Why iPhone Strategy is Wrong and Has to Change Soon

This blog article is not about Apple strategy, or the iOS strategy, which are both brilliant. This article is not about death grip, which obviously is not strategy, that was a rare execution stumble, unnecessarily made worse by a poor execution at an Apple PR event.

This blog article is one in a series of strategic viewpoints to the major players in the smartphone bloodbath, at the half-point of this pivotal year 2010, the bloodiest year of the battle for the control of the future of smartphones and mobile phones, and by extension the future of personal computers, the internet, media, advertising and even money. All of those are seen to be headed to a mobile phone near you - and many mobile industry analysts expect most, some say all - mobile phones will become smartphones before this decade comes to an end. What we are witnessing is the first year of the big race for all the spoils of digital convergence. All the big names of the tech space are already in it from HP to Apple to Lenovo to Dell to Intel to Microsoft to Google to Nokia to Sony to Ericsson to Motorola to Samsung and LG and many more. So this is 'part 1' of the big strategy blog articles, building on my blog from yesterday, where I gave the grades to the major players at this half-way point of 2010.

The top line for Apple today. The iPhone made the best-ever launch into smartphones in 2007. For the next two years, Apple grew at breathtaking speeds, capturing a huge slice of the enormous smartphone market - reaching a 17% market share in Q3 of 2009. Then the strategy imploded. Since Q3 the iPhone has lost market share and is now down to 13% according to Canalys (14% according to Strategy Analytics). By Canalys numbers, Apple has lost almost one quarter of its market share - in nine months! Worse yet, this year Apple is seeing a decline in unit sales - a decline which happens when the smartphone market is exploding. Since Apple's peak moment in Q3 of 2009, the smartphone market has grown 49% according to Canalys. Just in the past 3 months, the market grew 12%. All of Apple's big smartphone rivals grew unit sales and maintained or grew market share.

Apple not just lost market share, it actually saw unit sales decline. This even as Apple released the world's best, most-anticipated iPhone upgrade, the iPhone 4, that sold 1.7 million units in 3 days. This was before anyone was even buzzing about any Antennagate. Apple has the world's most desirable smartphone. It has the world's best customer loyalty of any smartphone. The smartphone market is exploding. There was no viable 'iPhone killer' on the market in Q1 or Q2 of this year and superphones like Google's Nexus One failed spectacularly and Apple's rivals like Palm folded and went bankrupt.

If Apple had the best phone, the most desirable phone and the most loyal customers, and it launched its best phone yet, why is Apple not able to turn that affection into market share growth? Why for nine quarters already has Apple been bleeding market share - growing more slowly than the rivals. Why is Apple actually seeing a decline in unit sales - the only one of the big 6 smartphone makers to see a decline in unit sales in any of the past four quarters? Something is wrong.

Its not that the iPhone is failing or the customers are deserting the iPhone (and this happened all before Antennagate). Something is wrong in Cupertino. This is the analysis of what happened and what has to happen to fix the problem. Its a matter of smartphone strategy.

This article is not a criticism of the iPhone itself. The iPhone is the world's most desirable mobile phone. The original iPhone in 2007 was the most successful new phone launch ever in this industry and each subsequent iPhone has been significantly better, achieving ever greater sales. Even with Antennagate, the iPhone 4 is a roaring launch success and iPhone retail outlets around the world cannot keep the iPhone in stock. The iPhone is selling literally better "than hot cakes".

This article is not a criticism of Apple the company. Apple is the world's most profitable mobile phone maker growing its profits in an industry where almost all rivals are struggling with declining profits like RIM and Nokia or making losses like LG or failing spectacularly out of the phone market like Palm, Google and Microsoft. This blog article is an analysis of the iPhone strategy today.

I am not saying Apple overall strategy is flawed. I admire Apple for the great products that it does very profitably, with enormous customer loyalty. But the strategy for the iPhone - that had been excellent in the first 3 years - is now wrong. The old iPhone strategy that was right for 2007 (and I said so many times back then) is now wrong in 2010. Its time for Apple to change its iPhone strategy. This blog is a long article of over 10,000 words - it will take you half an hour to read, but it is deep analysis of where Apple is today, how we got here, why it worked in the past, and why the current iPhone strategy is no longer working today. Go grab a cup of coffee as you digest this article. I think it will make many people think of the iPhone in a new light.

