How the iPhone 3G is changing the wireless game

July 9, 2008: 7:00 AM ET
The iPhone 3G doesn't look much different from the earlier version, but it's poised to have a dramatic impact on the global wireless industry. Image: Apple

When Apple CEO Steve Jobs took the wraps off of the iPhone 18 months ago, the wireless establishment offered a smug response. At the Consumer Electronics Show in Las Vegas, a Nokia executive sniffed that Apple's new gadget merely validated his company's strategy, and voiced his surprise to journalists that the iPhone didn't use the latest 3G networks for fast data connections. "Overall, it's very exciting for us," he said, implying the mighty Nokia had nothing to worry about.

A year and a half later, as the iPhone 3G arrives, Apple's (AAPL) rivals look a lot more flummoxed. The little gadget has catalyzed the wireless industry, boosting earnings for Apple and U.S. partner AT&T (T), and inspiring an avalanche of copycat touchscreen devices. Samsung has the Instinct, a chunkier, less elegant knockoff. Research in Motion (RIMM) is readying the BlackBerry Thunder. LG has the Dare and Nokia (NOK) the dubiously codenamed "Tube" phone. Each claims to best the iPhone in some feature or other – a better camera, say, or touch-feedback.

But with the competition scrambling to develop an iPhone killer, might they be missing the point? Judging by customer raves, the iPhone's magic isn't in the features – not the 2-megapixel camera, or the Safari web browser, or even the music and video capabilities. It's in Apple's knack for making all those features easier to locate and use. What's more, as the iPhone 3G debuts this week, Apple's trademark simple approach is doing more than setting consumers' tongues wagging – it's changing the game in wireless, from phone sales to software development.

Just ask Aaron Levie. The CEO of online collaboration startup Box.net has been watching the iPhone's impact on his business, and he marvels at the results. Though there are millions more devices out there running Windows Mobile software from Microsoft (MSFT) and BlackBerry software from RIM, his usage logs show that iPhone users are already accessing his service through the Safari browser just as often as the other gadgets – suggesting that iPhone owners are more likely to actually use advanced Internet features.

Of course, it's still early in the iPhone's life, and plenty could still go wrong. The forces arrayed against Apple are a who's who of the tech world: Microsoft, Samsung, LG, Nokia and more. And Jobs & Co. have already made a few questionable moves – like dropping the price too fast on the first-generation device, and pushing carriers to give Apple a cut of the subscription fees from new iPhone subscribers. Sales so far have been promising, with Apple on track to meet its goal of selling 10 million iPhones in calendar 2008, but much depends on how businesses and overseas buyers react to the unconventional phone.

Still, the iPhone's impact so far is much bigger than its sales figures suggest. Even detractors grudgingly admit that the bar is now higher for phone design. Confusing menus and hidden features just won't cut it anymore. "Most smartphones are smart in name only," says Richard Doherty, an analyst at the Envisioneering Group. "People tend to feel dumber using them."

He sees similarities between the iPod's shakeup of the music industry earlier in the decade and what the iPhone is starting to do to wireless. A key difference, though: Unlike the iPod, which some music moguls blame for lost revenue, the iPhone represents a trend that could make a lot of telcos richer.

With that in mind, it's no wonder that wireless carriers around the world are in a tizzy over the iPhone 3G. Their business hawking voice minutes to subscribers is becoming less profitable with competition driving prices down, and their best alternative is to sell mobile Internet access on top of their voice plans. But to do that, carriers need easy-to-use mobile gadgets to hook consumers – and that's where the iPhone comes in.

"There's no doubt in my mind that a really positive effect of the iPhone was to focus mainstream people on the idea of using their device for data," Qualcomm (QCOM) CEO Paul Jacobs told The New York Times last year.  "Qualcomm could have spent huge amounts of money advertising 3G and not gotten the point across as well as the iPhone has." (Qualcomm, whose technology powers many of the world's 3G networks, has much to gain from iPhone fever.)

The mobile Internet hype should only accelerate now that the iPhone has 3G speed, and is arriving in more countries. Until now, the iPhone has been available in just six countries; on July 11 the number jumps to 21 markets, representing roughly a third of the world's 3G networks based on WCDMA and WCDMA-HSPA.

These new locations are a goldmine of wireless subscribers: According to data provider Wireless Intelligence, the top ten new iPhone carrier markets have 31.6 million 3G subscribers already, and the number is growing fast. Why does that matter? The iPhone makes people hungry for 3G, and 3G subscribers spend more. That makes the iPhone an important strategic weapon. Wireless Intelligence analyst Will Croft wrote in a recent report that carriers who sign up 3G subscribers will have extra money to upgrade their networks and outgun the competition.

The iPhone's mobile renaissance doesn't stop there. Apple seems to be having just as big an impact on the way software companies write programs for mobile phones. The concept of open development for phones isn't new; Microsoft has courted developers for years with its Windows Mobile software, Palm (PALM) and Nokia-backed Symbian have done the same with their software platforms, and Google (GOOG) is jumping into the fray with its Linux-based Android offering.

But by serving up straightforward iPhone development tools based on its polished OS X operating system, Apple has generated more buzz than any of them. Game developers and corporate IT shops alike have clamored to build programs for the iPhone, and to add them to a marketplace that also launches this week.

Coincidentally, Nokia recently announced plans to dramatically retool Symbian, taking the code open source and cutting the fees for developers to write authorized software. Says Envisioneering's Doherty: "We have no doubt that they only took these moves because of the developer attention they've seen drained by Apple, and a little bit of Android."

The iPhone is drumming up enough interest that the establishment isn't shrugging off its impact anymore. In the U.K., heavy preorders of iPhone 3G crashed the website of carrier O2 on Monday morning. In India, interest in the iPhone is so high that even though the country has yet to settle on 3G spectrum auction rules, carriers Vodafone Essar and Bharti have committed to carrying it on their 2G networks until the kinks get worked out.

And remember Nokia? Executives there sound a lot less excited these days. CEO Olli-Pekka Kallasvuo was quoted last month saying the iPhone's launch in India, where Nokia has been gaining market share, is sure to have a negative impact on his company.

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