We need a bigger iPhone, we need a cheaper iPhone, we may even need a QWERTY iPhone soon

Apple had an amazing 5 year run with iPhone. It launched the smartphone revolution. iPhone went $0 in 2007 to over $20 billion in quarterly revenues today, and is a huge chunk of Apple’s profits.

5 years in, iPhone is still the most popular smartphone in the world, with ~20% market share worldwide, and about 50%  share in U.S. It generates about half of mobile industry profits. It is a big part of why the most valuable company in the world today carries the fruit logo.

Apple did all this as a complete newbie in mobile, competing with incumbents at the most profitable high-end of the market. With the device that has $600+ average selling price – 20 to 30% more than competitors get for their top of the line handsets. And Apple managed to keep that price level, plus the huge profit margins involved, for more than 60 months now. They also did it with a smartphone that has a major update every two years, with a minor update in the middle. In an industry with ever shorter product replacement cycles, where competitors release major flagships twice a year.

There were two main reasons why Apple was able to do so well with iPhone for so long:

#1. iPhone was a Revolution. And Steve Jobs was right – it was 5 years ahead of competition

Apple invented the modern smartphone as we know it. Before that – all the Symbian, Windows Mobile and Blackberry devices were just phones, with some “smart”/computing functionality tacked on top. Nokia and RIM were trying to squeeze a computer into a phone. Apple turned this notion on its head, built a small pocketable computer, then added a phone functionality to it. And it worked really well.

What’s more, Apple had two to three years to really think about and build this new true mobile computer, while competition didn’t have a clue what’s coming. iPhone announcement caught everyone else so much unawares, that it took Nokia, RIM and Microsoft – former smartphone incumbents years to figure out what it’s all about. To understand that their old “smart” platforms were rendered obsolete by iPhone, and that they had to start from scratch if they ever wanted to compete in the paradigm shift to the true mobile computing.

Google was lucky. They had their CEO on Apple’s board – the first hand knowledge of where Apple was headed and what Steve Jobs was thinking. Also, Google’s own Android project was in early enough stage of development to pivot. So a Blackberry look-a-like became an iPhone copy. Even then, with Apple’s 2-3 year head start, and constant improvements of iOS, it took Google 4 versions of Android and 5 years to more or less catch up. Steve Jobs was right about how far ahead of the competition iPhone was at launch.

#2. iPhone’s carrier greenhouse

The second important reason of why iPhone’s good times lasted so long – is the nature of mobile telecoms markets, especially were the devices are involved. In most affluent parts of the world there is no free mobile device market. It is controlled by a handful of operators, who usually decide which device lives or dies via contract subsidies.

The situation is even worse in the U.S., Apple’s home market, where it’s up to AT&T and Verizon to decide which smartphones will succeed. And where price competition in mobile phones is virtually non-existent. It doesn’t matter whether you pay $50, $100, $200 for a heavily subsidized mobile device, or bring your own $500 phone – your monthly data, SMS and talk costs are usually the same. Over the life of a 24 months contract, the price of the device is a small consideration.

Due to the revolutionary nature and high desirability of iPhone, Apple was able to shift the balance of power in mobile industry. They could demand extremely high price and big subsidies for an exclusive availability, which carriers compensated via pricier contracts for heavier data. Country exclusives also helped operators to poach the most affluent customers from competition, thus strengthening Apple’s hand in negotiations to end exclusivity in this country or that. And, by gradually increasing the number of carriers iPhone is available on, Apple could show steady and impressive growth year after year. While its 2 year major device upgrade cycle was perfectly tailored to the 24 months contract/subsidy business model most carriers run on.

As long as iPhone was THE device to have, while everyone else was scrambling to come up with comparable experience handset, Apple was shielded from the competition by carrier subsidies.

Good easy times are almost over for Apple/iPhone

But all good times come to an end, and in technology markets the end usually comes much sooner. iPhone’s carrier greenhouse days are approaching that point.