So who am I to say? My competence is in the mobile industry, specifically its strategy. Not just a random blogger, I am the world's most published author in mobile and my thoughts, as discussed in my nine bestselling books - including the first strategy book (M-Profits) for the mobile industry - so far have been referenced in over 90 books by other authors in the industry. I am held in considerable respect by my peers. And I am saying not that the iPhone has failed - far from it - but that the iPhone strategy is wrong. The iPhone strategy is severely 'sub optimized' and delivering a stunning victory in the wrong battle, while abandoning any chance of winning the main war it is in, where the big rewards would be. And therefore, the strategic guidance from Cupertino is faulty, steering the company to repeat the painful decades of the Macintosh prior to Apple's revival roughly timed with the the launch of the original iPod and iTunes. How many Apple loyalists can still remember all those years in the 1990s that Apple made losses while it had the Macintosh as the world's best PC and that slow death it was doing losing in the platform war to the Windows compatible army of PCs?

iPHONE THE TRANSFORMATIONAL PHONE

The original Apple iPhone (2G model) changed the whole industry as I predicted it would. No other phone before or since, not the Motorola Razr, not the RIM Blackberry, not the SonyEricsson Walkman or any other phone ever, had achieved that. And the iPhone went even beyond the mobile handset business which it revolutionized. It changed the larger mobile telecoms industry, and the adjacent IT/PC and internet industries. It changed the media industries and it woke up the mostly USA based giant advertising and banking giants to the potential of the mobile phone. There is a reason we consider the mobile industry in two eras, the time before the iPhone and the time after the iPhone (as I predicted we would).

This is similar to the Macintosh. In 1984 when the original Apple Mac launched, it did change the whole PC industry forever. We were introduced to the first user interface so simple, you didn't have to take a computer class to operate the computer. The screen had menus and icons that you could point to with a mouse. By one fell swoop a whole row of keys on the PC keyboard became obsolete (the 12 "Function" keys above the numbers on a typical PC keyboard). Today obviously all personal computers have a pointing interface in some form of mouse.

The Macintosh ushered in a new era in computing. In that process, personal computer sales exploded and the PC was embraced by all businesses and more importantly, the far bigger market of home consumers. Today grandparents can use a PC and even 5 and 6 year old kids who don't know how to read can already play videogames on their parents' PC. Note this is very similar to today, with the explosion of the smartphone as it moves from the business users to the consumers - in the past 12 months the smartphone market grew 69% - an unprecedented growth rate in human economic history for a gadget that was already selling over 100 million units annually at that time (the smartphones sold about 175 million units last year).

So all PCs in use can trace a clear lineage to the first Mac. So why are the world's biggest personal computer makers named HP and Dell and Acer and Lenovo...but not Apple? Because the Apple management failed to see many 'obvious' trends in the PC industry that abandoned massive market segments to its rivals, most obviously the whole laptop era. Again modern young tech analysts might not remember that Apple stubbornly refused to release a laptop version of the Mac until long after all its PC maker rivals had carved up that new high-priced and faster-growing (and more profitable) laptop market segment. Yes, today Apple offers Macbooks but they were very late to the party. Too late to help Mac back into the Top 5 (which they just now in Q2 finally managed, with the help of the iPad). Twenty six years in the wilderness, for the company that changed the industry. And why? Because of wrong strategy, as many long time Apple followers know fully well.

I do not hate the iPhone or Apple. I love the company and admire the product and have pleaded for Apple to join the mobile industry for many years before the iPhone was launched and I have cherished Apple's contributions since it did. But I am a mobile industry analyst, not a Wall Street analyst nor a PC industry analyst or a blindly loyal Apple fanatic. I try to be as honest and truthful as I can be. And it is clear to me that Apple's excellent launch of its iconic iPhone from 2007 has run its course, and the phenomenal market share growth by leaps and bounds through 2009 had screeched to a halt. The facts are in. Now its high time for Apple to make a major change in its strategy. That is what this blog is about.

THE APPLE LOYALISTS

From the iPod to the iPhone to the iPad, the modern Apple products are simple, elegant and have revitalized and re-invented their older industries (portable music players, mobile phones and tablet PCs). The Apple loyal user base has every reason to love the Apple products. They are by far the best-designed devices and technologies in the market. The Apple user base is familiar with this and willing to pay the extra for the premium of having an Apple product compared to any rivals.
 
This is the engine to the current profitability of Apple. American Express told us that a good experience is worth an extra 9% that consumers are willing to pay for. Apple has learned to live in that space, making their products (and the iTunes and App Store etc, even their consumer experience like in the Apple stores) better - for which Apple then is able to charge a premium. Then Apple has expanded from being just a computer maker.

