Year in review: Apple's iPhone takes off

While 2007 might have seemed like the year of the iPhone, Apple will probably look back on 2008 as the year it became a cell phone company.

Apple had a rocky road at times with the iPhone in 2008, but it finished the year having turned its first phone into its most important product. The iPhone began the year as a gadget status symbol in four countries and ended the year as the world's second-best-selling smartphone, putting Apple in perhaps the best financial shape in the tech industry as the world entered a severe economic downturn.

The lowlights? The Cupertino, Calif.-based company was unable to control hacker access to the iPhone and thus rampant unlocking. It had to abandon its revenue-sharing pricing model in favor of the carrier subsidy model favored by the rest of the industry. It endured the iPhone's first major technical gaffe, with widespread reception problems prompting a massive software update. And it appeared overwhelmed at times by developer response to the App Store.

Credit: Apple

Despite some technical bumps in
the road, the iPhone 3G quickly
became the most popular smartphone.

But the highlights more than made up for any trouble. Late in the year, Apple revealed just how much cash the iPhone was generating for its business, after a blowout quarter for the iPhone 3G. Despite the technical glitches, the iPhone 3G outsold Research In Motion's BlackBerry and all Windows Mobile phones in the third quarter of the year, and application downloads surged as developers threw resources into the platform.

While the iPhone fluttered all over the map, the Mac continued to make steady gains. Apple's market share rose each quarter as it continued to gain converts and overhauled its notebook lineup in October. But it had significant problems moving old .Mac users over to a new service called MobileMe, part of Apple's gaffe-filled July and August.

As the clock rolled around to September and Apple's annual iPod event, the company regained its feet. The new iPods failed to generate as much buzz as in years past. But even after all these years, few companies are making any progress derailing the iPod train. Apple's greatest worry with the iPod these days is what to do next, which started to play out late in the year, as the company pitched the iPod Touch as a gaming device.

In corporate matters, the biggest story of the year was the selection--and delayed arrival--of IBM's Mark Papermaster to replace Tony Fadell as head of iPod and iPhone hardware engineering. IBM looked set to fight bitterly over Papermaster's defection to Apple by enforcing the terms of a noncompete agreement, setting up a court battle that could stretch well into 2009.

The most interesting story, however, might very well have been Psystar, a small Florida company that became the talk of the industry for challenging Apple's restrictions on Mac OS X licensing. Psystar's decision to sell barebones desktop PCs with Mac OS X preinstalled touched off a wave of controversy--and eventually litigation--as the Mac community once again debated whether Mac clones were a good idea.

And finally, Apple CEO Steve Jobs survived the year, despite the attempts of various hedge funds and speculators to diagnose him with cancer based on his gaunt appearance at the Worldwide Developers Conference in June. Jobs eventually revealed that he had had surgery for a digestive issue related to his 2005 treatment for pancreatic cancer. Subsequent public events in the year, as well as a rare appearance on an Apple earnings call, dampened speculation regarding his health.