTube fans, so expect to see it among the YouTube most viewed videos soon.

The dog that didn't bark

As Sherlock Holmes noted back in 1892, sometimes it’s just as interesting when a dog doesn’t bark as when it does.

Last month I asked whether this week’s iPhone SDK would bring Flash support. It didn’t, and in almost all the coverage of the SDK intro nothing was said about this major gap (for Apple? for Adobe?) in platform compatibility.

Despite what Adobe boosters claim, Steve Jobs still feels that Adobe needs Apple more than Appleneeds Adobe. Various accounts quoted him as telling shareholders Tuesday that PC-based Flash is too slow and Flash Lite is not capable enough to support today’s web. It’s not clear if Steve is being sincere, or merely sending a message diss’ing (or even promising?) Flash support. Adobe this week was noncommittal.

Interestingly, Sun took a quick look at the iPhone SDK and then promised to bring Java to the iPhone. That’s what I expected Adobe to do, so maybe Steve is right: the current Flash is suitable for the current iPhone hardware.

Fund, fund, fund

Thursday was the big day for the iPhone. Apple finally announced its SDK, it has a new partnership with Microsoft for Exchange server support, and has intimated that white-market (not gray market) iPhones will show up in Asia sometime soon.

All of these things were interesting, and the Microsoft alliance was somewhat (but not entirely) unexpected. But the oddest thing was the deal with KPCB to come up with $100m for the iFund, to fund iPhone (and iPod Touch) startups.

The KPCB FAQ explains

Q: Does the iFund focus on specific investment areas?

A: The iFund is agnostic to stage and size of investment (from seed stage to established products with revenue), but targets companies with long-term standalone potential. Focus areas include location-based services, social networking, mCommerce (including advertising and payments), communication, and entertainment.

Q: Why did KPCB establish the iFund?

A: KPCB believes that the iPhone and iPod touch are a fantastic platform for mobile applications and services, combining a world class development environment, great devices and UI, an advanced customer base, and strong global distribution. This confluence of factors will ignite a wave of mobile internet innovation, generating opportunities on par with or greater than the PC internet. We expect the most innovative mobile companies and entrepreneurs will choose to develop their apps for the iPhone and iPod touch platform.

Q: How much will the iFund invest in each startup company?

A: The iFund will invest anywhere from $100K of seed capital to $15M of expansion capital in mobile application and services companies.

As with any venture fund, this is not a promise to fund specific companies — presumably the VCs will only put their money where they think they have a good chance of earning their desired return.

But why KPCB? Yes, they’re the bluest of blue chip VCs in Silicon Valley, and partner John Doerr (who shared the stage with Steve Jobs) is the king of active VCs. But Apple was funded by Arthur Rock, and NeXT by Ross Perot, so Jobs had no obvious linkage to KPCB linkage.

I was scratching my head. And then I saw it: Algore, one of 8 directors on the Apple board, and also “team member” at KPCB. Apparently Gore has brought Doerr and Jobs together before to sell his passion for “greentech” investments.

I was initially skeptical of Gore’s initial appointment to the Apple board, that it was merely a self-indulgent, feelgood move by the aging hippie iCEO. But if Gore brokered the iFund creation, he certainly earned his director fees for a few years.

iPhone Flashpoint

Although I no longer read the daily WSJ, Larry Gagnon of ZDNet pointed me to an interesting article today on the WSJ website (by former CNET reporter Ben Charny) about Flash on the iPhone.

Adobe has successfully created a new platform with Flash, Adobe wants the iPhone to ship Flash. Mobile platforms are a strategically important source of growth for Adobe. As of last October, it had 300 million installs on 430 phone models and 140 device models, and mobile/device revenues (for both Flash and Acrobat) were $52.5 million, up 40%.

So far Apple isn’t cooperating, and went so far as to use a work-around to get YouTube on the iPhone without providing Flash. Today Adobe needs Apple’s cooperation because Apple tightly controls third party apps on the iPhone; even on the ISV-friendly OS X, Apple retains some control such as for apps that require low-level interfaces.

Once the new SDK ships (this month?), the iPhone will become a feasible target for a wider range of third-party apps. At that point, Apple’s attitudes could range from

1. bundle it and pay a royalty
2. bundle it if it can get out of a royalty (not very likely)
3. treat Flash as a strategically important application and help Adobe develop a Flash port for the iPhone — which it then can distribute as it sees fit
4. treat Adobe like any other ISV (which is to say, not go out of its way to support a very popular application)
5. do what it can to discourage/prevent Flash for the iPhone, such as by changing APIs or allowing it on its redistribution site.

The WSJ makes it seem like Apple is at #4 or #5.

Neither side is talking, but the key issues would appear to be:

• Processor usage. Flash is a resource pig, although Flash Lite supposedly runs on a 150 MHz ARM chip. The iPhone has a 620 MHz ARM chip, but that chip is severely taxed right now.
• Royalties. Adobe gets 20¢ per phone for preloaded software, but nothing if the software is downloaded by the user (e.g. for Symbian or Windows Mobile).
• Platform control. Flash is a classic closed standard — even more closed than Windows — in that Adobe controls the APIs and no third party implementations are available. By comparison, Apple supports Adobe’s PDF standard on OS X but has its own implementation of a PDF reader that lags Adobe’s by several generations but for most purposes is good enough.

IMHO this last point is the most important one. Flash is a prerequisite to using an increasing number of websites, as I found trying to go without for several years. (Still, it was only GrandCentral that caused me to finally install it). Apple is gambling that Adobe needs the iPhone more than the iPhone needs Flash.

