The iPhone, one year later

One year after Apple's iPhone made its debut in a frenzy of consumer lust, much of the hubbub may have died down but the story is just getting interesting.

In just a year, the iPhone has had a clear impact on the way smartphones and mobile software in general are now designed, and has raised consumer interest--especially in the U.S.--in the concept of truly mobile access to the Internet. But Apple has struggled to find the right price for the iPhone, manage its supply chain, and limit the ability of hackers to get total control over the iPhone.

As a result, Apple has realized that it will have to embrace the business model used by the rest of the mobile phone industry, and has made significant changes to the way iPhones will be sold in the second year of their existence. While the mobile industry might have forced Apple to bend to its will in certain ways, the iPhone's breakthrough user interface and Internet browsing prowess clearly caught the attention of the mobile industry, and we'll probably find out by this time next year whether any of them have learned their lessons.

Let's take a quick look back at the first year of the iPhone. Apple sold 6 million iPhones from a year ago this weekend up until around the middle of May, when it ran out of the older generation model ahead of the debut of the iPhone 3G on July 11. The company said it "underestimated" demand for the older model when it made its purchasing decisions for 2008, meaning that Apple will not have sold a single iPhone during the last six weeks of its first year.

Starting with iPhone Day on June 29, 2007, iPhone sales have followed a bit of a bell curve pattern, peaking at 2.35 million shipments in the fourth calendar quarter of 2007 before retreating this year. That spike was driven by what was a smart move in retrospect but perhaps Apple's biggest public-relations blunder in its first year of the iPhone: the infamous price cut.

Just 10 weeks or so after thousands lined up to be the first to purchase an iPhone for $599, Apple cut the price to $399, angering some of its most loyal customers. The company moved to mollify the early adopters with a $100 store credit, which seemed to douse the flames.

Around the same time, Apple finally addressed the pleas of the developer community for a chance to get their hands on the iPhone. In mid-October, CEO Steve Jobs announced that Apple would release a software developer's kit in February that would allow third-party developers to create software for the iPhone. The SDK will be a little late, but Apple and other companies have shown what types of applications are possible using the unique touch-screen user interface on the iPhone, and the fruits of that labor are expected to arrive in early July.

While that process was going on, however, a vibrant developer community had already sprung into action, creating hundreds of unauthorized applications for those willing to "jailbreak" their iPhones. These developers found a relatively easy way to bypass Apple's lock on the handset, which also allowed a thriving "gray market" for unlocked iPhones to emerge all over the world. Executives at carriers who had signed exclusive revenue-sharing deals with Apple were likely not amused.

What's next for the iPhone?
So as we look forward into the second year of the iPhone's life on this planet, we can already see that some things will be very different. For one, it looks like Apple has finally settled on a price for the iPhone: $199 for the 8GB model and $299 for the 16GB model. It will get down to that price thanks to hefty subsidies from AT&T and other carrier partners around the world, which means the end of the revenue-sharing agreement that Apple signed with its initial carrier partners.

When the iPhone was first released, Apple was willing to forgo the usual subsidies attached to a high-end phone in exchange for the long-term revenue-sharing agreement, perhaps believing that its marketing expertise could sell iPhones as combination high-end iPods, phones, and mobile browsing devices at the higher prices. But once the initial hype wore off during 2008 and a general economic malaise set in, phone buyers--especially in Europe--seemed put off by even the $399 price. Some experiments with lower pricing by O2, the iPhone's U.K. carrier, quickly moved its remaining inventory of iPhones.

The other main difference that will play out during the second year of the iPhone will be official third-party applications, combined with a faster networking pipe and GPS on the iPhone 3G. Business-oriented smartphone users will now also be enticed to take a look at the iPhone with the addition of support for Microsoft Exchange e-mail and security for those conservative IT types.

It's now mass-market time for the iPhone. If I may make a sweeping generalization, the early buyers of the iPhone seemed to reflect two types of people. One, the hardcore gadget-lovers who had been waiting for an Apple-designed phone for years to replace their Palm, Windows Mobile, or BlackBerry smartphone and didn't care that the iPhone ran on the slow EDGE network with stock applications. The other? Normal, everyday people who had never seen the need for a smartphone until they saw the iPhone merely say "Hello," in the first commercials run during the 2007 Oscars, and had no idea what they were missing running on the slow EDGE network with stock applications.

I've seen this phenomenon several times over the past year, with co-workers, family, and friends--people who I never thought would be interested in a smartphone--amazed at how the iPhone has changed their life. I'm sure that's also happened to BlackBerry owners, Windows Mobile users, and the Europeans who probably look across the pond at us with bemused looks from behind their Symbian smartphones, but in the last 12 months, it has been the iPhone users who have gone through that awakening process, and many of them have been first-time smartphone owners.

In the next 12 months, iPhone buyers are going to be all the people who couldn't justify spending $399 on a phone as well as those who would have never considered buying a phone that ran on a slow network, plus the hard-core upgraders, I suppose. Some analysts expect Apple to sell as many as 18 million iPhone 3Gs in the next six months, although that seems quite a stretch to me. But it doesn't seem impossible that Apple would ship at least 7.5 million iPhones over the remainder of the year, hitting its 10 million goal for 2008.

Apple will face a different environment in its second year. Research In Motion is dramatically expanding its efforts to attract regular people, not just businesspeople, to the BlackBerry. Windows Mobile and Palm are expected to have new versions of their operating systems out next year. And while I think Google's Android software is aimed more at midlevel "feature" phones than the iPhone, the buzz around that eventual launch should be intense.

But Apple still appears to hold the high ground in terms of software design and the appeal of its user interface. The first year of the iPhone was humbling for the company, in a certain way, as it realized just how much it had to learn about this strange new mobile world. But it was also affirming in that users, critics, and competitors have all acknowledged the changes in mobile computing created by the iPhone's software.

That's amazing progress in a year from a company that had never participated in this market before. Phones and computers are finally coming together, after years of promises of convergence. And Apple will definitely play a leading role in the definition of that market over the next several years, having earned the right during the first year of the iPhone.