CHAPTER 27

Wireless

The path to today's smartphone has many branches: the Bell system, for certain, but also large government contracts, a grassroots networking protocol, and many clever architects and programmers. These developer communities can either be independent or in the service of the computing giants: Adobe, Google, Microsoft, and of course Apple. The iPhone proved to be a breakout device for many reasons.

While we talk about cell phones with the emphasis on “phones,” the smartphone is far from being an extrapolation from Bell's original device. The iPhone's naming convention makes a certain amount of sense, but it's not really a phone: Person-to-person voice communication is maybe a fifth of its value. Calling it an ultraportable computer would not have worked; I defer to the marketing genius behind this extraordinarily successful product. But the fact remains that the smartphone has much more to do with computing than with traditional voice.

Precedents

Even the term “smartphone” needs to be defined carefully. The original Amazon Kindle, for example, allowed only rudimentary Web access, eschewing the Swiss Army knife approach in favor of intense concentration on one core activity: reading. Amazon is routinely secretive about competitive issues and thus has given no firm indication of how many readers are out there. Given the massive software sales—Kindle titles outsell all print editions on the earth's biggest bookstore—hardware sales have to be robust. The Kindle is, in point of fact, a single-purpose mobile device, with the Sprint wireless network utilized to facilitate the instant downloads of new purchases on the airport tarmac, for example. Broadband access costs are bundled into some combination of hardware (including ad revenue from the low-price variant) and book revenue, invisible to the customer but a mobile data transaction nevertheless.

The Apple iPad presents similar definitional issues. Lacking a hard drive and a hardware keyboard/mouse, it's not really a laptop, yet it duplicates considerable functionality. At the same time, it can't make voice calls or send and receive text messages unless the user jumps through some hoops. For our purposes, the iPad counts as a large smartphone rather than a small computer; most of the factors in this section work to explain the tablet's success.

The following trends, some coming from unrelated domains, converge in the contemporary smartphone.

Miniaturization

In the 1950s, the IBM RAMAC featured a 5-megabyte hard drive (drum storage) that weighed about 1,000 pounds and was the size of a large washing machine. Fifty-plus years later, solid-state memory gets smaller and faster at a predictable rate, to the extent that 64 gigabytes (about 10,000 times more) had shrunk to a package weighing about 1.5 ounces, or 10,000 times smaller. Combined, that's improvement by a factor of 100 million—not to mention the cost, which has declined by a slightly smaller factor.

Most any component of a smartphone has been miniaturized, if not by such a dramatic multiple (see Figure 27.1, which shows Nokia's progress in this regard). GPS units used to be carried in backpacks; they now fit in a pocket. High-resolution color displays were formerly built from cathode-ray tubes; the LCD then OLED* display (and the miniaturization thereof) is an often-overlooked part of the smartphone's success. Batteries, antennas, even speakers—the list goes on.

Usability

Cramming all the functionality of a contemporary smartphone into a tiny package is an engineering accomplishment, to be sure, but what's even more noteworthy is how the market has been “trained” to accept the trade-offs that come with the packaging. Voice quality, for example, remains an issue, as does wireless data coverage. Dropped calls, which rarely happened on traditional wirelines, are met with the shrug of a shoulder: Expectations have been downsized in that particular domain. Ringtones, however, are customizable, which generated substantial revenue for the carriers in the period from 2004 to 2007 particularly.

FIGURE 27.1 Nokia's First Car Phone and First Mobile Phone Compared to Current Products
Source: Nokia.

Texting is another area where the carriers were surprised when a secondary piece of capability emerged as a major market in its own right. Originally a kludgey workaround on GSM* networks in the 1990s, Nordic and some Asian teens used the Short Messaging Service (SMS) as a way to avoid the heavy voice tariffs that were designed to capture revenue from the rapidly increasing base of users. Uptake has been nearly universal on every continent, moving from the original strictly text-based service to include sound, photo, and video variants as bandwidth and device capability improve.

The Apple iPod trained people to dock their devices to a computer and, later, to buy content from an online storefront. As the form of that content migrated from songs to movies to software, users could take small steps up a ladder of increasing complexity. Experiments with a stylus, on the Palm Pilot and Apple Newton, in the mid-1990s helped pave the way for full touch-screen operation, a step that Nokia and BlackBerry are finding it difficult to take. One factor in the smartphone's success, then, is the development of native mobile operating systems that gracefully support the wide range of functionality in an on-the-move context. Early versions of Windows CE and Windows Mobile, meanwhile, treated the smartphone as a small desktop, down to file folder metaphors, which newer designs have resisted.

