Apple's iPhone Likely a Hit, But Not Disruptive

Apple's new iPhone has high appeal to a segment of the market and looks like it will be successful.

Early reports show several indicators of pent-up demand and cult-like followings even before the product is released in June.
Why?

• Apple is the master of design in creating simple, powerful devices with high appeal
• Apple markets better than any tech consumer company
• Apple has no entrenched base of cell-phone customers or channels to worry about offending, marginalizing or competing against

But is the iPhone a disruptive force in the industry? By disruptive I mean, will it displace current suppliers like Nokia, Motorola or even a niche-player like RIM's BlackBerry? Will it win in the market by changing the basis of competition?  Will iPhone change the game for cell-phone users? 

Or is adding a phone to an iPod an incremental function for a disruptive product? By that, I mean is it just a brand extension that enhances the value and helps take a product mainstream, similar to the addition of an mp3 player and a phone on recent BlackBerry models?

Using the Disruption ScoreCard (located on The Disruption Group's  tools page) here are some of the assumptions I used for the iPhone:

• New customers: C
• Product inferior to mainstream: C (ie iPhone is not perceived as inferior)
• Product superior to early adoptor needs: A
• New business model: A+ (I assume that iTunes makes this a new cell phone business model)
• Investment required large: C (Apple has invested two years R&D and mega-bucks)

I don't know if the Disruption ScoreCard is the best framework for analyzing the iPhone or other high-end products because it has a clear bias towards new markets and low-cost entries.  (Afterthought: Maybe there is room to consider the iPhone as inferior relative to conventional phones in that it lacks a keyboard, which would be a sore point with mobile email-junkies, as some readers have pointed out.)

However, a key issue comes through: The iPhone has a different user interface; It is sleek; It is cool; It is well integrated; But it does not appear to do something new for a new set of customers. And doing something new, (especially something new that mainstream suppliers consider unimportant or wrong) is a key ingredient of many successful market disruptors. 

My personal experience (or bias) sees little value in Swiss Army knife kind of multifunction products that do many things adequately but do not specialize in doing one thing extremely well. That razor-like focus, at the expense of ignoring other functions, is what helped make the iPod and the BlackBerry very successful, high-margin products with long-lasting competitive advantage.

The net result of the Disruption ScoreCard was a "B-" rating for iPhone: Some work ahead to get disruptive.  Download the iPhone Disruption ScoreCard and test your own assumptions in the spreadsheet.

This lack of full-on disruption doesn't suggest that iPhone won't make inroads in the market. And it clearly adds some value to people who are considering buying an iPod or a cellphone. But it suggests a limited lifespan and a product that is less likely to be a disruptive breakthrough than say, the Apple Mac or the iPod.

My take is that the iPhone caters to a segment that wants status and high-design and is willing to trade up for it, to use the language of Michael Silverstein of Boston Consulting Group.  While the $500-price point seems impossible to current cell-phone suppliers, ultra high-end pricing of other so-called commoditized products (coffee, beer, laundry machines) shows that historic price-demand assumptions can be dead wrong.

**Forecast Confession**

Six years ago, I mistakenly thought the iPod would flop: Too expensive; Incompatible with PCs; Me-too product.  My mistake was in undervaluing two important iPod attributes 1)The mega-size of the iPod allowed it to solve a new problem for customers (How do I carry ALL my music with me?) and 2) I underestimated the capabilities of iTunes in that it made it easy and convenient for people to legitimately download music.  Those two attributes far outweighed the shortcomings of the early iPods.

**Other Thoughts**
Apple's iPhone has 50% gross margins and a great business model says Alex at EightySevenFour.

RoughlyDrafted says Apple will disrupt the entire wireless industry just as it did the music industry.

More juice from Apple: Apple TV rated an 'A' on our Disruption ScoreCard posted last September when the first details of the product, then known as iTV, were released. Why? It's a low-cost device that fits with how consumers already behave.

Bruce Tognazzini, a 14-year Apple veteran, has a detailed analysis of the iPhone's user interface: Not exactly new and revolutionary, but advanced enough to put the rest of the cell phone industry to shame.

Bloomberg news columnist Matthew Lynn says iPhone will be a flop: Apple is late, Apple is not a team-player with telcos, and the product is a defensive attempt to protect iPod, he says. "Consumers are interested in new things, not reheated versions of old things."

Eager to get an iPhone right away and without dropping $500? Try printing off this fold-and-clip paper version.  And this one with full-color fish screensaver (pdf).

The Wall Street Journal reported on the online debate of whether iPhone will be a hit, including reference to a list of seven iPhone shortcomings compiled on her blog by Motorola Chief Technology Officer Padmasree Warrior.

Arik Hasseldahl at Sci-Tech Today says he learned his lesson from overstating the shortcomings of the iPod back in 2001, when it suffered a long list of complaints (incompatitble with PCs, poor battery life, expensive, etc.) "We now know that the first iPod was just that: the first. Apple learned from what worked and what didn't and made adjustments." 

Stock view: Needham's Charlie Wolfe says buy Apple based on a forecast 7% cellphone market share by 2016. But Eric Savitz at Barron's shows the risk side as well from Bernstein.

 

Comments

[Yin-So Chen]

Hi -

I have written an article about iPhone's disruption as well.

http://www.yinsochen.com/blog/2007/01/11/iphone-misses-the-mark-on-competitive-threats/

While I agree with you that iPhone would do well, I cannot see that being attributed to disruptions. Apple seems want to compete head on via better designs, more functionalities, and stronger marketing/grassroots movement. And it's possible to win that way too.

But there are definitely people who will not buy such a highend phone, so it will start off being a target to be disrupted by others ;)

There should be no question iPhone would start with a bang but other makers will be in the game for the long haul, so let's be patient and observe for a couple of years before declaring a winner.

[Bagelturf]

The iPhone *is* disruptive, and seriously so. What you analysis does not take into account is that the iPhone is not *the* product. It is just a gadget for experiencing the product.

The product is the combination of four things: function, possession, emotion, and access. Apple has created a value delivery model that so far no one else has duplicated.

The iPhone disrupts because it changes the game for the incumbents. They simply have no response to this attack.

Apple is not just skimming off the top customers, they are driving a wedge into the cracks of the incumbents' armor and will keep hammering it until something pops open.