Consider:

  • Almost every major operator with standard radio bands/network technology, who wants iPhone, already has one. Growth opportunities by expanding the reach via new markets and carriers are almost over. There are three major iPhoneless carriers left: China Mobile, Japan’s NTT DoCoMo and T-Mobile U.S. Probably a few of smaller ones in other countries. How long will it take Apple to get all they are ever going to get with current approach?
  • In U.S., where there is effectively no price competition, iPhone is already at about 50% smartphone market share. How much higher can it go?
  • In other affluent subsidized markets like Western Europe, where costumers can get “cheap” iPhone, but then have to pay real price via higher monthly contract fees, iPhone’s market share has stabilized at around 20%, and hasn’t been growing for years.
  • iPhone was never able to make significant inroads in most unsubsidized markets (e.g India), and never will with current approach. Unless it changes iPhone business model, Apple will always remain in the high-priced single digits niche there.
  • Destruction of Nokia, RIM and Microsoft in smartphones, which was responsible for at least part of iOS market gains early on, is almost over. There’s almost nothing left to take from them. Plus all three are desperately trying to re-enter the fight with new true mobile computing platforms. What if some of them succeed?
  • Then there’s Android. iPhone was never able to take anything away from Android. In fact, after the initial gains, in all the markets where price matters one way or another, iPhone is barely hanging on to the early gains. In market share. And, now that Samsung is on a roll, even in profit share.
  • In Apple’s best market, U.S., Google’s Nexus 4 is now $299 unsubsidized, compared to $199 for iPhone on an expensive 2 year contract. It may not matter much today, but what if some shift towards pre-paid happens in the next couple of years?

At the current –high price/slow update, 1 new model a year – business model, the easy growth avenues for iPhone are almost exhausted and will disappear in the next 24 months. If Apple wants to continue to grow in smartphones faster or even in-line with the market – they will have to change.

Apple will have to get off its butt and start competing in mobile, just as it does in every other market it plays. With a wider range of models, released more often, with lower overall ASP, and lower margins than it currently enjoys on iPhone. We will need a wider iPhone, a cheaper iPhone, heck, maybe even QWERTY iPhone and what not.

I am pretty sure Apple will figure it out. Their supply chain, manufacturing, design and distribution capabilities are second to none. With Macs, iPods and iPads, Apple has shown time and again that they can outperform any free market competitor in a fair fight.

Tim Cook clearly understands what’s at stake and has already signaled they are going after mobile phone market as a whole, not just smartphones. I hope Apple’s management is smart enough to know they can not get above the single digits in overall mobile devices with only one $600+ device release a year.

And I hope those rumors that Apple is working on iPhone 5S release in the first half of next year, are true. Apple already gave an unnecessary leg-up to Samsung and other Android vendors by ignoring bigger screen opportunities, keeping to a lazy update schedule, and leaving for one and two year old iPhone models to take care of lower end opportunities.

Now would be a very good time for Apple to step up the pace in the smartphone game.

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • Ben Kapferer

    Exactly! The main appeal of Android (and to a lesser extent, Windows Phone) is choice. Apple needs to be able to give their consumers more choices if they want to continue to grow in market share.

  • d_anders

    Iphone 5s is not going to bring a bigger screen, just possible chasis metal changes (less scratching) and internal tech improvements in the same form factor…hopefully that will be in Spring 2013….iPhone 6 in Fall is likely to be another game changer…expect incrementally bigger screen there.