Fungibility of Sound, Voice, Video, Text

Not that long ago, digital communications was format specific: Reading a magnetic stripe card, playing a compact disc, taking a digital photograph, or watching digital video each required its own piece of equipment. In the smartphone, voice bits can move over a cellular carrier or over Skype; video can be recorded, edited, uploaded, and/or consumed; still images go to Flickr or Facebook; e-reader applications duplicate the function of the book or newspaper; and MP3 files can play through the earphones just as easily as any other kind of sound. Not only can the smartphone manage all those different media types, the Internet can move them with equal ease and low cost.

GPS

As we saw in Chapter 25 and elsewhere, GPS has become essential for both consumer way-finding and industrial applications as well as military coordination. The migration of location awareness into the smartphone involves GPS, to be sure, but also the Wi-Fi mapping efforts of Google Maps and such services as Skyhook. On top of the U.S. government's core system, such private-sector players as NAVTEQ (now part of Nokia) and TomTom along with Google's powerful Maps and Earth tools combine to offer extensive geographic capability to smartphones and tablets.

Radio

As much as the iPhone has stressed the cellular network, the picture would be far worse if Wi-Fi had not picked up so much of the load. According to comScore, 47.5% of iPhone traffic is handled by Wi-Fi; Google Android smartphones move 78% of their data over cellular networks, while iPads are 92% Wi-Fi centric.¹ The role of Wi-Fi in the success of the smartphone is all the more important for two reasons: These are ad hoc networks that were not built with a government stimulus package, a spectrum purchase, or a conscious deployment plan; and every transaction over Wi-Fi spares the often-overtaxed cellular system, which was deployed at great cost. This offloading of bandwidth explains the steady variation in mobile pricing plans: As video gains in importance and more people carry smartphones (now estimated to be about a third of the U.S. market), unlimited plans become less attractive to carriers.

The importance of a robust wireless data network is obvious to anyone who has tried to download even simple content over slow connections. The tens of billions of dollars spent by U.S. carriers alone on spectrum licenses, tower rights and real estate, and networking equipment can at times be overlooked, but like electricity, it's painfully obvious in its absence.

After Wi-Fi and cellular, the third radio in their smartphone that few people think about much belongs to Bluetooth, the close-range protocol used mostly for headsets but also for printing and keyboards. Named for a Scandinavian king from the tenth century who united warring tribes, the standard fills an important gap for which higher-power (and battery-depleting) protocols would be undesirable. After the Bluetooth special interest group (a common factor in technology platform development) was formed in 1998, the standard was rapidly adopted and only six years later could be found in 250 million different devices. At its 10-year anniversary, 2 billion devices had been shipped.²

Software Developers

More than 15 billion pieces of software had been downloaded to iPhones as of mid-2011. Amazing as that number is, Apple has a log of every single one, even the free ones, through its App Store ERP* backbone. As good as its design and hardware might be, the iPhone's success relies in large measure on Apple's reinvention of the global software market in only a few years. A vast ecosystem of software developers has created more than 500,000 approved applications for the iPhone, and Android developers have been essentially as busy. One indication of the primacy of the “ecosystem” is the separation of Android and Apple from the rest of the smartphone market: The Nokia and BlackBerry hardware might be superior, in theory, but app selection is severely lagging. Because platform dynamics are in force (see Chapter 5), developers and customers flock to the market leaders, further marginalizing the laggards: Feedback loops and network effects can be powerful at this global scale.

On the handset front, meanwhile, Apple confronts the question of how to reach the next 50 million users and the next 50 million after that, given that many of those people will be using non-alphanumeric languages, such as Chinese and Arabic. Stand-alone hardware companies scramble for software partners: Motorola is being acquired by Google, HTC and Samsung debate how safe it is to stay on Android, and Nokia is betting on its alliance with Microsoft. Each combination brings a distinctive package of strengths and weaknesses to the table as they fight for market share in a global contest for hardware supremacy in a new order. Whatever happens, we will be confronted by growth rates the likes of which no manager (or capital market) has ever seen, each with its own raft of unintended consequences.

The Breakthrough

The Apple iPhone was not the first or the most technologically capable smartphone. (IBM introduced a prototype in 1992.) Why, then, did it break through to broad market success? Not to enter the realm of Apple hagiography, but Steve Jobs presided over five defining moments* in the history of computing. Getting lucky could explain one, or even two, successes, but the overall pattern must be recognized: Jobs understood something about the power of great design and smooth user experience that led to a no-prisoners demand for easy-to-use, and even fun-to-use, products in a way no other U.S. tech executive has been able to deliver on a consistent basis.