Apple users are incredibly loyal, coming back to buy more Apple products. A survey of early iPad buyers by Piper Jaffray found that 92% owned an iPod, 74% owned a Mac and 66% owned an iPhone. The Apple army is loyal. In surveys from market after market, the current iPhone owner is incredibly likely to buy another iPhone, while even most other expensive rival smartphone owners like those with a Blackberry are more likely to buy 'any other brand' than another Blackberry, as we saw in Nielsen's survey of US consumers this week. A crushing advantage to Apple, as Nielsen found the propensity to be that 90% of current iPhone owners want their next mobile phone to be an iPhone. Meanwhile in the UK its gotten so bad for Nokia that even for those of current Nokia owners who are willing to make their next purchase also a Nokia, those Nokia owners are not willing to recommend Nokia to their friends! They are clearly ashamed of owning a Nokia.

This brings me to the true power of the Apple army of fanatics. Its not that they are loyal to a fault. The are much better than that. Apple loyalists are the most active brand ambassadors of any tech brand. Think about how many times you've been somewhere with your Windows compatible laptop and some Mac owner has said 'isn't it time you changed to the Mac?' And the same with the iPods and iPads. They are constantly peddling their gadgets at those who aren't part of the Apple army (yet).

MAGNIFICENT SCREEN

So why the iPhone? It came at the perfect time, with the perfect paradigm change, in the perfect market, for the perfect audience. The magnificent screen. Yes, there had been 3 inch screens prior to the iPhone and even bigger screens. But the iPhone made the 3.5 inch size touch screen interface work. The first truly functional touch screen phone. Compared to its contemporaries - the Nokia N95 had a screen size of only 2.5 inches. As screen size is measured diagonally, in reality the iPhone had almost twice as big a screen as the similarly-priced Nokia N95. If you wanted to look at something, at that hand-held distance, the size difference is gigantic, in favor of the iPhone. Gigantic.

What do we show on the mobile phone? The first mobile phone service is the voice call. We don't 'show' our calls. Then came SMS text messages. Yes, we look at our messages on the screen on the phone - but we do not 'show' our messages. In fact most people are very possessive and secretive about their messages on the phones.

WE SHOW OUR PICTURES

So what is it that we do show? Its the pictures! The cameraphone was invented by Sharp and J-Phone (now Softbank) of Japan in 2000. The early cameraphones had very poor resolution cameras of very poor quality optics and limited storage. That evolved with Moore's Law and by 2005 we had megapixel cameraphones and by 2007 the first 5 megapixel cameras were appearing on the market. Today we see 12 megapixel cameras on mobile phones. No wonder the cameraphone completely shattered the stand-alone camera industry and today cameraphones outsell stand-alone cameras by about 9 to 1 and two of the 'big four' traditional camera makers - Konica and Minolta - have gone out of the camera business altogether.

The iPhone came at a perfect time, in that transition, when for the first time the mass market consumer was seriously transitioning camera use from stand-alone digital cameras to the cameraphone. And now where the phone might be 'lesser' as a 'camera' for casual snap-shot pictures, the iPhone style touch screen cameraphone 'trumped' the existing digital cameras - with its giant screen!

Think about it. What other digital pocket-sized cameras existed in 2007 that had a 3.5 inch screen? None. They also all had tiny 2.5 inch screens.. The iPhone 2G came at the optimal time to capitalize on this shift already happening globally. This was the perfect marriage of a modest camera but a superb screen. Most cameraphone pictures are not printed, they are shown on the phone. And for the average consumer, suddenly the cameraphone meant that everybody had a camera always in their pocket. And thus the new photo sharing opportunity - show it around the table.

MAGICAL MULTI-TOUCH

And here Apple ruled the world. The screen was not just gigantic in size - but there was Apple's 'magical' technologies of the accelerometers - just turn the phone sideways for the next picture if one was in portrait form and the next was in landscape. Can you still remember how you felt the first time you saw that? Wow, this is magical. You just turn the phone, and the picture changes 'magically' as if reading our minds. Why aren't all phones like this?

And then the icing on the cake, the effortless multitouch capacitive screen, just swoosh the pictures along, from this picture to the next. This was utterly amazing. Apple seemed to be lightyears ahead of any other phones.

Note that the iPhone 2G was a severely compromised phone. It was technically not even classified a smartphone by the purists, it was categorized as a featurephone. Its camera was very modest. It didn't do 3G. It didn't have GPS. It didn't support major industry standards like MMS. Its camera didn't record video. It didn't do multitasking, it didn't allow for users to install apps, and on and on and on. Those who had a few years of experience with 'real' 3G smartphones from the major global rivals, in the more advanced markets like Asia and Europe - were not impressed by the specs of the iPhone.

But that did not matter, because in bars and coffee shops and pubs all around the world, regular consumers were showing their pictures - on iPhones. And then when they compared to any pictures shown on any other technically 'better' cameraphone like a SonyEricsson Cybershot or some advanced Samsung or Nokia N-Series, that phone owner would always have to 'teach' the user - what button to press to zoom the picture, or how do you move to the next picture, or 'now it vanished, how do I get the picture back' etc. When we compared looking at pictures snapped now at the same childrens' birthday party, the parents would all be amazed at how 'intuitive' and simple that iPhone was. It was clearly the best cameraphone.. Not because of better optics or more megapixels - it was because the screen was so good.

