Consultant, Board Professional, Author
Jyrki Kontio
Software business
In Finnish
In English
June, 2008
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June, 2010
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December, 2010
iPhone is a Business Model Innovation – and a Breakthrough one!

Apple announced the new version of the iPhone on June 9, 2008. This was a much expected announcement. The new technical features of iPhone were long due and as expected: support for 3G, GPS, and open developer platform.

The announcement created a lot of hype on the market. However, it seems the market expected more as Apple’s stock came down a bit after the announcement.

I suspect the market missed the real innovation and significance of Apple’s move.

Apple made a breakthrough innovation with its release. It’s just that the innovation is not technical one but innovation based on business model.

See, technologically there is not really anything new with this release. Apple was simply catching up with the lag it had had with the first generation of iPhones. The real innovations seem a bit counter-intuitive, but they seem brilliant.

First, look at the pricing. Apple is selling the fanciest phone on the market for a price that is about one fourth of the comparable high-end phones. Why would they do that? The phones are still in very high demand, they could be sold for much more, how could Apple possibly be targeting the high volume market, when really big players (like Nokia) must have a tremendous cost advantage in manufacturing. 

I suspect that the Apple has played its cards very well, in fact. First, the real price of the phone is not the $199 as announced. Apple has locked in the operators and, hence, the customers into long term deals that create a steady stream of royalty revenue for Apple. Consumers are also not particularly smart about the total cost of ownership when it comes to new gadgets. Early adapters make their buying decisions on a whim and “coolness” factor.

Apple also must have studied the using behaviors of iPhone users well. It seems that iPhone users are the most active in using the Internet browsing features. It’s a win-win deal for Apple and operators to push for iPhone sales as the higher airtime use will result in higher revenue – both for Apple and operators. If the consumer enjoys the surfin’, everybody wins.

Now that the Apple has the fanciest product on the market, it has also opened up its interfaces to third parties. With excellent market hype, lock-in to consumers and distributors, it is likely that plenty of third party vendors will develop add on applications for iPhone. Nokia and Symbian have attempted to the same for many years now with reasonable success. However, Apple stands to really make it big with their deal.

Apple has also leveraged the synergies between its other products, iPod and its computers. Think of photos, movies and music being truly integrated with your portable device. The best user interface on the market with a comprehensive digital media management experience for the consumer market. That is one cool combination.

The first generation of iPhones was a user interface and user experience innovation. This time the innovation was a business model innovation, and a pretty darn good one.

Go buy Apple stock while it’s still at reasonable prices. They are the best company now on the skin of the modern, digital consumer with the most comprehensive offering. Times truly have become interesting for the early adapter consumer.

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