Want CNET to notify you of price drops and the latest stories?

Apple unveils iPhone 2, both the phone and the business

Everyone knew the iPhone 3G was coming, but Apple quietly changed the way the iPhone is sold Monday in addition to releasing a next-generation product.

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
5 min read

The second chapter of Apple's iPhoneera is almost ready to begin, and it's already clear that things will be a little different this time around.

Few people who pay even scant attention to the technology industry could claim to be shocked by the introduction of a faster iPhone earlier on Monday by Apple CEO Steve Jobs. Apple has sold 6 million iPhones since June 2007, Jobs said, and will likely sell a few more once the new model arrives on July 11 with a faster networking chip, GPS capabilities, and a software upgrade that's an IT manager's dream for a mobile device.

Apple CEO Steve Jobs unveils the 3G iPhone. For more photos from the event, click on the image. James Martin/CNET News.com

From a features point of view, the new model delivers on what iPhone customers want and need. Yes, you still can't do mobile messaging, and I still don't think you can do cut-and-paste, which is just bizarre. But Apple has added just about everything else people have asked for or complained about in iPhone 1.0: faster networks, secure access to corporate e-mail, precise location-based services, and third-party applications.

What's perhaps more interesting is what Apple has learned about the mobile phone business. It's not all that surprising that Apple, which has a proud legacy of product design and software development, would have created an excellent product that has the rest of the industry scrambling to overtake.

But several developments later on Monday indicate that Apple has had to learn just as many lessons about playing in the mobile phone market over the past year as it has taught the mobile phone industry about product development.

About 90 minutes after Jobs concluded his keynote, AT&T held its own press conference to announce some major changes in the way iPhones are sold. You now must immediately agree to a two-year contract with AT&T whether you buy the iPhone in one of Apple's stores or one of AT&T's stores, and there will be no online ordering. AT&T and Apple have ended their revenue-sharing agreement, and Apple also said that the "vast majority" of its new carrier agreements overseas do not involve revenue sharing. To top it off, iPhone data plans are now $10 more expensive.

This just might be the aftereffect of the unlocked iPhones. Apple executives downplayed the actual number of unlocked iPhones several times this year, claiming they couldn't estimate how many iPhones had actually been unlocked and that in any event, it just demonstrates demand for the product.

But Apple's carrier partners sure cared about that number. Apple negotiated extremely favorable deals for iPhone 1.0, getting a piece of AT&T and other carriers' revenue for data services while retaining complete control over what applications would appear on the device.

Apple held up its end of the bargain in one sense--delivering a solid product that enticed people to switch networks and drove data usage--but failed to secure its product against those who wished to unlock it from its designated networks, forcing some carriers to watch their rivals reap the benefits of iPhone data usage. Wireless carriers may be opening up their networks in new and interesting ways, but their influence on the mobile market isn't waning just yet.

It's not clear whether Apple will introduce technology changes into the new iPhone that makes it harder to jailbreak, then unlock, but it will at least require U.S. iPhone buyers to sign a two-year contract and activate the iPhone on AT&T's network before they can take it home. This won't eliminate unlocking, but could discourage it to some degree.

The faster speeds, additional countries--and a tweak to Apple's business model--should help the company hit its goal of shipping 10 million iPhones in 2008. James Martin/CNET News.com

Of course, compromise is part of any good partnership. In exchange for giving up revenue sharing and its novel at-home activation service, Apple is getting a subsidized iPhone. That will lower the price of entry into the iPhone world and should accelerate sales without dinging Apple's product margins to the degree that would be result if Apple absorbed the cost decrease itself. The increased sales should also offset the loss of the shared revenue.

So the big question: will the iPhone 3G--and new business model--enable Apple to meet its sales target for 2008 of 10 million units? If Apple has sold 6 million units to date, as Jobs said in his keynote, that means the company has a long way to go, having sold just 2.3 million iPhones so far in 2008.

The fact that the new iPhone won't be available until July 11 was one of the most surprising things to emerge from this morning's keynote. Apple, of course, never put a finer grain on when it expected to ship iPhone 3G beyond "next year," which Jobs quoted a few times in response to questions about the issue in 2007. But few expected the company to miss the one-year anniversary of the iPhone's debut with the new model, and at the very least, Apple itself had promised the iPhone 2.0 software by the end of June.

That means Apple will have shipped almost no iPhones from roughly the middle of May to July 11: about two whole months, although AT&T stores took longer to run out of their supply. We'll get a more precise number for iPhone shipments during Apple's third fiscal quarter, which ends in June, during the company's earnings call in July. But no matter how you slice it, that's a large gap that points to a bit of a supply chain snafu at some stage along the way.

Apple's Greg Joswiak, vice president of worldwide iPod and iPhone marketing, reiterated Apple's 10 million shipment goal in an interview after Jobs' keynote, so it's not like Apple is backing down. There are two main reasons why the company can still be confident: the combination of 3G and the cheaper price will spur potential customers who have been sitting on the sidelines in countries where the iPhone already exists, and a total of 70 countries will get official access to the iPhone, including major new destinations like Canada and Australia. In addition, Jobs hinted to CNBC later in the day that the big prize--China--could be coming sooner rather than later.

It's always interesting to watch a company try to make its way into an entirely new business; those who fail far outnumber those who succeed. The most common reason why many fail is because they forget to learn from their initial experiences, or assume they know better based on their past successes.

Apple may not proclaim it from on high in the Stevenote, but today the company showed that it's willing to learn from its mistakes, and to adjust its business model when prudent. So far in its iPhone era, Apple has wisely tackled the hard problem first--making a great product, and continuing to improve it--and is now making the kinds of changes to its business model to make sure the iPhone really does turn into the third leg of the company's business some day.