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The Killer iPhone

How Apple designed its new model to be sweet to customers and vicious to rivals

(Corrects figure in fifth paragraph concerning strength of glass casing)

Given how much was known about the fourth-generation iPhone before its official unveiling on June 7, Apple (AAPL) CEO Steve Jobs did quite a job to generate as much as excitement as he did. Fans and analysts raved over the $199 phone's videoconferencing feature, applauded its slimmed-down design, and looked forward to a promised new era of hyper-multitasking.

The new iPhone is built not just to compete with other phones but to keep pushing the boundaries of the Apple universe. It's Apple at its most creative—and its most aggressive, as it attempts to divert revenue from advertisers, book publishers, and content providers.

Retina Display: The threshold at which the human eye can no longer tell whether one screen is better than another is about 300 pixels per square inch. Apple exceeds that with 326 pixels. Although displays found on other phones are bigger—Sprint's (S) EVO 4G tops it by almost a full inch—it's the highest resolution ever used in a wireless phone, says iSuppli display analyst Vinita Jakhanwal. Apple is going for the last word on display quality and challenging others to match it. Look for Apple's rivals to respond with a display-resolution arms race before the year is out.

Cameras: While other phonemakers have gone megapixel-mad—Nokia, Samsung, and others boast cameras in the 8 to 12 range—Apple has held steady at five megapixels. A smart move, says Van Baker, analyst at Gartner (IT) who praises Apple's decision to instead increase the overall size of the camera sensor, which will do more for picture quality than adding megapixels. Additionally, iPhone 4 has a front-facing camera that's central to its marquee feature: Video calling. While technically not new—Nokia (NOK) has offered it since 2007—Apple's version, FaceTime, is drop-dead simple to use, Baker says. Apple has for now restricted the feature to Wi-Fi networks, meaning that if consumers love it, it'll give them one more reason to grumble about their service provider (T)and generally increase Apple's leverage over the carriers.

Better Screen: Nothing steals the joy of owning an iPhone like a cracked touchscreen. Apple boasts that the iPhone 4's front and back glass casing is 30 times stronger than plastic, though analysts say it's only slightly sturdier than the stuff used for the past two generations of iPhones. Apple decided to talk about the glass strength to assuage concerns that the iPhone 4 is too fragile. To do that, they may still need to offer a plan that covers screen breakage.

Software: The newly renamed operating system, iOS4, finally brings multitasking to the iPhone with the ability to organize apps into folders by category, such as sports. Better late than never, Jobs says. The real gems are iMovie editing software for high-def video and FaceTime, which will give Skype and Cisco Systems' (CSCO) Flip Video a run for their money. Single-use products continue to be vulnerable to Apple.

Gyroscope: Apple surprised the wireless industry with the addition of a three-axis gyroscope chip, the first phone to have one, says iSuppli analyst Jérémie Bouchaud. Paired with accelerometer chips already present, the iPhone 4 will be able to precisely detect tilting and rotating motions to power an impressive batch of new gaming features and navigation apps to help users find their way inside buildings, airports, and malls. It will be up to third-party app developers to make people care that the gyroscope is even there, but Apple has done very well relying on their ingenuity so far.

iBooks: Analysts accuse Jobs of using very rough math to back his claim that Apple has grabbed 22 percent of the U.S. eBooks market in just a few weeks. Still, 5 million books sold is impressive. Unless Amazon (AMZN), Sony (SNE), and others quickly roll out color screens and offer readers the ability to sync reading across the iPad, iPhone, and iPod Touch, their days in the eReader business are numbered.

iAds: Apple has lined up an impressive list of advertisers willing to stake big bucks that they'll grab a lot of eyeballs on 100 million iOS4 devices worldwide. Apple manages the ad inventory and its important demographic data however, which might not sit well with big software developers who are looking for a larger cut of the mobile pie.

Data: Apple, IDC, Pinch Media


2007: 3,704,000

2008: 13,675,000

2009: 25,105,000

2010 to date: 8,752,000

Edwards is a correspondent in Bloomberg Businessweek's San Francisco bureau. Hesseldahl is a reporter for Bloomberg Businessweek.

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