John Gruber has a long post about why he believes Apple will not help bring Flash to the iPhone. It appears that we don’t agree on much, but we agree here:

Apple doesn’t control the HTML/CSS/JavaScript web standards, but neither does anyone else. And Apple does control and own WebKit, which is by anyone’s measure the best mobile implementation of these standards today.

Flash, on the other hand, is (from Apple’s perspective) the wrong sort of proprietary — owned and controlled by another company.

Gruber notes (correctly) that Flash may have won on the desktop, but the mobile web is still wide open.

The iPhone has an opportunity to influence those mobile standards far out of proportion to its market share (of about 6% of new smartphone sales). As Google told the Financial Times last week, Google “had seen 50 times more searches on Apple‘s iPhone than any other mobile handset”.

My bet is that for 2008, Apple will continue to promulgate WebKit and work with Google (Ajax etc.) to make websites work well with the iPhone using open standards. I also expect Adobe to ship its own Flash player (with or without Apple’s help) in Q2 or Q3 of this year.

The real issue is whether mobile-oriented websites will develop assuming a Flash playe, and then require iPhone users to download a copy of Flash Lite — or whether they will follow the Google-iPhone web application model.

The triumph of WebKit

I’m sorry to be here in San José instead of Barcelona, because this sounds like a particularly momentous 3GSM conference this year. There’s such a huge amount of news that even from 7,000 miles away it’s impossible to keep up, although the FT coverage (and that of CNET and Engadget Mobile) helps.

Although there’s been a lot of coverage about Google’s gPhone prototypes at MWC, I found an article about Google’s business model to be more interesting.

Google on Wednesday said it had seen 50 times more searches on Apple‘s iPhone than any other mobile handset, adding weight to the group’s confidence at being able to generate significant revenues from the mobile internet.

“We thought it was a mistake and made our engineers check the logs again,” Vic Gundotra, head of Google’s mobile operations told the Financial Times at the Mobile World Congress in Barcelona.

If the trend continues and other handset manufacturers follow Apple’s lead in making web access easy, the number of mobile searches will overtake fixed internet searches “within the next several years”, Mr Gundotra said.

Of course, more searches equals more page views of Google-served ads. Does it mean more click throughs? We assume that, but of course there’s not enough of a track record to tell.

This is a clear validation of Google’s efforts to work with Apple to make the iPhone the premier mobile Internet device. Apple deserves a lot of credit for showing others what to do, and will receive abundant flattery through imitation over the next few years.

What I think it makes clear, however, is the triumph of WebKit — a fast, lean, standards-based open source browser that is rapidly gaining share. It’s Apple’s desktop browser, its iPhone browser, Nokia’s S60 browser, Google’s Android browser, and — as a presentation last month at Mobile Monday made clear, coming soon to Windows Mobile.

The next opportunity is obviously to bring WebKit to the 10% of the smartphone world that uses Blackberries. Strangely, an open source effort to port WebKit to Symbian UIQ seems to be stalled — you would think the Sony Ericsson (or UIQ) bureaucracy could spare an engineer for six months to help along the conversion.

WebKit’s success means that mobile websites will eventually be targeted for WebKit browsers — unless somehow Mozilla can up with clean fast code soon. Since WebKit is open source, Apple may be able to put a unique UI on its iPhone but not a unique web rendering engine.

All browser implementations of HTML etc. standards have their quirks. Today many sites don’t work with Safari’s. However, if you have market share then website operators will have to write their code to be compatible with those quirks.

More importantly for Google, if everyone is running Ajax-compatible WebKit browsers, it can develop cross-platform web apps for the vast majority of the smartphone world while others are still figuring out how to port their native apps.

Apple: We're #3!

On Tuesday, Canalys released its estimate that 115 million “smart devices” were shipped in 2007, where such devices are defined as “smart phones and wireless handhelds”; as best I can tell the numbers are 112 million vs. 3 million. (It’s hard to tell how many of the latter are Palm PDAs, Windows PDAs or an iPod Touch).

Canalys is coy about full year results, but the stats for Q4 allow comparison of the overall handset market (released last month by IDC) and the “smart device” market. Making some reasonable assumptions (in italics)

Vendor	All handsets		Smart Devices
Nokia	133.5M	40.0%	18.8M	53.0%
Samsung	46.3M	13.9%
Motorola	40.9M	12.2%	2.3M	6.5%
Sony Ericcsson	30.8M	9.2%
LG	23.7M	7.1%
RIM	4.0M	1.2%	4.0M	11.3%
Apple	2.3M	0.7%	2.3M	6.5%
Others	52.5M	15.7%	8.1M	22.8%
Total	334.0M	100.0%	35.5M	100.0%

Of the “other” smartphones, about half are Windows mobile. Apple is tied for third with Motorola on smartphones, but of course Motorola sells 20x as many featurephones.

Other smartphone stats from Canalys:

• Worldwide, the Q4 operating system share is 65% Symbian, 12% Windows, 11% RIM, 6.5% iPhone and about 5% Linux. Of the Symbian, 82% is Nokia; presumably most of the rest of Sony Ericsson.
• In the US, Q4 device market share was RIM (Blackberry) 41%, iPhone 28%, Windows 21%, Palm 9% (Note the overlap of Palm Windows devices).

Also on Tuesday Apple, introduced new iPhone and iPhone Lite models:

Model	8gb	16gb	32gb
iPod Touch	$299	$399	$499
iPhone	$399†	$499†

† plus a two-year contract unless you figure out how to unlock the iPhone

Apple is certainly holding off on cutting prices on either model, which presumably awaits the 3G iPhone in June or July.