TELE-VISUAL TELE-PHONE

Which brings me to the cherry on the top. The free media publicity. You want your technology on TV. The iPhone was by far the most TV-friendly mobile phone, ever. Its screen was magnificent in any close-up shots, the TV camera could zoom into the hand of the reporter, who could show the iPhone and what was on it. That became the ultimate phone to show on TV. The media darling.

We have the perfect storm. The iPhone 2G came at just the right time, when consumers were willing to accept cameraphones as replacements for the simple point-and-shoot digital cameras. The first of a new type of mobile phone experiences was being born, that was prone to sharing via the phone screen being passed around. The mobile phone user experience up to 2007 had been almost totally private. In 2007, we started to share the screen of our phone - and most of all it was those pictures on our phones.

The Apple loyalists were the perfect army to unleash to go convert the world. The iPhone was 'visibly' better than any other phone. This was manna to the Apple army. It was undeniable visual 'proof' that Apple made the world's best phone. For Apple loyalists, the evidence seemed obvious, that the iPhone was so much ahead of all others, and clearly, the other phone makers would have to 'learn from Apple to do this right'. Also it was an ego trip as clearly the Apple loyalist was 'clever' for having bought the expensive iPhone when it first appeared, and the friend should be smart too, to switch from the old-fashioned rival phone to the magnificent new iPhone... The evidence was before our eyes, and from 2007 to 2009, no other phone could touch the iPhone for sharing pictures as effortlessly by passing the iPhone around. (And after 2008 the App Store added games and apps and ebooks and other reasons to pass the iPhone around as well).

The visual evidence of the enormous growing popularity was further supplemented by the similar form factor of the iPod Touch - which to casual viewers in any bar, coffee shop or pub, would seem like 'yet another iPhone'. This added the perceived penetration rate of the iPhone by as much as 60% to 75%. And as the iPhone was so cool and sexy, many owners of expensive rival phones - that did not have big touch screens - were hiding their phones at Starbucks, not putting the Nokia N96 or SonyEricsson Walkman or Blackberry on the table, almost ashamed that it was not as cool as the new iPhones were. So while iPhones (and visually near-identical iPod Touch'es) were over-exposed and their users boldly showing the world how great the iPhone was, the rival phones were often hidden from view. And again, with WiFi both the iPhone and Touch were often used at considerable length at various Starbucks and other public places with WiFi coverage, so iPhones were very much 'out in the open' and visible. So the iPhone seemed to be everywhere.

It was the perfect storm and far more perception than reality, it was easy to believe that the iPhone was the world's most popular mobile phone as well as its most desirable one. In reality in 2008 only 1% of all phones were iPhones and in 2009 that was up to 2%. But anyone who lives in any city can attest that in the past two years, there have been far more iPhones about town, than one out of every 50 mobile phones. It often seems like iPhones are almost 1 out of every 2. That is the power of perception.

GAP IS CLOSING

The iPhone has not been sitting still since 2007. We have had the camera improved from 2 megapixels to 3 megapixels and now 5 megapixels. The iPhone camera now shoots also video and has added a LED flash for the iPhone 4. Meanwhile the wonderful 3.5 inch screen remains the same size but this summer Apple gave us 'retina display' resolution, of so high pixel density, that it rivals the ability for the human eye to discriminate sharpnesses that would be greater. That increase in sharpness is visible to the naked eye, when comparing any two phones side-by-side, to Apple's advantage.

But in January of 2007 when the iPhone was announced, the 3.5 inch screen was almost unprecedented to most consumers in most countries. The gap from the iPhone 2G to the rival phones by Nokia, Samsung, Motorola, SonyEricsson, LG, Blackberry etc - was enormous. If you took the most common phone sharing situation - the picture sharing as I mentioned in the above, the early iPhone models were very visibly "in a different class". All other phones seemed to be obsolete. The multitouch capacitive screen with the accelerometers was a huge leap forward in the summer of 2007 and its taken Apple rivals many failed attempts to finally do all of that.

But now in 2010 we have a slew of touch screen smartphones that do capacitive multitouch and have accelerometers. So that user interface gap is diminishing. I am not saying it is closing, Apple is still innovating but the rivals are diminishing the gap to a large degree.

