Keep the iPhone in perspective

August 5, 2009

Mark Caron is CEO of Snac Inc.

By Mark Caron

While
the iPhone has been one of the most successful mobile devices in
history and has clearly created a whole new level of engagement with
mobile applications, the excitement surrounding it has blinded the
industry from a frank assessment of where the iPhone is, and what it is
lacking. 

The facts are that it currently is, and will likely
remain, a small slice of the mobile market as a result of its singular
product offering, limited functionality – even with 3.0 – and high cost
of ownership.

Attending
mobile conferences and reading mobile blogs and news, it is easy to
believe that the iPhone has taken over the world, or at least is
destined to do so very soon. 

Hearing developers say, “The
iPhone is the only platform that matters,” and seeing half of every
conference audience raise their hands when the speaker asks, “How many
of you have iPhones?” reminds me of a story about the BlackBerry in
2003. 

I was pitching a venture capitalist about the emerging
growth in text messaging, and he interrupted me saying, “Why would
Americans text message? Everyone has a BlackBerry.” I happened to know
that BlackBerry maker Research In Motion was approaching its millionth
subscriber, so I decide to play with this guy a bit. 

“What
percent of U.S. mobile subscribers do you think own BlackBerrys?” I
asked. “I don’t know – maybe half?” he responded. When I told him it
was less than 1 percent, he refused to believe it. “Everyone I know
uses a BlackBerry,” he said. 

Niche market
The
facts are that AT&T probably has between 9 million and 10 million
iPhones active on its network, even after the introduction of the 3G S
in mid-June. That is about a 3 percent market share nationwide.

When Apple/AT&T announced first-quarter 2009 U.S. iPhone sales of 1.6 million units, everyone cheered.

Knowing
this number was lower than earlier quarters, I scoured the media for
some critical assessment of iPhone’s trajectory. I could not find a
single article that mentioned iPhone’s first-quarter sales represented
the second consecutive quarterly decline in unit sales, and that sales
had fallen 33 percent from their peak in the third quarter of 2008.  

In
addition, you can bet that second-quarter sales would have been down
again, probably way down if Apple had not slashed the price to $99 on
June 6, and launched the 3G S model. 

And given AT&T’s
generous upgrade plan, do not be surprised if many or even most of the
new iPhones are being sold to existing iPhone users upgrading from
their older iPhones. This will slow the growth of the iPhone installed
base even more.

It certainly seems that the Apple-lover market is
nearly tapped out, and the brutal competition of the mobile phone
industry is in full swing.

It is safe to assume that Apple will
never get above single-digit market share unless it makes massive
investments in a very broad product portfolio, just like the major
handset players have done for years.

This would likely lead
Apple to have margins that gravitate toward the mobile industry mean,
so do not expect to see it happen soon. Like the Mac, mobile products
from Apple will remain a niche market.

Great phone, but …
But what about those 65,000-plus amazing iPhone applications?

Indeed,
iPhone applications have broken new ground in level of user engagement.
The cool visual effects alone make the applications fun to play with –
I love the deleted file getting sucked into the garbage can – but many
applications go further with the pinching, squeezing, tilting, shaking
and even blowing into the microphone, making for a truly engaging
experience.

While these applications have opened a whole new
market, “engagement” is not always the goal for mobile users. More
often than not, mobile users just want to get something done fast –
while walking/talking/driving and using one hand and not
pinching/squeezing the screen with two hands. 

And here is where the iPhone falls down.

Have
you ever noticed that the weather icon on the iPhone always shows
“Sunny and 72”? That is because the iPhone, remarkably, does not
support applications running persistently in the background.

The
only way to get the current weather on the iPhone is to launch the
weather application and let it retrieve fresh data. And on the iPhone,
only one application can be open at a time.

Ironically, the
iPhone is the only smartphone platform that cannot run third-party
applications persistently in the background. 

Windows Mobile,
Symbian and BlackBerry have been running third-party applications in
the background for years. Android and Palm Pre do it, too. Now even
proprietary OS feature phones, such as ones from Sony Ericsson can do
this.

Many developers were sorely disappointed, and some shocked
when Apple announced that the new version 3.0 of the iPhone OS would
not support application multitasking.

This limitation prevents
whole classes of applications from running effectively on the iPhone,
including persistent messaging/communications, LBS tracking, enterprise
monitoring and widget applications.

T-Mobile and Sprint have been
hammering AT&T on this point. It is not just the upfront device
cost. It is the ongoing monthly cost. To buy an iPhone you must commit
to two years of a minimum $70 per month plan – $40 for voice, $30 for
data. With fees and taxes, that is nearly a $2,000 commitment – a huge
barrier for most Americans, especially during this recession. 

What
many consumers, but few industry insiders, are increasingly realizing
is that their existing phone or a “free” new phone on a $5-$15 per
month data plan can access more than 1million mobile-optimized Web
sites, and some very cool new mobile widget applications for fast
access to top Web services and content. 

And many of the new
“feature” phones have touch screens and QWERTY keyboards, so consumers
think they are getting a “smartphone” but at a fraction of the ongoing
cost. This is a core reason feature phones remain the vast majority of
the installed base and continue to outsell smartphones by two-to-one.

The
iPhone has brought remarkable innovations to the mobile industry, but
we do ourselves a disservice if we do not keep its role in perspective
and exert our collective industry efforts accordingly.

Mark Caron is CEO of Snac Inc., New York. Reach him at

mark@snacinc.com.