Steve's new, new, new phone

I hear Apple introduced a new phone a week ago. I didn't see the announcement because I had a meeting at school, but I did watch the 90 second condensed version on YouTube (60 seconds of Steve Jobs and 30 seconds of self-promotion).

Since there has been an onslaught of coverage, let me just offer a brief reaction. What was introduced: a new phone, a new business model (with a new price), and a new software ecosystem.

On the phone, my friend Mike Mace captured it nicely: the announcement “was probably the minimum necessary to please the community.” The hardware changes include 3G, GPS, improvements in size and battery life; however, it still has a mediocre camera.

The remaining changes were in software, and the iPhone 2.0 update will be available free to old iPhone users ($10 for iPod Touch owners). This includes the Microsoft Exchange server access, some support for attachments, and of course the third party software apps.

For the business model, Apple has given up on its revenue share plan and has switched to a more conventional operator-subsidized handset price recouped via long-term contract. The standard subsidized price is now $200 (£100), but some operators (as in UK's O2 or Germany’s T-Mobile) will let you have the phone essentially free if you spend enough money on the service plan.

The good side is that Apple now has a much easier time getting its phone adopted by carriers — the old contentious rev share model didn’t scale, because few were as desperate as SBC AT&T. On July 11, the 3G phone will be available in 21 countries (according to the Apple website) or 22 (adding France, according to Steve’s keynote slides). Another 49 (48) countries are due Real Soon Now.

As the doomsayers predicted, we can now label the iPhone 1.0 business model a failed revenue share experiment. It was worth a try, but it didn’t work, because the industry was used to something else (and competitors are still using it).

The downside is that the hardware price cut from $400 to $200 is more than made up by the $240 increase ($10/month) in the required data plan. The other feature is that the phone will be activated before leaving the building, cutting out the gray market (and also the remote activation revenue stream of Synchronoss — as brilliant predicted last month).

I am interested to see whether the real price of the iPhone will drop over time, as it has with the iPod, or whether Apple will continue to only sell high-end smartphones. I can see the logic of not selling anything less than a 3G phone, because the attraction of the iPhone to carriers is that users have more mobile Internet use than any other device (and thus will take the expensive plans). Still, in the long run, will there be a family of products (as with the iPod and Apple’s laptops) or just a single product with different RAM specs (as today or with its Mac Pro desktop).

Apple’s announcement at WWDC emphasized the final point about the new phone — the software ecosystem with distribution via the iPhone App Store, due to go live on July 11 with the new phones. Apple will be selling and fulfilling the apps and taking its 20% cut along the way. Update 2:10 p.m.: John Boudreau of the Merc has a great story this morning on Apple’s successes in winning iPhone developer loyalty.

One survey of developers predicted that 70% of the apps will be free. This is like saying that 70% of the Macintosh apps are free — which is probably a low number. However, if the Mac model holds, all the major apps developed by multimillion dollar programming teams will have a price tag.

The free ones are usually simple one-trick ponies from a small (or single programmer) company trying to get PR. Under this model, the 1.0 will be used as teaseware and a paid 2.0 (or “Pro”) version will be offered.

The ones where the teaseware works will become modest little businesses like Bare Bones Software BBEdit (mentioned in the original paper about two-sided markets). The ones where it fails will either be pulled, or left as generic free publicity for a company seeking odd job contracting work, or as free sharing by a programmer who wrote the software for fun. The most famous Palomar Software alum, Glenn Andreas, gives away all sorts of OS X widgets to cross-promote his software products.

Overall, I think Apple this year will win the hearts and minds of US developers the way it won high-end iPod users last year. Native iPhone apps are not particularly easy to develop, but as with the original Mac days, Apple will attract a wide range of motivated developers wanting to push the envelope, which will produce lots of new apps (probably mostly consumer oriented) that will make the iPhone more valuable.

Most of these app developers will fail, eek out a modest living, or cross-promote some other business (doing ports for big companies). But if Apple creates some important winners, then this new ecosystem will become a major part of the iPhone value proposition and Apple’s business model. (Not bad for a company that started with a closed device).

Overall, this will help Apple’s overall strategy of growing the US consumer smartphone market, because most US consumers are not using smartphones. The business smartphone market seems to have much higher penetration and switching costs, and so I wonder how much upside is left there. Exchange support will allow access to the small fraction of sites that are using it as their mobile push solution. (Or, perhaps, the large number of sites with a small number of handsets).

RIM and BlackBerry are in Apple’s sights: I think this could stunt RIM’s attempted consumer crossover, but it would be a long time (if ever) that it impacts the business market.

As for overseas, the tepid response to the pre-3G phone leaves little to judge from. The apps may make the difference — if the iPhone apps are much better than those from the better established Symbian S60/UIQ community, and manage to stay ahead of Android.