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Can Apple Disrupt the Mobile Phone Industry?

It’s official: Apple has announced the iPhone handset, featuring a gorgeous design and a sparkling, innovative user interface. Will Apple function as a mere handset vendor, or a disruptor/transformer of the mobile phone industry?

It’s official: Apple has announced the iPhone handset, featuring a gorgeous design and a sparkling, innovative user interface. Will Apple function as a mere handset vendor, or a disruptor/transformer of the mobile phone industry?

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Let’s review Apple’s five year foray into the music business for some clues about what might happen in the phone business. Apple introduced the first iPod music player in October 2001, bringing style and simplicity to the MP3 player category. Yet the masterstroke occurred seventeen months later, when Apple launched the iTunes Music Store. Apple had sold less than one million iPods when the iTunes Music Store was launched.

The combination of 99 cent pricing, full participation by the major labels, reliable performance and ease-of-use made the iTunes store into the Amazon of downloadable music. Industry observers hailed Apple, and the record companies finally started to get paid on at least some of the music files flowing around the Internet.

Flash forward to January 2006, when Apple announced cumulative sales of 42 million iPods and 850 million songs. That’s a mere twenty songs per iPod.

Think about it: Apple enjoys $200 in revenue per iPod, and the record companies realize only $14 in revenue from their 2/3 cut of digital music sales. (It would be nice to think that iPods stimulate sales of physical CD’s, but CD sales have been shrinking throughout the iPod era.)

The fresh numbers announced at MacWorld and in Apple’s quarterly results tell a similar tale. iTunes has now sold 2 billion songs across an installed base of approximately 86 million iPods. With this new data, the number of songs purchased per iPod is still less than 25.

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Simply put, Apple turned a “razor-and-blades” business inside out. In 2001, CD players were a commody product, and all the profit was in the CD’s. The DVD business is similar: film studios make billions of dollars on DVD sales while the DVD player has become a $39 doorbuster. So in a business where content is king and the player is a commodity, Apple makes $200/player and the content companies make less than twenty bucks in incremental sales.

Could Apple bring the same creative transformation to the cell phone business? Is the iPhone merely the trojan horse for a future end-to-end, high-touch customer experience? We already have a clue, in the form of Cingular’s “visual voicemail,” exclusively available on the iPhone. Instead of listening to messages sequentially, you can look at a list of voicemails and touch the ones you want to hear. It’s a simple, elegant, “why didn’t I think of it” innovation.

In our increasing complex hardware/software/net ecology, Apple has a unique ability to integrate all three elements into a fun, innovative and reliable experience. Hmmmm: fun, innovation and reliability… sound like competencies of America’s mobile phone industry?

Greg Spotts is Creative Director of the Shortlist Music Prize, and rocks the Digital Media beat for Fast Company.