  • Rambir

    The fact is apple was in fact only 3 years ahead. They have only just brought in gingerbread features such as panorama and LTE. They still dont have a brilliant notifications panel and have a clunky and difficult to use maps service. The main reason that I prefer android and windows phone is the choice. You can get a 4 inch phone to a 6 inch phone with everything inbetween. You can now get a 1080p phone (Oppo 5 and HTC Deluxe/Droid DNA/ J Butterfly) and have a 4inch phone that turns to a 10inch tablet. They have quad core processors have a better games system (XBOX games) and, ultimately, are much cheaper. What Apple should do is spend less time suing and making the phone look nice, and spend more time making the phone better.. I want to see either a phone that blows away the competition to justify the price or a windows phone/android device. The latter probably wont happen but the former happened 5 years ago, and needs to happen again. iOS has turned to copying the competition, something that Steve Jobs said Android was doing. Now they are completely different but, in many ways, Android has surpassed iOS. All I can say is name one feature that apple has clear dominance over Android and Windows. Before the fanboys start backing or killing me, I believe I am impartial, I enjoy windows phone and deem it fresh but still think its in its infancy, love the new flavour of Android but the Chrome browser is, well, the worst thing ever, and only on Android as the iPhone version is great. I also like apple and own an iPod touch, nano and a macbook for everyday use (not gaming or programming/debugging basically). I really want Apple to succeed but they need something special for me to get one of their iPhone or iPad products, like the new Surface pro with i7 and USB 3.0 or the nexus 4 with high end specs and a low price of £280 ($349) for the only version worth thinking about, the 16gb model. Come on Apple. I hope Tim Cook is reading this as they really need to be as good as everyone thinks they are to outdo the competition, which is a bad thing as well as it lowers competition. My last words are, do they really want the result to be similar to the Mac v Windows war, where apple got, basically, owned, and make a comeback 20 years later.

  • S S

    I am a big fan of the iPhone, but if they do increase the size of the screen, as some people are asking for, I will not be buying another. I personally do not see the attraction of a phone with a screen so big you need two hands to hold it . IMHO the GS3 is TOO big. And as for Android surpassing Apple, that wont happen till Google can actually make a system that is universally stable.

  • smith@wsesson.com

    “Who’se we sucka?”

  • bibleverse1

    Apple will make a cheaper iPhone only cheaper for them to produce but those savings will not be passed to consumer. Qwerty is a horrible idea.

  • reverend_house

    Staska, a good piece, but you make one inaccurate assertion and ignore one important fact.

    False accusation – Android copied the iPhone. In the very first demonstration video, the first model shown is a Blackberry-esque device. Halfway through a full touch prototype is shown. The iPhone definitely changed the game but saying that Android ‘copied’ it is as ridiculous as saying that all car designers have merely ‘copied’ Gottlieb Daimler. Android is certainly influenced by the iPhone – it has been striving for full touch operation and simplicity. But Android has just as much influenced the iPhone – discreet and useful notification and seamless app interaction using intents (see Android’s share to menu, or ability to set default apps).

    Fact – Apple is stuck with respect to screen resolution and size. iOS cannot scale horizontally. That’s why Apple could only make the new iPhone taller and uglier (then of course make a virtue of the necessity imposed by its OS rigidity by talking up one-handed operation and bashing Android) and not wider. Therefore, short of pixel-doubling or making an even taller more ungainly device, the next iPhone, to have a bigger screen without rendering all apps letterboxed, will have to sacrifice PPI. To keep the PPI above 300 dpi, the screen can be enlarged to 4.3 inches. That’s your lot and your iPhone screen size limit. At least until the next pixel doubling.

  • http://evildevnull.com/thinktank/index.php?action=collapse;c=14;sa=collapse;d227fb2388ec=9e8bb86861f0686e54bcbaae99929bbd#c14 George Leon

    Best selling in the world? LOL…You need to do a bit of research before you write my dear. And to the twit @d_anders , “Another Game Changer”? Get real, how is trying to now keep up with Android by adding different size devices a game changer? I know most of you are too you to know any better, but the real power users were doing everything you do on your i-whatever or Droid via custom made cables & WinCE devices tethered to our StarTacs. BTW, That device I used in late 90′s & early 00′s was also a color touch screen device. The true game changer was the BlueAngel. Still one of the fastest devices period.