Jobs and Apple got a lot of little things, along with some big ones, close enough to right to make the iPhone the standard-bearer for a critical phase of the smartphone's market development. Google's Android platform has since done extremely well, but surprisingly, given the powerful global players in competition—Samsung, Motorola, Research In Motion, Nokia, and Microsoft—it is currently a two-horse race. How did Apple jump into a segment as an outsider and proceed to set the agenda for an entire industry?

• Apple managed the price curve. $499 (which AT&T was not allowed to discount from the outset) yielded an estimated 50% margin, according to iSupply, which does market research on bill-of-materials costs. That profitability, however, allowed Apple to cut the price after the early adopters paid a premium, and economies of scale dropped the cost of the inputs. Even after other touch-screen smartphones came to market, Apple could charge premium prices. In part, this relates to Apple's supply-chain effectiveness, which shows up in procurement, logistics (inbound, outbound, and product returns), manufacturing quality, and on-time launches.
• The form factor works. Other smart devices with rich visual interfaces have failed to translate well as handsets for conversations: The BlackBerry is great from the thumbs' point of view but less attractive to mouth and ears. Looking at global markets, many young SMS users can text blindfolded. The iPhone's smooth screen doesn't allow this kind of typing, yet the drawback hasn't been a major factor in sales. Dispensing with the stylus, judged as risky at the time, proved to be a very smart decision.
• Apple understood the Swiss Army knife factor. All-in-one devices reduce footprint, but few chefs rely on a red pocket knife to slice cheese, bone meat, and dice carrots. And who's ever used the saw for anything? The point here is that the iPhone's range of capabilities is good enough to make it acceptable for nearly any relevant activity. Digital camera and video camera sales are falling; the iPhone is the most commonly used camera by people who upload images to Flickr.³ The GPS functionality of smartphones is hurting the share prices of TomTom, Garmin, and their kin. Apart from e-readers such as the Kindle and Nook, few portable electronic devices are stand-alone any longer—Apple's own falling iPod sales testify to the trend. Even game consoles are expected to be surpassed by smartphones in the coming years.⁴
• The device works. Apart from some issues with the iPhone 4 antenna/case, Apple has made the product sufficiently reliable and robust to survive the rigors of tens of millions of users' many habits, abuses, and extremes of environment. Battery life, overall durability, voice quality, and data security are all good enough for most of the market, and usability apparently is more important than any single aspect of functionality.
• Apple has masterfully built a partner network. Ranging from Foxconn, which does assembly in China, to FedEx, to component suppliers, to the developer network, and to movie studios and record labels, the Apple extended ecosystem is big, capable, and on-task. Significantly, Apple seized control of the handset from the wireless carriers, whose earlier gatekeeper role had allowed them to set much of the mobile agenda. By creating must-have hardware, Apple forced AT&T and then other carriers to accede to terms and conditions no other handset manufacturer had been able to win. Customer service is Apple's, high-margin extended warranty revenues are Apple's, advertising is approved by Apple, and pricing is set by Apple. Compare the Windows 7 smartphone launch in 2010, in which AT&T was offering two handsets for the price of one just weeks after the product came to market.
• The retail channels for the iPhone are important. Apple has massive foot traffic—74.5 million in the fourth quarter of 2010, more than all of Major League Baseball and more than how many visited a Disney theme park—into its own stores. There the product education function of the heavily scripted Genius bar experience helps introduce nontechnical buyers who might lack a family Mac-head to get them started. At more than $5,600 in sales per square foot, Apple stores measure nearly double the rate of Tiffany, the traditional leader in that metric.⁵
• Launching into a mature mobile market with powerful incumbents, high capital intensity, and well-defined roles, Apple elevated its level of execution. In contrast to the music market into which the iPod launched in 2002, which was characterized by tumbling share prices at the labels, distribution of the capital base (recording studios and pressing plants) to millions of PC owners, and few megaselling titles, the wireless industry has consolidated to a small number of global network operators, equipment manufacturers, and handset firms. The scale of wireless is almost unfathomable: At the time of the iPhone launch, Apple had sold about 100 million iPods in five years, which is a huge number in the PC industry. In the fourth quarter of 2006, Nokia all by itself sold 102 million handsets.
• Design-wise, Apple invented a new category of device, learning from previous failures. In the music player case, Apple integrated a far superior music management software application with its version of the MP3 player and implemented copy protection to satisfy the labels that their 99-cent songs would not be copied indefinitely. In the iPhone case, Apple took a variety of lessons from Motorola's ROKR music player+phone, which had its iPod/iTunes license pulled. Rather than being a follow-up to the extremely successful RAZR phone, the ROKR is essentially the answer to a trivia question.
• Apple once again used superior industrial design, elevated to the level of art, to create unsurpassed “cool” factor in a category. The microscopic attention to coherence and detail in the iPod, from marketing, to packaging, to peripherals, to product endorsers, created an emotional appeal found in few electronic devices, and the iPhone built on that foundation. Few other companies have that kind of precedent to live up to and to build from.
• As venture capitalist John Doerr noted, Apple has a vast army of users trained to sync their device with a computer.⁶ It's an installed base of user behavior that gave the iPhone a jump-start in adoption.
• The iPhone captured momentum amidst industry disruption, and with its success consolidated several trends. As mobile broadband emerged from competing standards and platforms, the iPhone dominated a multiradio niche just at the moment that heterogeneous coverage became a reality. Working at the office? Going abroad? Working in a Starbucks hotspot? Surfing on a train in the Northeast Corridor? Customers found that having a unified device to maintain connectivity across access technologies proved extremely valuable.
• Unlike many previous successes, the iPhone is not powered by a single “killer application.” In the case of the iPod, it was clearly iTunes music management and legal downloads. With the iPhone, voicemail is handy, but fewer people rely on voice communications. Texting and typing support is good; the BlackBerry and in some cases Android devices are better. Maps and way-finding are excellent, but days or weeks might go by between uses if the device owner is on her home turf. The point is that as compared to the spreadsheet for the early PC, for example, or Internet access for 1990s laptops, the device supports whatever the user requires: Major League Baseball's At Bat app is great, but that doesn't explain the iPhone's success. Facebook and social games play well, but not for everybody. Weather and news can be viewed through many handy services.