This is exactly like the Mac vs the IBM compatible computers in the 1980s. The first user interfaces that tried to mimick Apple's Mac were very bad - Windows 1.0 was truly horrible. So in 1986 to 1989, there was almost no contest, where the Mac was far and away better than early Windows PCs. But Microsoft kept working at it, and by 1990 there was Windows 3.0 which took over the world and became the first mass market adopted user interface on a PC that outsold the Macs by a big margin. And important to remember, Windows 3.0 was not 'as good as' the Mac. But by 3.0, Windows was 'good enough'. For the purist, like a professional in the graphic design arts, there was only the Mac. But for the mass market, the Windows at 3.0 was 'good enough' where the average consumer no longer was willing to pay the premium Apple wanted. When the mass market came, it went to the Windows version and very rapidly all PCs and apps and services (and revenues and profits) followed. This, while Windows was never able to catch the Mac 'technically', in any subsequent editions either.

We are seeing that story now repeating with Google Android already outselling the iPhone - most normal consumers now think the latest edition of the Android OS is 'good enough' to be viable as a true rival to the Apple. Now the two bigger rivals to Apple, both Symbian and RIM have upgraded their OS to advanced touch screen systems that incorporate multitouch. I am not saying the rivals will catch or pass Apple in making the best smartphone OS for user interface. But the gap is diminishing to the point where today in 2010 a Samsung Galaxy or Nokia N8 can be a very viable multitouch rival to the iPhone.

Remember, Apple cannot win by being 'the best' in this race, after the rivals become 'good enough'. That was the lesson of the Mac (and incidentially, also the lesson of the Betamax vs VHS - Sony's Betamax was far superior technically with better video, audio etc but VHS won the race for market share with lower costs). Then all Apple can do, is hope to hold onto its current customer base, which in the big scheme of things in mobile, is tiny. Apple holds only 2% of the global phone market today, thats smaller than what the Macintosh has traditionally held in the PC market. Macs have been recently having about 4% of the global PC market. So understand, this is the wrong strategy for the iPhone, for Apple to 'be satisfied' with this tiny sliver of 2%, half that of what the Mac achieved.

THIS IS JUST LIKE AN iPHONE BUT BETTER

Then we have the 'other' advantages. Imagine the average non-technically informed mass market consumer, walking into an average phone shop somewhere on the planet. Lets say that consumer has already decided that the next phone has to be a touch screen about 3.5 inch smartphone and has seen a friend use an iPhone and wants to consider the iPhone.

If that consumer truly wants the slimmest most minimalist smartphone today, the iPhone 4 is definitely it. Best screen resolution and meets all the basic expectations. But then its up to the sales guy to see what the consumer "really wants".

Now, what if that normal consumer likes the iPhone, but also wants something more? What if the consumer wants an even larger screen than the 3.5 inch screen? Then the salesguy will pull the Motorola Droid X with its 4.3 inch screen and let the customer compare to the iPhone. The iPhone 4 has a 'sharper' screen but the Droid X has the bigger screen. My gut says many will end up liking bigger more than sharper..

Or if the consumer is ok with any 3.5 inch screen, but is heavily addicted to mobile messaging (remember 78% of all mobile phone users worldwide are already active users of SMS text messaging, as I report in the TomiAhonen Almanac 2010, and 30% of all smartphone buyer will not consider a phone that does not have a dedicated separate QWERTY or T9 keyboard for their messaging needs, according to to Motorola). If the customer wants a full QWERTY keyboard - then for about the same price as the iPhone, but a bulkier smartphone, you can have your big touch screen with the slider QWERTY and get the Blackberry Torch. The salesguy will put these two phones into the hands of the customer. If QWERTY is what the customer would like, the customer will walk out of the store with the Torch, not the iPhone 4.

Or if the random customer wants the same experience as the iPhone, but rather than the 5 megapixel camera with LED flash, is more into photography and likes a 12 megapixel camera with 'real' Xenon flash. That customer will walk out of the store with the Nokia N8, not the iPhone 4.

Or if the customer want the same form factor of the iPhone but wants also to have a pico projector in their pocket, now there is a touch screen smartphone with the pico projector - still in the same price range as the iPhone - the Samsung Galaxy Beam.

These are not more expensive phones. All do the large screen multitouch 3G cameraphone internet enabled 3G smartphone concept very well (they are 'good enough' compared to the iPhone, for any non-iPhone user today). But like in cars we don't all buy the Ford Model T in black. Different consumers have different needs. Some like the fast sporty - but minimalist car like a Ferrari (no back seat, almost no space for luggage, very low ground clearance so speed bumps and potholes can be problems, etc) while others want a big tall roomy vehicle with tons of storage space and ground clearance like a Cadilllac Escallade or Range Rover SUV, while others want an eco-friendly hybrid car like the Toyota Prius, or yet someone else lives in the city and size and parking are a premium needs, so a small city car like the Mini or Smart Car is what they want, etc.

