All Eyes On Apple

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Soon another miscue roiled the Apple base: the now infamous "patch" that disabled any iPhone tricked out with unauthorized third-party applications. Again, the cult hollered--and the influential gadget blog Gizmodo went so far as to revise its iPhone review, urging readers not to buy it until Apple changed course. Users vented their frustrations online, "calling for Jobs's head," says Jason Chen, Gizmodo's senior associate editor. Jeremy Horowitz, editor of iLounge, an Apple-centric blog, said the debacle produced "more 'angry Apple customers' posting comments and complaints than ever before."

Suddenly, the company that could do no wrong could do no right. Jobs felt compelled to send out another communiqué, this time announcing that an Apple-approved iPhone platform for third-party developers would arrive in February of 2008. (No word yet on whether Apple will charge for the applications.) "I'm thinking his hand was forced," Chen says, "and he was getting tired of all the bad press." The general perception was that Apple was maximizing short-term profitability at the expense of customer satisfaction. It was acting--shudder--like Microsoft.

Phone Alert

The less mystique Apple holds for its customers, the more susceptible they are to temptation. Already a slew of technology companies are lining up to woo the faithful. As McCourt, the Morgan Keegan analyst, points out, "Each SanDisk generation of MP3 players is getting closer to iPods; the handset manufacturers are arguably making more impressive music-enabled handsets than the iPhone; and try out a new HP laptop with imbedded Altec Lansing speakers--it's half the price of a MacBook, with a far better audio experience. HP and Dell are getting better at consumer marketing--still not Apple, but this will change too."

Samsung already sells a touch-screen phone. So does Motorola. Sprint has a touch-screen phone that runs "thousands" of third-party applications, whereas Verizon not only peddles a touch-screen smartphone but also is road-testing VCast Mobile TV, which offers real-time TV broadcasts. Rumors abound about Google jumping into the mobile market with a low-cost "gPhone" platform (just be prepared for a barrage of targeted ads). And the king of search has banded together with Apple foes such as Dell, HP, Microsoft, and Samsung to form the White Space Coalition to push the Federal Communications Commission to open up part of the broadcast spectrum. If successful, Americans would be able to use any Wi-Fi-enabled device to access the Web anytime, anywhere, and at zippy speeds--a direct threat to AT&T and Apple, which have a five-year exclusive contract.

But Apple's biggest hardware threat may arrive from overseas. While Apple will be happy if it can sell 10 million iPhones by the end of 2008, Nokia, based in Finland, sells some 400 million handsets a year and controls almost 40% of the worldwide market. That's more than Motorola, Samsung, and Sony Ericsson--its three arch competitors--combined. Nokia, no slouch itself as an innovator, had an even better last quarter than Apple, with profit zooming 85%. And the company knows how to defend its turf: Three years ago, when Motorola's Razr began to gain on them, the Finns came back with a barrage of phones with MP3 players and cameras, and Motorola faded away. Now Nokia is about to roll out a touch-screen cell phone that does the iPhone one better. It's "haptic," meaning there is a physical pulse and feedback when the user taps the screen.

Nokia has at least two other major advantages. First, where Apple's five-year deal with AT&T is exclusive, Nokia's cell phones work with all the major carriers, a basis for huge scale reminiscent of the Microsoft-Intel partnership in the 1990s that almost destroyed the old Apple Computer. Second, Nokia's gear works with the faster 3G networks that are the standard across Europe. The iPhone is not 3G (there are rumors a 3G iPhone will be announced at MacWorld in mid-January), but Apple is looking to Europe for much of its future growth. That technical hurdle could be compounded by the anti-trust issues also confronting the company abroad--the makings, potentially, of a nasty conundrum.

In short, pretty soon the market will be glutted with smartphones with touch screens, real-time TV, MP3/video players, cameras, GPS, and digital recorders. And the one thing all of these manufacturers have in common is their willingness to work in a world where open platforms, collaboration, and social networking are becoming ubiquitous--not just in consumer contexts but as key components in corporate plans as well. If Apple chooses to remain apart, its leverage as an innovator will need to be powerful enough to counter the sheer scale of its competitors and their willingness to work together.