Cingular and the iPhone: Apple's 30% Solution

What if you built a wonderful new product that tech pundits were raving about - but only made it available to 5% of its potential market?

That's what Apple did when it released the iPod in 2001. It was a Mac-only device that required FireWire. Later versions of the iPod supported Windows PCs, but they still required FireWire, which few PCs have.

It wasn't until Apple released an iPod with USB 2.0 support - a port found on virtually any PC running Windows XP - that iPod sales took off. Apple totally dominates the MP3 player market, and the iTunes Store absolutely dominates online media sales.

What if you built a wonderful new product that tech pundits were raving about - but only made it available to 30% of its potential market?

That's what Apple has done with the iPhone, which will be exclusive to AT&T (formerly Cingular) customers for its first two years on the market.

Yes, AT&T is the largest wireless company in the US, but barely. According to Red Herring, Cingular had 58 million subscribers when the iPhone was announced, Verizon 57 million, and Sprint Nextel 53 million. (Followed by T-Mobile and Alltel.)

'We Don't Care - We Don't Have To'

Far more than the US$499-599 price of the iPhone (which probably already includes a discount for a two-year service plan), this will be a serious barrier to Apple's success. Apple is telling 70% of mobile phone users that they have to switch carriers if they want to use the iPhone - and AT&T is generally regarded as having the poorest customer service among the "Big 3" wireless carriers.

It reminds me of Lily Tomlin's Ernestine:

We handle eighty-four billion calls a year. Serving everyone from presidents and kings to the scum of the earth. We realize that every so often you can't get an operator, for no apparent reason your phone goes out of order, or perhaps you get charged for a call you didn't make.

We don't care.

Watch this... [she hits buttons maniacally] ...just lost Peoria.

You see, this phone system consists of a multibillion-dollar matrix of space age technology that is so sophisticated, even we can't handle it. But that's your problem, isn't it? Next time you complain about your phone service, why don't you try using two Dixie cups with a string?

We don't care. We don't have to. We're the Phone Company.

And that's the company Apple has partnered with. Exclusively. For two years.

That puts a lot of wireless users between a rock and a hard place. For instance, I've been with Alltel for years. I'm pleased with their service, rates, and coverage. And I just added a line and extended my contract for another two years. No iPhone for me - unless I want to get a new phone number and switch to another carrier.

AT&T Costs More

I don't want to give up My Circle, which lets me call 10 non-Alltel phone numbers without using plan minutes, and which doesn't take away my free mobile-to-mobile minutes to other Alltel users.

Like a lot of mobile users, I'd seriously consider buying an iPhone if I could use it with my current carrier. I'm in no position to switch until January 2009, and I'm not interested in obtaining AT&T service just so I can use the iPhone.

Besides, AT&T's Family Plan costs more. With Alltel, I'm paying $59.99 per month for 900 minutes plus $9.99 per additional line. With AT&T, $69.99 would get me 700 minutes and two lines (plus $9.99 per additional line). To have the same number of minutes I currently have, I'd have to choose AT&T's 1,400 minute plan at an additional $20. (If I wanted 1,400 minutes, it would cost the same on Alltel and AT&T. Everyone but T-Mobile seems to offer a 1,350 or 1,400 minute 2-line family plan at the same price.)

And I'd be losing My Circle, which means the minutes would add up much more quickly. Thanks to My Circle, Alltel gives me all the coverage I need at the best price - I don't want to switch.

Closed Systems

That Mac has lost out on market share in part because it's a closed system. Except for a brief period (the clone era, 1996-98), Apple has been the exclusive provider of Mac OS computers. Some companies refuse to buy single-vendor solutions, which has helped the Windows juggernaut become even larger.

The iPod is part of a closed system. While the iTunes Store and the iPod work with both Windows XP and Macs, only Apple makes iPods and only Apple sells rights-restricted content for the iPod. (The situation is even worse for Microsoft's Zune, which doesn't support Macs at all.)

Wireless companies create their own closed systems with branded phones. While the phone may be built by Motorola, people see the rebranding and tell everyone that they have a Cingular, Nextel, T-Mobile, or whatever brand of phone.

In a way, they do, because these rebranded phones are customized to Verizon's specifications - or those of any other wireless carrier. They may disable features. And they often "lock" the phones so you can't readily use them if you switch carriers.

That's one of my pet peeves. Why should my girlfriend have to give up a phone she knows and loves just because she's switched from T-Mobile to Alltel? Why do the wireless companies feel they have to lock up our phones (we paid for them!) to make switching more costly and more difficult?

I wish Congress would pass a law about cell phone "portability", just as they once did for phone numbers. It's economically and environmentally irresponsible to force people to take perfectly good phones out of service simply because they change carriers.

How Closed Is the iPhone?

Apple's iPhone is a very closed system. It's not based on any Intel CPU, and probably not PowerPC either. Rumor has it there's an ARM CPU inside the iPhone. Apple used an ARM610 to power Apple's Newton PDA, which was released 12 years ago. The ARM architecture has grown since then, and Xscale CPUs (commonly found in PDAs) are an outgrowth of the ARM architecture.

The iPhone runs OS X - but not Mac OS X. It's a version of OS X compiled for whatever CPU is inside the iPhone. And it undoubtedly lacks a lot of features that aren't necessary or important on a phone/PDA/MP3 player.

With the iPhone, Apple controls the vertical and the horizontal. They determine what carriers it will work with. They decide who will be allowed to develop software for it. They choose which channels will offer it for sale. And they control whether it can be used with any other wireless carrier.

Sure, someone is bound to figure out how to install Linux on the iPhone - they seem to find ways to put Linux on just about anything with a CPU, including the iPod. But for the most part, we're going to be stuck with the iPhone as Apple creates it and whatever third-party software they authorize for it.

I don't like the idea of being locked in with a closed system on principle, although in reality I've been very happy with my Macs (and a couple SuperMac clones), my iPods, and my our-service-only cell phones. Closed systems can and do work just fine, but they do limit our options.

With the Intel transition, Apple learned that Mac users prefer a more open system. Given a computer with the potential to run Windows, hackers found ways to run Microsoft's operating system on Apple's hardware (and also OS X for Intel on non-Apple hardware) before Apple released Boot Camp.

Apple, we like our options. Please give us more options with the iPhone!

How Successful Will It Be?

According to EE Times, Apple has contracted with suppliers in Taiwan for 6 million iPhones, with a possible 3 million additional units if needed. If Apple does sell 6 million iPhones the first year, that alone will account for 10% of AT&T's wireless business.

And if Apple manages to sell 9 million iPhones, it will pass the Macintosh division in terms of units sold. (Further, I fully expect the next generation of iPods to be a lot like the iPhone - the same screen and capabilities, but lacking phone features. And they'll probably be timed to take advantage of the iPhone release hype.)

I don't doubt that Apple will sell 6-9 million iPhones the first year - and more in each succeeding year. And I'd guess that at least half with switch to AT&T from other carriers just so they can use the iPhone.

The dam will break if/when Apple makes the iPhone available for carriers other than AT&T, which will turn Apple's 30% solution into a 100% solution.