It was late morning in the autumn of 2006, approximately one year before Steve Jobs assigned roughly 200 of Apple’s most skilled engineers to work on the project that would redefine the telecom sector in the coming years. Yes, we are talking about the iPhone.
However, the prototype was still clearly a disaster in the Apple boardroom. Not only was the product clunky, but it was also inoperable. Data and applications regularly became corrupted and unusable, the phone would frequently drop calls, and the battery would drain before it was fully charged. Problems seemed to be inexhaustible. Upon concluding the demonstration, Jobs gave a stern look to the approximately twelve individuals present in the room and declared, “A product is not yet available.”
It was a terrifying effect, even more so than one of Steve Jobs’ famous meltdowns. When the Apple chief screamed at his staff, it was scary but familiar. A meeting participant remarked, “It was one of the few times at Apple when I got a chill.”
In just a few months, Apple was scheduled to host its annual Macworld convention, with the iPhone slated to be the star attraction. Upon his return to Apple in 1997, Jobs had utilised the occasion to introduce his most significant products and those who followed Apple were anticipating yet another momentous declaration.
Jobs had previously acknowledged that Leopard, the upcoming release of Apple’s operating system, would be delayed. If the iPhone wasn’t ready in time, Macworld would be a dud, Jobs’ critics would pounce, and Apple’s stock price could suffer.
The question was, what would AT&T (an American multinational telecommunications holding company) think? Steve Jobs had finally worked out a deal for the iPhone’s carrier, the telecom behemoth (then known as Cingular), following a year and a half of closed-door meetings. Jobs had been given unprecedented power by AT&T in exchange for five years of exclusivity, about 10% of iPhone sales in AT&T stores, and a small portion of Apple’s iTunes revenue.
He had persuaded AT&T to invest millions of dollars and thousands of man-hours in order to reimagine the labour-intensive in-store sign-up process and develop a new feature known as visual voicemail. He had also negotiated a special revenue-sharing plan that allowed him to take about $10 off each iPhone user’s AT&T bill each month.
In addition, Apple continued to have total control over the iPhone’s development, production, and promotion. Jobs had achieved the unimaginable: he successfully negotiated a favourable agreement with a major player in the well-established wireless sector. The least he could do at this point was to meet his deadlines.
For the next three months, there were frequently screaming matches in the hallways. Engineers who were exhausted from working through the night often resigned, only to return a few days later. The product manager locked herself in her office after slamming the door so hard that the handle bent.
A few weeks before Macworld, Jobs had a working prototype that he showed the AT&T suits. He first met wireless boss Stan Sigman (CEO of AT&T) in mid-December 2006 at the Four Seasons hotel in Las Vegas. He demonstrated the iPhone’s sharp screen, potent Web browser, and captivating UI. Unusually enthusiastic, Sigman praised the iPhone as “the best device I have ever seen.”
On June 29, 2007, six months after its launch, the iPhone went on sale. Analysts predicted that by the end of 2007, sales would reach approximately three million units, making it the fastest-selling smartphone ever at the time of publication. It’s also possibly Apple’s most lucrative product. With every $399 iPhone sold, the company makes an estimated $80, excluding the $240 it receives from each two-year AT&T contract an iPhone customer signs. In the meantime, the iPhone has tripled AT&T’s data traffic in major cities like New York and San Francisco, and about 40% of iPhone buyers were brand-new customers.
Although the iPhone has been crucial to Apple and AT&T’s success, its true influence has been felt in the way the $11 billion US mobile phone market is structured. For many years, wireless carriers have acted as though manufacturers were subservient, controlling phone production, pricing, and feature availability through access to their networks. The majority of people saw cell phones as disposable, low-cost bait that was heavily subsidised to entice users to use the exclusive services offered by the carriers.
But with the iPhone, carriers started to realise that a well-chosen product, even if it is expensive, can attract consumers and generate income. Nowadays, manufacturers are racing to make phones that consumers will love rather than ones that the carriers will approve of in an attempt to land a deal akin to Apple’s.
According to Piper Jaffray securities analyst Michael Olson, “The iPhone is already changing the way carriers and manufacturers behave.”
Jobs began considering creating a phone in 2002, not long after the first iPod was introduced. It makes sense that customers would prefer to have just one device when they see millions of Americans carrying around multiple phones, BlackBerrys, and now MP3 players. In the future, he also anticipated, cell phones and mobile email clients would continue to add features, posing a threat to the iPod’s hegemony in the music player market. Jobs anticipated having to enter the wireless industry at some point to safeguard his new product line.
However, there were challenges. Data networks were unreliable and unprepared for a fully functional handheld Internet device. The operating system for the iPod was not complex enough to handle advanced networking or graphics. Even a stripped-down version of OS X would be too demanding for a mobile phone chip. This meant that Apple had to develop an entirely new operating system for the iPhone.