We are humans, we have differing needs. In 2007, one iPhone 2G was the only thing out there - quite literally the only choice - if you liked the large touch screen concept. Today for the same price you have many varieties of large touch screens in the high end of the price point. At this richness of choice, one model iPhone 4 can no longer hold the fort for holding market share. The rivals will run past it, as they already are like we see with Android. Google has just today announced it is activating 200,000 Android phones every day - that means Androids outsell the iPhone by 2.2 to 1 already. It was even just a few months ago.

Yes, the iPhone App Store has a quarter of a million apps and gets several billion downloads - but there are now many rival App Stores getting up to speed as well. The Nokia Ovi Store is already doing more than half a billion downloads and several dozen other app stores are out there supporting most platforms and phone brands. Android is getting more mobile web use, all of the 'but the use of the iPhone is different' arguments are proving false. If you give consumers a similar form factor phone, on a similar price plan, the Androids and Symbians and others will all generate similar usage as the iPhone. That is not a sustainable advantage for Apple either.

PROFIT VS MARKET

So we come to what is wrong with the iPhone strategy. I apologize for the long article, but I had to establish that this is not in any way being critical of the excellence of the iPhone itself, or of its loyal fans, or its true competitive advantages. And that I acknowledge the iPhone's launch and first years have been executed with excellence, far beyond what any other brand has ever achieved (compare the iPhone to say the failed launches of rival tech giants with the Google Nexus One or Microsoft Kin). But now its time for the second stage of the iPhone, and Apple is in danger of missing its opportunity. The current strategy - continuing the early awesome launch - is wrong for 2010. Wrong for this time. It was right in 2007 to 2009 but no longer. It is wrong for a market where the rivals are snapping at the heels of Apple.

In a stable mature industry like the PC industry for example or the music player industry, its great to be the biggest at making profits. But in a new industry that is experiencing rapid growth, where markets are still being made - that is where the management has to balance profit to market share growth. This is a difficult balance. If you have a good product and you price it too highly, you generate great profits - your investors will love you this quarter - but you abandon market share to a long-term investor revenge when their visions are crushed as the rivals take the market. But if you price too low, you risk buying market share now while making losses, which is an unsustainable market situation, suicidal to long term - and you go bankrupt with supremely happy customers, witness Palm.

In a time when an industry is in hypergrowth stage - like smartphones are today - the price is not the primary purchase criterion. In times of strong market growth, it is possible to have a desirable product, to gain market share, and grow profits - simultaneously. Once the market matures, and everybody offers similar products, the competition is far more driven by price. When price is the primary criterion, Apple is suffering and cannot easily grow market share. Apple is too dependent on its design edge, which means it will always be a premium price product. Now is the 'best' time ever, for Apple to achieve market share growth in smartphones. Apple can always rely on 'loyalty' ie return customers. That is not growth. But Apple has a rare chance, a once-in-a-decade chance, now. Once the big growth era is over, and price is far more important to buyers of smartphones, then Apple will have the hardest time to try to match the low cost providers from Asia.

What the tricky management conundrum is, is to gain market share while making profits. You cannot maximize one or the other. You have to balance the needs of the two. Please understand what I am saying. I am not saying Apple is wrong to make profits (that is great). I am saying, that if Apple has set strategic targets which generate excessive profits - at the cost of market share - that is a dumb strategy. If Apple can grow its market share while making some profits (as it did in 2007, 2008 and 2009) - that is the correct strategy.

But somewhere in late 2009 or early 2010, Apple strategy went off the rails. While still making profits, Apple's market share turned into decline (as first explained by me on this blog, but now retold regularly by the major mobile industry analysts, such as in this graph of global smartphone market shares by Strategy Analytics). There is no excuse for Apple to own the most desirable smartphone on the planet, and not be able to turn that into market share growth. That is simply incompetent management, clearly focusing on the wrong priorities. Apple should maximize its profits in the mature industries of Macs and iPods, but only optimize profit/market share mix in the smarphones space, to gain maximum obtainable market share for long term viability and profits measured in years and even decades, not a couple of quarters.

DRUG DEALER STRATEGY

We know that Apple's loyalty is beyond any rivals. 90% of existing iPhone owners want another iPhone. And we know that Apple is able to expand that loyalty across the other Apple products. Get the consumer to buy an iPhone today, it will consider the iPod, the Mac and the iPad in the near future. And most of all - still today in 2010, what has been true the past 3 years, the current owners of iPhones will try to convert their friends to try the iPhone, most of all by sharing pictures. No other phone brand in mobile has this power. So no other phone brand has this strategic option. Apple should take the 'drug dealer' strategy, to get Apple iPhones into the hands of the widest possible reach of consumers - and rely on Apple love, loyalty, bordering on addiction - to build its future base. Because still today in 2010, there is that very rare 'spreading factor', where not only does that user return to buy another iPhone but that iPhone user will try to convert friends to become new iPhone users.

