Roben Kleene

The Deal That Made the iPhone

The iPhone might seem like a counterargument to my piece on innovation being easier than people think. If all it takes is a few smart people in a room, what happened with the iPhone? Why was one device so impactful?

The answer comes from what we already understand about markets. Before the iPhone, cell phones were an artificial market, because the carriers determined which hardware was made. Here’s how Fred Vogelstein described the situation in a 2008 piece for Wired:

For decades, wireless carriers have treated manufacturers like serfs, using access to their networks as leverage to dictate what phones will get made, how much they will cost, and what features will be available on them. Handsets were viewed largely as cheap, disposable lures, massively subsidized to snare subscribers and lock them into using the carriers’ proprietary services.

The carriers stifled innovation by controlling which hardware was allowed on their networks1. The longer that situation continued, the more potential there was for an innovative product to be created; the status quo was far behind what current technology could actually produce. If the free market had been allowed to do its job, then cell phones would have incrementally moved towards a a design that resembles todays smartphones, without requiring a huge breakthrough like the iPhone. That’s what a healthy market looks like.

To get around the carrier restrictions, Apple made a special deal with Cingular (later AT&T). This is the deal that made the iPhone possible. Here’s how Vogelstein describes it in the same piece:

In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple’s iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He’d also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer’s AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone.

If you want to predict when and where innovation will come from, here’s a useful rule: If a bunch of companies are all investing in the same technology, you can expect them to get similar results. So don’t expect one company to come out with a breakthrough AR, VR, or AI product in a categories that we all know many companies are also working in. If you want to identify where a big breakthrough will come from, look for areas of neglect.

  1. Remind you of anyone? This is the same thing Apple is doing with the App Store today. ↩︎