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Will Apple’s Culture Hurt the iPhone?

Miguel Helft|The New York Times
Monday, 18 Oct 2010 | 10:29 AM ET

If you want a smartphone powered by Google’s Android software, you could get Motorola’s Droid 2 or its cousin, the Droid X. Then there is the Droid Incredible from HTC, the Fascinate from Samsung and the Ally from LG.

That’s just on Verizon Wireless. An additional 20 or so phones running Android are available in the United States, and there are about 90 worldwide.

But if your preference is an Apple-powered phone, you can buy — an iPhone.

Apple iPhone
AP
Apple iPhone

That very short list explains in part why, for all its success in the phone business, Apple suddenly has a real fight on its hands.

Americans now are buying more Android phones than iPhones. If that trend continues, analysts say that in little more than a year, Android will have erased the iPhone’s once enormous lead in the high end of the smartphone market.

But this is not the first time Apple has found itself in this kind of fight, where its flagship product is under siege from a loose alliance of rivals selling dozens of competing gadgets.

In the early 1980s, the Macintosh faced an onslaught of competition from an army of PC makers whose products ran Microsoft software. The fight did not end well for Apple. In a few years, Microsoft all but sidelined Apple, and the company almost went out of business.

Can Apple, which insists on tight control of its devices, win in an intensely competitive market against rivals that are openly licensing their software to scores of companies? It faces that challenge not only in phones, but also in the market for tablet computers, where the iPad is about to take on a similar set of rivals.

“This is a really big strategic question,” said Toni Sacconaghi, an analyst with Sanford C. Bernstein and Company. “No one knows whether openness will ultimately prevail as it did on the PC.”

Apple declined to comment on the issue.

By some measures, the competition Apple faces this time is even more formidable than it was in PCs. In addition to the Android family, Apple already competes with Research In Motion, maker of the BlackBerry.

And the iPhone will soon have one more powerful, and familiar, foe: Microsoft. That company’s well-reviewed Windows Phone 7 software will appear in as many as nine new smartphones beginning next month. Others like Nokia cannot be counted out.

The stakes are huge, as the mobile computing market could prove to be larger than the PC market ever was.

No one is counting out Apple, of course. The iPhone 4, which Apple began selling this year, has been its most successful phone introduction yet. On Monday, when the company reports financial results, it is expected to announce that it sold nearly 12 million iPhones in the quarter ending Sept. 25, according to analysts’ estimates. That would represent a 60 percent increase from a year earlier.

And with Apple expected to bring the iPhone to Verizon early next year — most likely in an attempt to slow Android’s momentum — the sales growth may well accelerate.

Among investors, there is little doubt that Apple’s strategy is the right one. The company’s stock has soared nearly 50 percent this year, and on Friday it closed at an all-time high of $314.74.

But the rise of Android has been both sudden and unexpected, and its ascent highlights some of the advantages of an open approach.

“There is much more rapid innovation taking place in an open environment,” said David B. Yoffie, a professor at the Harvard Business School who has written recent case studies on Apple. While Apple comes out with a new iPhone model once a year, slick Android phones with new features hit the market often.

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NO ROOM FOR ERRORS

That leaves little room for error at Apple. The company must continue to create hit products, as a single misstep could give Android and other rivals an opportunity to make inroads and steal market share.

Also, as the number of people with Android phones grows, Android will grow more attractive for app developers. For now, Apple’s App Store, with more than 250,000 applications, enjoys a large advantage over the Android Market, which has about 80,000. And those numbers don’t tell the whole story. Apps made for the iPhone tend to be of better quality, are more frequently downloaded and on average are more profitable for developers.

But that edge may not last, especially as many developers fret about Apple’s tight control over the App Store.

“Having a tightly controlled ecosystem, which is what Apple has, is a large short-term advantage and a large long-term disadvantage,” said Mitchell Kapor, who as founder of the Lotus Development Corporation is a veteran of the PC-versus-Mac wars, and is now an investor in app makers. “The question is, how long is the short term?”

But for all the similarities in Apple’s approaches to mobile computing and desktop computing, there are plenty of differences, and most analysts doubt that history will repeat itself.

For starters, Apple is the richest company in the technology industry. With $45.8 billion in cash, it can afford to invest heavily in research and development. Apple’s large early lead in devices and developers puts it in a much stronger position than it ever had in the PC market. And because it is one of the largest purchasers of Flash memory, which is one of the most expensive components of a smartphone, it has “enormous economies of scale,” Professor Yoffie said.

What’s more, the iPhone isn’t really fighting alone. The two other devices that run Apple’s iOS mobile software, the iPad and the iPod Touch, further strengthen the iPhone, because consumers like being able to access the content and applications they bought on iTunes and the App Store on multiple devices. Apple has sold more than 120 million iOS devices.

And while Apple’s personal computers were by and large technically superior to Microsoft-based PCs, they were also far more expensive. In the smartphone market, carriers, who play a vital role in distribution, have been willing to subsidize the iPhone so that its cost to consumers is roughly the same as that of comparable Android phones.

For now, the smartphone market is growing so rapidly that the rise of Android has not necessarily been at the expense of the iPhone. That will change as the market matures. But most experts predict that no single company or operating system will rule the mobile market like Microsoft ruled the PC.

“I don’t think we’ll be in a situation where there is one operating system,” said Matt Murphy, a partner at the venture capital firm Kleiner Perkins Caufield & Byers, where he manages a fund that invests in applications for iOS devices. “This market will be more fragmented than the PC market.” Mr. Murphy said he expected one or two operating systems to co-exist with Apple’s.

Professor Yoffie agreed: “Apple will lose its overall leadership, but maintain a share of the market that could easily be in the 25 percent to 30 percent range.” He added: “That’s enough to sustain a very large and very profitable business.”

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