The High-end iPhone: How Apple Could Grow a New Market

iPhone, iPhone, iPhone. It's all over the Web. Apple will release the iPhone. Apple has delayed the iPhone. And the latest rumor is that Apple has ordered 12 million units from Foxconn.

Why?

Back in the 1970s, Apple took a hobbyist computing market and helped launch the personal computer revolution with the Apple II. And thanks to VisiCalc, the first electronic spreadsheet, the Apple II soon made its way into the workplace.

Well, IBM noticed this new market and developed the IBM PC. Its release in August 1981 redefined the entire personal computer industry. People went from having to justify purchase of a personal computer for the workplace to having to justify not buying an IBM.

Apple went from 15% market share in 1981 to just under 10% in 1982. The IBM PC achieved a minuscule 2.5% market share in 1981 and grew to 8.6% in 1982 (its first full year on the market). With the advent of clones, PCs grew to 26% of the market in 1983 and outsold the Apple II, 32% in 1984, and 49% in 1985.

Apple's response was the US$10,000 Lisa in 1983, which make very little headway against the DOS world, and then the US$2,500 Macintosh in 1984. From a running start - Apple sold 372,000 Macs in 1984, sales declined drastically in 1985 (200,000), and barely matched 1984 levels with the 1986 introduction of the Mac Plus.

Apple was great at innovation - the first personal computer with color, the first personal computer with a mouse and GUI - but always a niche player in the personal computer industry.

Consumer Electronics

I could bore you with further details of the Mac's growth through 1995, drastic decline through 1997/98, and resurgence in 2005, but you probably know the story.

What finally changed things for Apple wasn't a computer. It was a portable music player, the iPod. The Mac-only peripheral that required FireWire, the 5 GB MP3 player was introduced in October 2001 to a lot of head scratching. Would people pay US$400 for a digital music player?

But Apple didn't rest on its success this time. In 2002 they introduced iPods for Windows - but Windows users still had to have FireWire cards, which really cut into the potential market.

In 2003, Apple introduced third-generation iPods which had a dock connector that supported both FireWire and USB. Best of all, there were no longer separate iPods for the Mac and Windows markets - and the iPod took off.

Apple opened the iTunes Music Store in the summer of 2003 to make it easy for iPod owners to acquire music by the track. Add iTunes for Windows to the equation, and it was easier than ever to rip CDs, buy music online, and put it on the iPod.

All the pieces were in place, and Apple has dominated both the digital music player market and the online music market ever since.

Enter the iPhone?

The question is whether an iPhone would mirror the iPod's success or the "nichiness" of the Apple II and Macintosh.

The cell phone market is still immature, as was the MP3 player market in 2001. There are too many brands, too many carriers, too many features, and too many interfaces. In some respects, it's a real nightmare.

Add to that Apple's limited support of a narrow range of cell phones with iSync: some Motorola, Nokia, Panasonic, Sony Ericsson, and Siemens models. Nothing from Samsung, Kyocera, LG, or Pantech. (When I replaced my failing phone last week, I really wanted a Samsung, but instead chose a Motorola because it works with iSync.)

What Apple Brings to the Table

Apple brings some of the best industrial design in the business to the table. The company that gave us the elegance of the iMac and the simplicity of the iPod is perfectly positioned to redefine the cell phone and its electronic interface.

Personally, I don't give a rip if it plays iTunes or not, whether it includes a camera, or if there's a speakerphone setting. Give it USB for charging and synching, Bluetooth for headsets and synching, full iCal and Address Book support, and an elegant user interface, and I'm interested.

Of course, Apple isn't going to enter the market with a low-end cell phone. As they did with the iPod, they'll start at the top of the market. Maybe something to compete with the Treo 650, Blackberry, and Windows Mobile "smart" phones on the market.

Yeah, that's it. Apple has the user interface expertise and the touch screen technology (think Newton). Instead of building a bulky PDA that functions as a phone, the iPhone could be smaller, comfortable to hold, and show the world what a smart phone should be.

Just like they did with MP3 players when the introduced the iPod.

If they do that on the high end, they'll give everyone a run for the money. And then they can move down the food chain - again as they did with the iPod.

Not that I expect Apple to own the market, but with such a huge market, holding 10-20% would mean a lot to Apple's bottom line. And having a cell phone that fully integrates with Macs would mean a lot to Mac users making do with the limited integration we have today.

• Link: Apple orders '12m iPhones', paper claims
• Link: Apple's iPhone is Calling