iPhone: Jobs's Revenge

A decade after Apple was pushed out of computing's mainstream, it's taking center stage in a host of other industrieswith the iPhone

In October, 2001, Apple launched the iPod. It quickly became one of the most heralded new products of the decade, creating big strategic risks for competitors and a huge new business for Apple, enriching the computer maker's shareholders by some $90 billion.

In the ultra-competitive space where computers, entertainment, and consumer electronics meet, Apple (AAPL) Chief Executive Steve Jobs must have hoped and prayed for at least a brief window of solitary dominance before powerful competitors attacked its lucrative iPod stronghold. Yet as of today, 69 months later and counting, not one has come up with an effective strategic response to the iPod.

Except, of course, Apple. Now Apple has announced its next big strategic move: the iPhone. Will the competitive response to the iPhone be just as slow?

History Repeating Itself?

In retrospect, maybe the failure of Apple's competitors to counter the iPod is understandable. Like most observers, they looked at Jobs's sleek little device and saw several things, including a well-made MP3 player and an example of sophisticated, cool design. But what they didn't see was even more important: a major new way to distribute music (and other media), as well as a brilliantly designed business model that combined the iPod itself, copyright protection via Apple's FairPlay digital rights management technology, and the convenient, nearly universal, one-price-fits-all iTunes Music Store. It was a business design that would shake up the distribution of power among consumer-electronics firms, music companies, computer makers, and retailers.

No wonder rivals failed to respond correctly. They saw a handy little music player and responded with handy little music players of their own. None has made a dent in Apple's market dominance. Not only has Apple sold over 100 million iPods, dwarfing the competing players, but it recently passed Amazon.com (AMZN) to become the world's third-largest music retailer (trailing only Wal-Mart (WMT) and Best Buy (BBY).

Now history may be repeating itself. Industry players look at the iPhone and see a snazzy new phone with some impressive ancillary features: a touchscreen-based input device with a virtual keyboard and natural-feeling drag-or-spin scrolling; music and video-playing capabilities; wireless e-mail and Internet browsing; and access to online applications such as Google Maps (GOOG) and YouTube. Viewed this way, it's undoubtedly a cool high-end phone aimed at such early adopters as Apple loyalists and on-the-go businesspeople who won't be deterred by the iPhone's high price ($499 for a model with 4 GB of memory, $599 for 8 GB).

A Sub-Laptop Computer

So far, so what? Companies such as Nokia (NOK) already have high-end phones of their own with great features aplenty. But behind the cool phone lurks something quite different: Apple's wedge entry into a lucrative new array of markets; a springboard for evolution into a new generation of devices, services, and infotainment systems; and another redistribution of power among industries, this time including cell-phone makers, network operators, makers and distributors of movies and TV programming, and computer companies.

Consider this: iPhone is not just a phone. It's also the world's first really powerful sub-laptop computer, equipped with an optimized version of the user-friendly Mac OS X operating system. More important, it's an 80/20 computer.

With just a fraction of the functionality of big, clunky desktops or even relatively compact, pared-down laptops, the iPhone will provide 80% of what you really use your computer for: e-mail, Web browsing, simple word processing, and access to music, pictures, and video when and where you want them.

Don't imagine that Apple won't push that potential to the limit. Visit an Apple Store and look at the pyramid of iPod products spun off from the initial version, from the $79 Shuffle to the $349 80-GB version that stores 20,000 songs and plays video on its 2.5-in. color screen. Now, imagine the pyramid of iPhones that will evolve over the next five years, from the beautiful little $199 version that every junior-high school student will covet to the $699 platinum model that might take dictation, offer plenty of memory for high-res movie viewing, and provide push-button access to endless conveniences for the traveler, from directions, flight and weather updates, and emergency services to hotel and restaurant reservations, limo connections, and ultimately (à la NTT DoCoMo's (DCM) i-mode phone) an electronic EZPass/credit-card/ATM device.

What Are the Risks?

In a few years, frequent fliers will be reading the latest thrillers and business tomes on iPhones with easy-to-read horizontal screens and adjustable type sizes, and they'll be downloading movies, news, and corporate videos from the Apple Media Store (the inevitable next stage of the iTunes Music Store). More and more will consider their old laptops bulky dinosaurs, and will leave them at home.

The iPhone will be Steve Jobs's Revenge. Back in the Nineties, Apple was squeezed out of the computer mainstream. It just hadn't built enough strategic control into its business model to protect its position. Now Jobs has come back with much greater strategic control than before, protecting profitability from competitive inroads by connecting an array of cool devices to the powerfully networked business design that supports them, and is ready to recapture center stage in the new, interconnected world.

Are there any major risks that can derail the plan? Of course. The network-dependent iPhone could stumble if glitches test the patience of Apple aficionados too severely. Corporate IT stewards wedded to their Palm (PALM) Treos and Research In Motion (RIMM) BlackBerries will resist supporting executive road warriors in a shift to iPhone.

Don't Count on Any Missteps

But then again, Apple could apply the same tenacity and attention to detail it showed in developing iTunes to working with its network partners at AT&T (T). And the demands of managers for the array of services that iPhone will offer could overcome corporate resistance.

If the companies now being challenged by Jobs's newest gambit—including not just cell phone makers, but the network operators, consumer-electronics companies, computer companies, and media distributors—are counting on missteps by Apple, they might want to think again. Take a much closer look at iPhone—not just what it is today, but what it is positioned to become in the years ahead. They may not be able to afford to watch from the sidelines for the next 69 months.

Before it's here, it's on the Bloomberg Terminal.