Looking Ahead

As we saw in Chapter 12, the mobile phone is having extended implications across the world, and not only in the realm of entertainment and convenience. Once the majority of the world's technology users connect to the Internet through a smartphone or related device, we will see even broader changes: What does it mean never to have to be captive to a wire for any form of information retrieval? What does it mean to have the phone become your date book, your wallet, the window to your music “collection” (whatever that term will come to mean), your photos, and so many other defining artifacts? After Apple built on the achievements of Palm, of Nokia, of Trimble, of Samsung, and of Research In Motion, so now will Google and perhaps Nokia/Microsoft attempt to leapfrog the iPhone franchise. Ultimately, the winner in such a high-stakes competition among powerful firms will be a whole new generation of customer who will be less and less tolerant of any sense of limits on the power of what could be the twenty-first century's defining device.

Notes

1. http://readerszone.com/facts/comscore-traffic-by-device-may-2011-report-ipadis-winner.html.

2. www.bluetooth.com/Pages/History-of-Bluetooth.aspx.

3. www.flickr.com/cameras/.

4. James Brightman, “John Carmack: ‘Unquestionable’ That Mobile Will Surpass Current Consoles,” IndustryGamers, July 7, 2011, www.industrygamers.com/news/john-carmack-unquestionable-that-mobile-will-surpass-current-consoles/.

5. Jordan Kahn, “Apple Ranks #1 in Retail Sales per Square Foot among Retailers,” 9to5Mac.com, August 23, 2011, http://9to5mac.com/2011/08/23/apple-ranks-1-in-retail-sales-per-square-foot/.

6. Dan Farber, “Churchill Club: 9th Annual Top Ten Tech Trends,” Zdnet.com, April 3, 2007, www.zdnet.com/blog/btl/churchill-club-9th-annual-top-ten-techtrends/4779.

7. Robert L. Mitchell, “Lithium Ion Batteries: High-Tech’s Latest Mountain of Waste,” Computerworld, August 22, 2006, http://blogs.computerworld.com/node/3285.

*Organic Light-Emitting Diode technology is brighter and uses less power than LEDs, among other benefits.

*Global System for Mobile Communications, originally Groupe Spécial Mobile, denoted the standards used for second generation (2G) wireless telephony in European markets.

*Enterprise Resource Planning.

*The five products were the original Macintosh with graphical user interface and unboxed hardware design; Pixar computer animation; and the iPod, iPhone, and iPad since 2001. Apple's share price multiplied thirty-eight-fold in the 10 years following the iPod announcement.