Why the iPhone matters: 8 questions for Horace Dediu

Apple's genius: Realizing it was more than hardware

Horace Dediu writes data-driven analyses on a wide range of mobile industry topics. He is the founder and author of Asymco, a blog for "curated market intelligence," and previously worked for eight years at Nokia, as an industry analyst and business development manager.

His background also includes software development, IT management, and computer science research. He has an MBA from Harvard Business School and an M.S. in engineering from Tufts University. He lives in Helsinki, Finland, with his family and a view of the Baltic Sea.

We asked him eight questions about the five-year impact of Apple's iPhone, and he replied from his iPad.

Five years ago, people actually began to get their hands on the Apple iPhone. There were other smartphones; no prior phone products from Apple; there was no App Store, no apps "ecosystem." So what accounted for its initial success with consumers?

The iPhone was launched with Internet communications and media consumption as the primary key selling points (also as a phone). At the time there were no phones which had browsing and media consumption that average consumers could actually use. The iPhone was competing with non-consumption in its key selling points. Apps came a year later.

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The fifth version, iPhone 4S, was introduced in October 2011, and widely criticized by the tech press for a variety of failings. Yet it became by far the best-selling iPhone to date. Why?

The iPhone 4S was successful because it was a very much improved product over the iPhone 3GS, which was what most users who upgraded their iPhones were using. The average time in use of a smartphone is about 24 months.

Also, for consumers who did not have an iPhone it offered a very good set of unique features like Siri and Retina Display and high-resolution camera. There were many consumers who could buy it because the phone was more widely available than ever before. This formula will be applied again for the next iPhone and it will be equally successful.

The tech press has been a good counter-indicator for market success.

Despite the iPhone's success, you said in a recent interview with MacUser that "Apple will need to sell at least 1 billion iPhones in the next few years. Seen another way, Apple has a market share of about 9% on a quarterly basis. This needs a lot of improvement." How can, or should, Apple improve that share?

Apple will reach 1 billion users by increasing distribution and improving the product in meaningful ways. It will also maintain older products in production and thus offer lower price points. What I don't know is how soon they will reach all the available markets. The product does depend on high-quality 3G network availability and agreements from operators to be used on their networks. Also their media consumption model depends on the availability of media downloads -- something which is very slow to grow internationally.

In an interview with Chosun Daily, you said that Apple's iPhone innovation was that "Apple created a new market for browser-based devices and for app-based experiences. These were enabled by an ecosystem that benefited from integration." What do you mean by this?

An ecosystem is a set of companies which profit from a common platform. The platform also benefits from these companies by having innovations which expand the usefulness and enjoyment of the platform. (In the context of devices, the term ecosystem was first coined by Palm in the late 1990s in relation to its Palm PDAs.) Apple's innovation was to enable this ecosystem with an integrated device, system software, APIs and retail store with built-in audience and discoverability. By integrating pieces of technology Apple was able to create an ecosystem very rapidly. This ecosystem generated over $10 billion in revenues (apps and media) in less than 4 years.

In that same interview, you said that Nokia's mistake was that "they did not think the basis of competition would change. They thought they were too big to fail. They did not challenge the core business model of hardware-first and try to find an internal disruptive business." How would you apply these insights to Apple?

Apple changed the basis of competition from hardware as the primary value consumers paid for to a combination of hardware, software and services. Being competitive changed from having good hardware to having good hardware, good software and services -- made usable through integration.

Apple has expanded its business model to include services such as iTunes, Siri and iCloud. It can remain disruptive as long as it improves along a dimension which is not good enough. What has been less than "good enough" has been the experience and that was made better through integration. Over time this becomes good enough, and so the company needs to add services (which are [currently] not good enough). Services can include solving deeper customer needs like companionship, assistance, discovery and social bonding.

What has been the main impact of iPhone on mobile carriers, and how are they responding to that impact?

The iPhone has made consumers understand that a phone can be more than a device for talking and texting. Once that understanding happened the realization came that there are other services which are compelling on a device which operators do not offer. These are often referred to as "over the top" or OTT services.

Consumers now value OTT more highly than traditional services like voice and text. The evidence is both in the ascent of OTT brands like Facebook, Twitter, Google search and Siri, but also the erosion of pricing power for traditional services.

Operators have benefited as users rushed to upgrade to data-based devices which came with data revenues while they still bundled voice and text. They will face increasing pressure, however, to reduce pricing as saturation is reached. This dependence on "upgrades" to the network value proposition followed by "commoditization" when saturation is reach is a common refrain in all network based businesses.

In your June 19 post, "The Evolution of the Computer Value Chain," you argued that Apple is expanding beyond product design for the iPhone into areas like sales and distribution, services, component design and materials. Why?

Value is profit-producing activity. Markets signal value by paying a premium over the cost of production.

The increasing of integration of the value chain is a natural phenomenon during periods when the product being delivered to the user needs to be improved rapidly because it's not good enough. Conversely, value chains break up into finer slices when a product becomes more than good enough and competition shifts to bases such as customization, convenience or niche exploitation.

I believe Apple acted in a common-sense way to this opportunity. It took some vision to begin early enough but I doubt it planned this 10 years ago. What makes Apple unique is that most competitors have not had the ability to integrate since they've been running in the opposite direction for so long (i.e., outsourcing as much as possible).

To you personally, what is the most remarkable aspect of the iPhone, considered either as an individual device or as part of this larger-value chain evolution?

The iPhone has had such a rapid effect on the market that it has allowed theories that usually require decades of research to validate to be shown in near real time (i.e., years). Most people cannot empathize with changes in computing from the '80s but they see how their lives changed as a result of smartphones as embodied by the iPhone.

To see the change in the market and in competitors makes it much easier to explain what is happening. It sharpens our perception of reality just as time-lapse photography allows us to believe that trees can grow from seeds.

John Cox covers wireless networking and mobile computing for Network World. @johnwcoxnww john_cox@nww.com http://www.networkworld.com/community/blog/2989/feed

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