Apple would also be up against fierce competition: in 2003, people went crazy for the Palm Treo 600, which combined a PDA, phone, and BlackBerry into one stylish package. That increased the bar for Apple’s engineers but also demonstrated that there was a market for a so-called convergence device.
Then there were the cellular service providers. Jobs was aware that they controlled what was built and how it was built, and that they viewed hardware as little more than a means of gaining access to their networks. Being a notorious control freak himself, Jobs was not going to allow a group of executives, or “orifices” as he would later refer to them, dictate how he should design his phone.
The iPod business owned by Apple was both more significant and more susceptible than before, by 2004. Although the iPod made up 16% of the company’s revenue, its long-term position as the industry’s leading music device appeared to be in jeopardy given the rise of 3G phones, the impending release of Wi-Fi phones, the sharp decline in storage costs, and the proliferation of competing music stores.
Therefore, Jobs was preparing his entry into the mobile phone industry that summer even as he flatly denied he would create an Apple phone. He went to Motorola in an attempt to get around the carriers.
With the release of the immensely popular RAZR by the phone company and Jobs’ familiarity with Ed Zander, Motorola’s CEO at the time, from Zander’s time as an executive at Sun Microsystems, it appeared to be a simple fix. With a deal in place, Motorola and the carrier, Cingular, could work out the intricate details of the hardware, leaving Apple to focus on creating the music software.
Of course, Jobs’ plan was predicated on the assumption that Motorola would create a worthy replacement for the RAZR, but that was soon to be determined. The three businesses fought over almost every detail, including how songs would be stored on the phone, how much music could be played, and even how each company’s name would be shown. There was still another issue: the device itself was unsightly when the prototypes appeared at the end of 2004.
With his trademark panache, Jobs introduced the ROKR in September 2005, calling it “an iPod shuffle on your phone.” However, Jobs probably realised he was dealing with a failure; customers detested it. The ROKR, which could only store 100 songs and was unable to download music directly, soon came to symbolise everything that was wrong with the US wireless industry. It was the result of a tangle of competing interests, with the customer coming last on the list.
Even as the ROKR was going into production, Jobs realised he would have to construct his own mobile device. He met with Cingular in February 2005 to talk about a partnership where Motorola would not be involved. A few Cingular senior executives, including Sigman, were present when Jobs presented his plans in a top-secret meeting held in a hotel in midtown Manhattan.
In December 2006, AT&T acquired Cingular. Sigman continued to serve as the president of Cingular Wireless. Jobs gave Cingular a three-part speech, stating that Apple had the technology to create something “light-years ahead of anything else” that was genuinely revolutionary. Apple was willing to explore an exclusive agreement to close that deal. However, Apple was also ready to become a de facto carrier by purchasing wireless minutes in bulk.
Jobs was justified in his confidence. After nearly a year of developing touchscreen technology for tablet PCs, Apple’s hardware engineers persuaded him that they could create a comparable phone interface. Additionally, with the introduction of the ARM11 chip, mobile processors could now run a device that merged the features of an iPod, a computer, and a phone. Additionally, wireless minutes had dropped to the point where Apple could resell them to customers; Virgin and other companies were already doing this.
The iPhone concept instantly captivated Sigman and his group. The approach taken by Cingular and the other carriers encouraged users to access the Internet more and more through their mobile phones. Price wars were slashing margins, and the voice business was in decline. The iPhone may result in a rise in the number of data users due to its advertised capacity to download media files (music and video) and browse the Internet at Wi-Fi speeds. Furthermore, profit margins were highest in data rather than voice.
Additionally, the Cingular team realised that the wireless business model needed to be altered. Carriers had grown accustomed to considering handsets as useless commodities and their networks as priceless resources. This tactic had worked wonders for them. Carriers facilitated new customer enrolment by offering subsidies for the purchase of inexpensive phones, which in turn led to the signing of long-term contracts that guaranteed a steady stream of revenue.
However, wireless access has evolved from a luxury to a need. The carriers’ biggest problem wasn’t finding new customers; rather, it was stealing existing ones from one another. It wasn’t sufficient to simply entice customers with cheap phones; Sigman and his team aimed to offer essential gadgets exclusive to their network. Who better than Jobs to design one?
Cingular found Apple’s aspirations to be both exciting and unsettling. A loving partnership with the iPod manufacturer would enhance the brand’s appeal. If Jobs was rejected by Cingular, another carrier would undoubtedly sign with him because he was adamant about pitching his idea to anybody who would listen. Sigman knew he would have a difficult time convincing his fellow executives and board members to approve a deal similar to the one Jobs proposed, but no carrier had ever offered anyone the flexibility and control that Jobs wanted.
Sigman was correct. Throughout the more than a year-long negotiation, Sigman and his team would frequently question whether they were giving up too much ground. Jobs met with some Verizon executives at one point, but they quickly declined him. Assigning blame was difficult. Carriers had been charging suppliers and users for using and selling services over their proprietary networks for years.