This is rare in any technology. But it means there is a magnificent opportunity for Apple (today). What Apple should be doing right now, is to get every conceivable customer on the planet to 'try' an iPhone - to get addicted now, and to teach all friends and colleagues to try Apple now, before every smartphone is a total iPhone clone. And most wonderfully for Apple's long term achievement - their brand loyalty is so strong, they can do this profitably, without 'giving away iPhones for free' haha. No, they can maintain the same profitability of the iPhone line as today, while dramatically expanding their market share.

PRICE PYRAMID OF PHONES

Morgan Stanley told us last year that you can divide the global mobile phone handset market into three price tiers. There are superphones costing about 600 dollars (like the iPhone, or Motorola Droid or Samsung Galaxy or Blackberry Bold or Nokia N8 etc). Their total market according to Morgan Stanley last year, was 2% of the global handset market in 2009. There is a cheaper smartphone (and premium feature phone) market of about 350 dollar phones that comprises of 11% of the global phone market. And then there is the remaining 87% of the global market where the basic phones exist with an average price of 100 dollars. Please note these prices are 'street prices' ie without contract, so yes, the real price of the iPhone 4 is not the 199 dollars you pay at AT&T, its real price hidden in the 2 year contract is 600 dollars.

Where do we stand today? Apple has a global market share of all phones sold worldwide (in Q2)... of 2%. It has taken most of that super premium phone market that is available according to Morgan Stanley. In reality, because of those confusing handset subsidies, the iPhone is also competing in the mid-price phones segment in many markets of handset subsidies like the USA, UK and Japan - where the price is not as clear to the end user. But still, its obvious that the current iPhone 4 is a super luxury phone at the top of the price pyramid. That also is reflected in statistics on iPhone users. The average household income of iPhone owners was the highest of any smartphones, at 100,000 dollars according to Yankee Group. The iPhone is disproportionately a rich person's tech toy. It is an expensive luxury good.

CURRENT SALES PATTERN

The current iPhone 4 is selling so well that it is on waiting lists in most stores. But that demand is an illusion that only applies in the beginning of the sales cycle. The iPhone cannot sustain its initial appeal for two reasons. The launch cycle of only 1 new iPhone model per year creates an anticipation factor to the iPhone, so in the Spring, owners of existing iPhones will delay their upgrade/replacement purchase decision while they await the newer greater iPhone due in June.

Note that this is a bad trend for Apple, as it prolongs the natural rate of replacement cycle. The replacement cycle for phones globally is only 18 months according to the Semiconductor Industry Association (vs 3.5 years for personal computers by the way). So if someone bought a nice shiny new iPhone 3G in October of 2008, then by February 2010 that same customer is edgy to get a new phone. If Apple had a new iPhone for that consumer in Q1 of 2010, Apple would make a sale in February and then be ready to sell another new iPhone for Christmas 2011. But as that Apple fan knows the new iPhones come in June, the purchase is unnecessarily delayed. And because the 'newer' iPhone is bought only in the summer, the 'next' iPhone is also delayed by a further 6 months, so the delay effect is cumulative.

The math is devastating. For every customer that would have upgraded at one and a half years (the world average rate), but prolongs to two years - Apple annual sales of replacement phones are depressed by a third. Apple is voluntarily abandoning a huge slice of the 'natural' market it 'owns' due to unnecessary delay in the upgrade cycle. Apple didn't understand this, coming from the PC industry where replacement cycles are more than twice as long.

The second effect is the rivals releasing new phones. This industry moves very fast. Most major rival giant mobile phone makers release new smartphones monthly (Nokia, Samsung, LG, SonyEricsson etc) and even the smaller 'pure' smartphone makers like RIM and HTC release more than a single new smartphone model ever quarter. Only Apple does only one new model per year. This means that in the Spring of any year, the rivals can pick prospective iPhone new users with alluring new phones. Apple is unnecessarily abandoning this market to rivals.

ITS TIME FOR THE iPHONE NANO

So this is what I think is inevitable. Apple has to expand its product range. Why? First, because it is too crowded in the top of the pyramid. All rival makers are offering new phones to go against the iPhone. The battle is getting brutal in the superphone category - only more bloody towards the end of this year with the newer models coming. Apple has to come down in price to where a bigger market exists. This is what Apple already does with the iPod and the Macintosh. Apple has no problem designing and managing a portfolio of premium luxury products with iPods and Macs, of exceptional design, that users love. Apple have no problem maintaining the competitive design aspects and Apple's brand loyalty as it has split those product ranges into multiple products. Why would Apple have any problem in doing so with the iPhone?

