The revolution will be sychronized

Posted by Admin on 08/07/2007

I mentioned a couple of weeks ago that the iPhone is going to radically alter the mobile phone industry, and complained about how many people have claimed this, yet how few have explained ‘how’. Time to take my own medicine. So, to start at the beginning:

iphone_3The iPhone’s UI is novel in that almost every function is driven via the touch-screen. This makes the hardware component of the phone substantially less limiting when it comes to adding new features and functions. In short: if Apple wants to add a button, a feature or an application, it’s just a software change. This, combined with the fact that the phone is running a very powerful complete operating system (OS X) makes it simple for Apple to rapidly add innovative new features on top of the existing hardware design. Whilst Nokia and Sony Ericsson can update the software on their handsets, any departures in terms of input methods and interaction methods sit behind the roughly 2 year time-to-market limit for new hardware designs. Whilst we expect new form factors on a monthly basis from the main handset manufacturers, we don’t from Apple. Don’t be surprised if an iPhone in a couple of years looks nearly identical to the existing iPhone, just with more and faster stuff inside, and a whole lot more features and applications. That’s not true of anyone else.

Guaranteed daily syncing
This is where things start to get interesting. Very few users currently update the software on their phones. For practical purposes, the manufacturer has to assume that most customers will be carrying their phone around with whatever software version on it that it shipped with. This presents a range of challenges.

For starters backwards compatibility and the need to support old software versions is a concern, something that can get expensive when supporting a large range of handsets. But more importantly here, new software improvements can’t easily be distributed to existing customers. Rather, it’s only the buyers of the latest handsets that get the latest software. The phone is effectively frozen in time at the moment of purchase. This is especially tricky for maintaining services: a web site designed to work on a Nokia needs to support a whole host of browser versions and screen sizes dating back 2+ years, adding significantly to the cost plus limiting the ability of the designers to use the latest features without excluding a large proportion of the potential user-base.

The iPhone is not limited in this way. Since to charge and load the iPhone you plug it into your PC, you’ll also inevitably update the software on it. This is a huge behavioural difference: almost no phone owner plugs their phone into their PC, but every single iPhone user does. What is more, when you’re plugging your iPhone in it’s connecting to one of the best pieces of software ever written: user friendly, relatively hassle-free DRM, auto-updating, and with an integrated store, media viewer, playlist manager, crosss-platform, massive installed user base…

Rapid development and roll-out
The result of this regular syncing and the iPhones 99% software UI is that Apple can reinvent the iPhone user experience and feature set and reasonably expect that within only a few weeks every single iPhone user will be using the new system. This is the key to why the iPhone is revolutionary. The ‘phone’ changes from being a relatively static consumer electronics device to a software platform that can be universally updated by the manufacturer as it sees fit on a nearly instantaneous basis.

Compare these two scenarios:

Nokia decides that an instant messaging client is a good idea. They develop it, and have to have it ready for end-to-end testing. Meaning that once the software is ready, it’s another 6 months before it reaches the market. The testing has to be perfect (hence time-consuming) since the possibility of fixing bugs once the app is live is very limited.

Once it reaches the market, it slowly gets into the hands of their customers as they buy the new phones. A few geeky users might download the software for existing devices (that it works with), but only a few. Given the 2 year device-replacement cycle, about 2 1/2 years after the software is complete, almost all users will have the software.

Apple decides that an instant messaging client is a good idea. Since their phone runs OS X and they already have a great IM client app and extensive OS API, the development time is short. Also, since they can easily patch any bugs after launch, the test cycle is short too, a couple of months is fine. So Apple are been able to write and launch the app in roughly the time it would take Nokia to test it, plus its probably a better app.

Then they go live. Instead of having to install the app on new devices and wait for the 2 year replacement cycle to run, they push the app out to all their customers overnight. Within a couple of weeks, 95% of all existing iPhone customers will be running the app. Find a bug a month later or a small UI improvement… just push out a patch.

