The 3G S iPhone: Apple's Force to Be Reckoned With

From the day it launched two years ago, Apple's iPhone has been a tornado of disruption ripping through the wireless phone market. With the release of the iPhone 3G S and, at least as important, a new version of the basic software for all iPhones, the upheaval will intensify and spread to new markets.

The latest moves seem designed to wreak havoc on the competition. The iPhone 3G S hardware is a relatively modest update of the current phone, but the changes address the few areas where Apple (AAPL) lagged rivals. For example, the mediocre camera has been replaced with a 3-megapixel autofocus unit capable of quality video recording. A faster processor boosts performance, and storage is doubled, to 16 or 32 gigabytes. For this, you pay either $199 or $299 with a two-year AT&T (T) contract. Battery life is significantly improved when you are on a Wi-Fi network, but not when you are on 3G. And you can not only voice-dial but also use speech to control many iPhone functions. At the same time, the existing 8GB iPhone'3G remains in the lineup at a market-threatening $99.

Competitors have at least as much to fear from the new software, which is free for the original iPhone and iPhone 3G and a $10 upgrade for the iPod Touch (a Wi-Fi equipped iPod you can think of as a phoneless iPhone). Apple moved to match and, in many cases, leapfrog the competition. You can now cut and paste text in any application. The on-screen keyboard works well in both vertical and horizontal orientations. A technology called push notification can be used to wake a sleeping app, such as an instant-messaging program. And app publishers can sell add-ons such as extra game levels, or content such as e-books, from within their programs and bill the purchases through the App Store.

Going Beyond Handsets The most obvious targets of Apple's moves are other phonemakers. The brand-new Palm (PALM) Pre suddenly seems overpriced at $300 before a $100 mail-in rebate. Microsoft's (MSFT) yet-to-be-released Windows Mobile 6.5 already looks lame, and many of the competitive software advantages of Google's (GOOG) Android have been erased. In European and Asian markets, Nokia's (NOK) dominance will take a hit. And over time, new security features added to the iPhone could chip away at BlackBerry's (RIMM) lock on the corporate market.

But Apple's ambitions and the impact of the iPhone go far beyond the handset business.

For example, Apple now allows users to download apps that provide turn-by-turn directions while you drive, and the iPhone's big screen makes it an excellent navigation device. One of those apps, from TomTom, is actually a whole driving kit that includes a window mount. The iPhone now threatens both standalone personal navigation devices and wireless carriers' subscription navigation services.

Another big shift: Shooting and editing videos and uploading them to YouTube is now as easy on an iPhone as on a Flip camera. That should give Cisco Systems (CSCO) pause; the company recently bought Flip maker Pure Digital for $590 million.

To make matters worse for competitors, the vibrant community of developers who dream up uses for the iPhone never imagined by Apple shows no sign of slowing. From silly apps, such as virtual watermelon seed spitting, to uses as serious as real-time intensive-care patient monitoring, it is third-party software that will continue to make the iPhone a force of creative destruction—one competitors will have a devil of a time stopping.

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