Is the iPhone a doomed business model?

Sorry Martin, this may be a career limiting move but I have to disagree. The iPhone model, in fact the whole Apple model, has seemed to defy all business rules, written and unwritten. The result has seen its market cap grow larger than Microsoft and its continuing high investment in R&D has created a stream of market leading products, and there are no signs of this trend waning, yet.

Apple has well and truly blown away your 'successful' value chains theory and, contrary to your belief that app developers make minuscule revenues, they seem to keep developing even more apps for Apple. But that doesn't mean there isn't room for the others, like Android, to succeed. I just wouldn't be too certain their business model is that much different to Apple's!

Are you burning yet? That was just the match, the flame-thrower beckons next!

I think the lesson from the iPhone is not that Apple created a doomed business model.  The lesson is that telcos have the doomed business model unless they adapt.

Crucially, Apple's success with the iPhone is not just down to the fact that the iPhone is a very fine product (though it helps!).  Apple's success is that the iPhone is one in a long line of very fine products, creating the kind of customer loyalty that many dream of, but few achieve.

Apple is proof that dominating market positions come from sustained quality in the long run - the ability to please customers and keep on pleasing them.  If that means they take the lion's share of profits, then so be it.  Good for them - so long as they reinvest to ensure they keep on pleasing customers.  They can pay peanuts to business partners because the crumbs from Apple's table is worth more than a 'fair' share from rivals.  In other words, a small trickle from Apple's huge and sustained honeypot is worth more than gambling on getting a much bigger share of a much smaller and much riskier honeypot.

The best part is that the business model is not just sustainable, but gets better with every success.  After every success, customers are even more loyal, even more trusting, than before.  So surpassing Apple is not about producing one good rival product, but a string of rival products over time.  With the head start that Apple have, the competition have a long long way to go before they catch up.

I agree with Eric.. I may be a little off topic but I'd rather take the pennies from Apple's customer base than sell TMF complaint solutions for pennies to operators!

Apple's key to success is scale.

Cheers

A couple points. AT&T's Q1 financial statements show that smart phones produce 1.7x the ARPU than normal phones. In addition 81% of smart phones are coupled with family plans so they bring with them additional paying customers. Given these numbers and the speed with which carriers are rushing to market new smart phone offerings I'm just not sure the claim they're making pennies on the transaction holds water. I'm also not sure how an Android phone would provide a carrier with a better deal. Presumably the consumption issues would remain the same regardless of smart phone brand.

As for Apple and the app developers... Apple gives 74 cents on the dollar of each app sale to the developer. They're retaining a very fair portion of the transaction and of all of the developer complaints against Apple revenue sharing has not been one of them.

There are over 200,000 apps currently available for download. While only a small percentage of people are getting truly rich off of their apps, my experience leads me to believe that except for the truly bad apps most have at least made their money back. We're also leaving out of the discussion in-app advertising and in-app purchasing which are powerful revenue streams for developers.

The Android platform presents many problems for the app developer that have been eliminated by Apple through their heavy handedness. With so many handsets running the platform the developer is left to cross test on dozens of handsets and spend a disproportionate amount of time fixing bugs brought on simply because of Google's openness. In my opinion any claim that there is more ROI available for developers on the Android platform is incorrect now and dubious in the future.

To me it really does appear that Apple has created a system where everyone involved becomes richer off of their product. I don't know how long their system will remain dominant, but it's tough to argue with billions in the bank all generated from a single phone.

The 1.7x ARPU from smart phone users will be a short-term anomoly (that figure has dropped from 2x ARPU in the early days of the iPhone on AT&T already). The reality is that iPhones started out life as a premium product only available on higher-price contracts which have always represented a higher ARPU segment, so whilst on the surface these statements are reassuring, they're not sustainable.

The basic problem with mobile broadband comes down to simple economics: if we assume that mobile broadband demand will continue to increase exponentially for the next several years, and that in order to meet that demand, operators must invest billions in to their infrastructure, who pays the bill in a world where market expects 'all you can eat' data bundles? The forecast rise in overall ARPU from more users taking out data bundles will not meet the cost of this investment, although arguably grabbing market share by offering the best mobile broadband coverage and reliaiblity could be the winner.

I have to say I'm on the fence about the future of the iPhone, but I agree with Martin's assessment. The mobile phone operators have always pushed the latest and greatest devices hard, but their decisions over which to push come down to margin. What we'll see is operators offering better packages to non-Apple smart phones which have greater long-term revenue potential.

However, Apple also have a lock-in factor that we've never seen in the mobile world before. Up until now the major reason not to change manufacturer of your handset have been low barriers - familiarity with interface, owning compatible chargers for cars, etc. All things you can imagine overcoming. The difference with the iPhone is that it's now your music and possibly TV or movie collection tied to that device. There aren't many iPhone users who don't utilize those features because they're so tightly integrated, so converting them away may be too high a barrier to jump.

For that reason, I think the iPhone market is here to stay, but I doubt it'll continue to grow at the same pace and we'll end up with a saturated market of smart phones where Apple holds one significant piece of the pie.

Very interesting comments. One side the operator needs to invest billion of $$ to get their networks ready for 4G/ LTE or whatever is the latest technology and other side the ARPU is declining like never before.

You are right in a sense that iPhone was the one that got the masses to buy and move to smart phones and thus overloading the networks with data which in reality they could have lived without.

The sad truth is as the customer is the king the operators need to adapt and adjust this reality that the networks are going to take more and more burden without spelling out more $$ for them.

So ARPU decline versus higher CAPEX for coverage and backhaul is kind of common for smartphones, I do not think that is an iPhone specific argument.

Whether android apps sold by operators can make a difference.. I personally doubt it. Android app store has been there for a while and 99% apps are for free and look less pro than iphone ones. The cross-platform overhead for dev & testing is becoming an issue compared with the apple side. But in any case agree that the telcos will push to get somehow a larger  piece of the cake.. that applies for any OTT player.

Whether or not Apple will have to change the business model, it is hard to tell. But they are making big money, creating a powerful ecosystem around their product line, so they will be in a position to share a small part with the operator, should market becomes tougher (for instance sharing part of the apps/ads income based on generated traffic).

Good discussion.

Nothing in this world stays forever - 'a' business model, 'a' company or 'a' product. You will always have a mix of all types of models, approaches, strategies making money at any point of time and the businesses have to have "openness" and ability to survive with the mix of strategies.

While Steve Jobs has created an excellent product/business model that is raking money for Apple, it will have its way for some time but the open source/open platform and open environment frameworks will also encourage innovation and will have a reasonably good alternative. Android based handset sales did better than iPhone in the first 100 days last year when it was launched.

And the players in the value chain will invariably criss-cross the stack - they wont remain where they are. So, you will find operators moving over to other layers to get more control over the revenues and get a bigger piece of the pie.

Bottomline - you will always have these competing models making money and co-existing.

Last week I questioned whether the iphone business model was doomed . I didn't have many supporters

I blogged last month about the iPhone business model and stimulated huge discussion about whether the

Sorry for the very late comment on this ... I think Apple is making the same exact mistake a second time. First, they developed a closed market for their PC hardware and initially their OS (at least they are UNIX based now). Recall they stopped Franklin from selling Apple clones. Now, they are doing the same with the iPhone. The story will likely have a similar ending, i.e., small market for Apple with the lion's share going to Android compliant phone makers.