Cingular ran the risk of making its renowned and costly network into a “dumb pipe,” a mere conduit for content rather than the creator of it, by granting Jobs such extensive control. Sigman’s team placed a straightforward wager: the iPhone would generate a massive increase in data traffic that would more than offset any money it lost on content deals.
Jobs wouldn’t hold off until the details of the agreement were ironed out. He gave his engineers orders to go full steam ahead on the project around Thanksgiving 2005, eight months before a final agreement was signed. If the talks with Cingular were difficult, they were nothing compared to the technical and creative difficulties Apple encountered.
First, there was the matter of which operating system to select. Mobile chips have become more powerful since the original Macintosh OS prototype was developed in 2002, which is when the idea for the Apple phone was first conceived. An iPhone OS should only be a few hundred megabytes, or about a tenth of the size of OS X, so it would need to be completely rewritten and stripped down.
Jobs and his top executives had to decide how to resolve this issue before they could begin designing the iPhone. Although Linux had already been modified for use on mobile devices, engineers gave it serious consideration, but Jobs insisted on using his own software.
They developed a phone prototype that was integrated into an iPod and used the click wheel to dial numbers; however, it was limited to selecting numbers and could not browse the Internet. Therefore, Apple started rewriting OS X for the iPhone in early 2006, right as their year-long effort to modify it to work with Intel chips was coming to an end.
At the very least, all of Apple’s senior executives had heard the discussion regarding the appropriate operating system to use. They were ill-prepared to talk about the complexities of the mobile phone industry, such as radio-frequency radiation, network simulations, and antenna design. Apple invested millions in purchasing and putting together specialised robot-equipped testing rooms to make sure the iPhone’s tiny antenna could perform its function.
Apple constructed human head models, complete with goo to simulate brain density, and measured the radiation output to ensure the iPhone didn’t produce excessive amounts of it. For millions of dollars each, Apple engineers purchased almost a dozen server-sized radio-frequency simulators in order to forecast the iPhone’s network performance.
Jobs learnt while carrying a prototype in his pocket that even Apple’s prior experience creating iPod screens wasn’t helpful in creating the iPhone screen: glass, not the hard plastic used on the iPod, was required for the touchscreen to reduce scratches. An insider projects that Apple invested about $150 million in the iPhone’s development.
Jobs remained as secretive as possible throughout. Inside, the project was referred to as P2, or Purple 2, short for Purple 1 (the name of the abandoned iPod phone). Teams dispersed throughout Apple’s Cupertino, California, campus. Apple executives registered as workers of Infineon, the company that manufactured the phone’s transmitter, whenever they went to Cingular.
The teams responsible for developing the iPhone’s hardware and software were kept apart. The former worked with circuitry that contained fictitious software, while the latter used circuit boards that were housed in wooden boxes. Only about thirty of the most senior project members had seen the iPhone by January 2007, when Jobs unveiled it at Macworld.
The iPhone was so overwhelming it was easy to ignore its imperfections. The initial price of $599 was too high (it has been lowered to $399). The phone is connected to AT&T’s EDGE poky network. Video recording and email searches are not possible for users. Programmes written in Java or Flash cannot be executed by the browser.
Still, it was all insignificant. With the iPhone, several advantages for manufacturers, developers, carriers, and customers were made possible, shattering the wireless industry’s carrier-centric framework. The product is a user-friendly handheld computer. And just like the introduction of the PC, the iPhone is inciting a new wave of innovation that will boost its capabilities even further. Jobs plans to make a developer’s kit available in February so that anybody can create apps for the device.
In the meantime, manufacturers have more negotiating leverage over the carriers they have been working with for many years. Carriers are rushing to find a competitive device and seem willing to give up some authority to get it, having watched AT&T eat away at their customer bases. Users, rather than the usual cabal of complacent juggernauts, will have more influence over what gets built, giving manufacturers more control over what they produce.
As the wireless carriers start to show signs of moving away from their walled-garden strategy of trapping customers, application developers stand to gain more opportunities. Google’s Android operating system, which facilitates the creation of mobile apps by independent developers, has partnered with T-Mobile and Sprint.
In November, Verizon, a carrier known for its stubbornness, announced that it would allow any compatible phone to use its network. A few days later, AT&T made a comparable statement. This will eventually lead to a whole new wireless experience where apps run on any platform and across any network. It will eventually provide some of the Internet’s flexibility and functionality to the wireless world.
The iPhone may seem to have fulfilled the carriers’ worst fears, giving manufacturers, developers, and customers complete control while reducing wireless networks to ineffective conduits. However, carriers’ networks might become more valuable, not less, by encouraging more innovation. Customers will use their devices and networks more frequently as a result of spending more time on them, increasing costs and profits for all parties.
Paul Roth, president of marketing at AT&T, says the company is looking into new services and products that make use of the iPhone’s capabilities, such as mobile banking.
“We have a different perspective on the market,” Roth said.
In other words, the very advancement that wireless carriers have long feared might be just what they require. It was demonstrated to them by Steve Jobs.