Apple are in a position to design, develop test and launch apps to all of their existing users in the time it takes a typical handset manufacturer just to test an application.

What is more, customer satisfaction is much higher with the iPhone. Whereas the existing Nokia customers may be irritated that they’re locked into another year of their contract before they can go out and buy the new phone, iPhone customers get the software automatically and ‘for free’. The experience is ‘hey, look, my phone does cool new things!’. No time investment or hassle for the user. Their product is improving whilst they own it, with no effort on their part. This removes the opportunity costs so common in the tech industry (oh, I’ll wait for the next one because I don’t want to be stuck with last years model).

Manufacturer and operator
This arrangement fundamentally shifts the balance of power between the operator and the manufacturer. It’s worthy of note that handset manufacturers call operators ‘customers’. Nokia and Sony Ericsson sell almost all their handsets to… Vodafone, T-Mobile, and the rest. They don’t sell them to you. The result is that these operators have huge leverage when it comes to the relationship. Operators effectively ‘own’ the end-customer (thats you), dictate features on the phones, and insist on software customisation just for them.

This changes with the iPhone. The fact that the end user is getting these constant feature updates direct from Apple changes the value proposition. The real value now isn’t the network and the contract (which is rapidly turning into a commodity business), but in the frequency and quality of the new product features. If Apple can constantly delight their iPhone users, then that’s where their loyalty will lie. AT&T know this, they are paying Apple a share of the monthly contract fee for each user. This is unheard of in the mobile industry, and represents the biggest balance of power shift the industry has ever seen.

However for other manufactures to follow in Apple’s footsteps they need to offer a product as compelling as the iPhone. And not just a super-desirable device, but the ongoing service-type arrangement via iTunes that Apple offers. Currently no one is in a position to offer this: they lack a suitable iTunes-like content and software delivery platform, and the phone operating systems (Symbian etc) are years behind OS X. They have their work cut out.

You might ask why the operators don’t attempt to do this? Perhaps they could establish their own software platforms and update mechanisms and ‘own the end customer’. In theory it’s possible, but take a look at the anatomy of a typical operator. Their technical and software skills are minimal (and mostly bought-in), their key competencies are marketing, billing and (usually mediocre) customer support. What is more, they’d have to support a wide range of different manufacturer’s hardware, or severely limit their product offering. And, given that they don’t manufacture the hardware, they lack the integrated software / hardware development teams of the handset manufacturers. Short of one of the big players actually buying a manufacturer (eg Vodafone buying Sony Ericsson), with all the attendant conflicts of interest, there’s very little chance of them competing in this new space effectively.

Operators as the new ISPs
Where this is going in the long run is, I think, clear. The other manufacturers will be forced to raise their game, eventually, to reflect the iPhone’s model. Namely: a flexible device with the latest software and services automatically supplied on an ongoing basis. This will commoditize the operator market. Operators will gradually lose their control over the feature set of the device, and the relationship with the customer. They’ll have to compete on the basics: network quality (primarily data speed), price, and keeping their customer service simple, effective and out of the way.

Does this remind you of anything? It might do. Where we are now is where the web was in the mid-90s. Companies like AOL and Compuserve were trying to own the end user via walled gardens (like Vodafone, Verison, etc are attempting now), whilst struggling to keep up technically. An impossible task: create a walled garden that is as good as the rest of the internet combined! The end was inevitable: the ISPs became almost invisible to consumers as commodity suppliers, and the important players became the device people (Dell, HP, Apple, Microsoft), and the application / content service people (Google, MSN, Yahoo, MySpace, etc).

Naturally the operators are not keen to let this happen, and will put the breaks on any developments moving in this direction coming from Nokia, Sony Ericsson, Motorola and the rest. But with the Apple iPhone out in the market, the cat is already among the pigeons.

PS: I got to use an iPhone yesterday, a rare treat for a european. It was every bit as good as I’d expected, and a whole lot more … bijou.