MY IDEA OF WHAT THE NANO iPHONE SHOULD BE

My suggestion is at roughly half the current price of the iPhone 4. Do a new iPhone Nano at a street price of about 300 dollars without contract, or about 99 dollars for the US market on AT&T with 2 year contract. That kind of price. And not to repeat the iPhone 3GS. Make this genuinely "a new iPhone". Give it a couple of 'new' abilities that the 3GS did not have. This is easy to take from the iPhone 4. Add LED flash to the 3 megapixel camera of the 3GS. Add the iOS version 4 that has multitasking etc. Add a faster CPU and memory than 3GS, so the iOS version 4 will run well. And give it the 'revised look' of the new iPhone 4 (obviously also fix the Death Grip haha). The rest of the guts would be essentially the 3GS.

Then VERY importantly, make this a nano model, ie make it physically smaller. Most of all, give it a modestly smaller screen than the iPhone 4, ie 3.2 inches. This gives Apple the chance to make the Nano 'noticeably' smaller physically than the traditional iPhone Classic size phones - something like 10% physically smaller in length and width (while retaining about the same thickness). There is the 'intuitive' reason why the Nano is cheaper and the full price iPhone 4 more expensive, because the Nano itself is smaller with the 3.2 inch screen, and the iPhone 4 bigger with its 3.5 inch screen. Like in cars, compare the BMW 3 series vs 5 Series etc. The Nano needs to be carefully designed to not significantly cannibalize iPhone 4 sales.

By using the same screen resolution as the current 3GS, there is no significant market fragmentation with a new screen resolution to manage. And by using Moore's Law, if Apple was able to make the 3GS profitably in June of 2009 with a street price of 600 dollars, it can do a Nano iPhone with almost the same specs but smaller screen, at half the cost it was for the 3GS in 2009. So the Nano in late 2010 will have the identically excellent profit margin.

This strategy does not harm Apple's profitability at all. Do not give the Nano the retina display. So this is clearly the 'entry level' model. Design the Nano to be 'not good enough' for current iPhone 2G or iPhone 3G users to consider in an upgrade/replacement - they don't want a smaller screen and they will love the Retina Display and 5 megapixels of the iPhone 4 - Apple has to make sure existing iPhone owners will all want the iPhone 4, and if the users were able to pay for the iPhone 3G (or 2G) then they can afford the iPhone 4 today. So in synch with the launch of the Nano, make a modest upgrade to the internal parts of the iPhone 4, to give it a bit of a 'supercharge' so upgrade the memory for example, to further illustrate the concrete value of the iPhone 4 being significantly more than the Nano, to secure the loyalty of existing iPhone owners.

DRUG DEALER WANTS NEW ADDICTS

The Nano strategy is to capture NEW customers to Apple's iPhone. Why? One, we know that worldwide, the big growth is at the lower end of the smartphone market. Two, we know the iPhone has the best desirability today, so there is a huge pool of love of iPhones that are deterred by the current high price. Three, we know that all new Apple product owners fall in love with Apple. This will mean that probably 90% of iPhone Nano first owners will continue as iPhone owners. Fourth, the iPhone Nano would be an entry level Apple product to get new buyers to Apple other products like the iPad or Mac or iPod (and future iOS devices). And fifth, because all iPhone users become fanatical brand ambassadors - who will show their friends how cool the iPhone is and try to get them to buy iPhones too. And sixth, this Nano offers increased unit sales, increased revenues at the same excellent profit margin as the 3GS did last year.

With the lower cost of the Nano, the iPhone will probably increase total global iPhone shipments by at least 50%, maybe even double it. Because its seen as a new iPhone with some honestly new features, there is no stigma that the 3GS currently has, of being 'the obsolete iPhone'. There will be very little of any cannibalization of the full price iPhone 4, because the 4 is the 'replacement version' for existing iPhone owners with clearly superior tech specs, specifically the Retina Screen and the 5 MP camera. The Nano is the new first-time iPhone 'entry' model for new buyers. The Apple loyalists are very knowledgable and peculiar about their devices, so it will be clear to all existing iPhone owners, that they really do want the iPhone 4, not to replace an iPhone 2G with the Nano today. And Nano buyers of today will eventually be then migrated to premium iPhones over time.

Coming for Christmas, the iPhone Nano would be the perfect Christmas gift for every dad to buy whose wife has been using "the family iPhone" before. The Nano would be the perfect gift for grandparents - here is the perfect smartphone for the elderly (the elderly are loving the iPhones). It is also a far more practical gift, pricing wise, for teenagers than the real iPhone 4 (teenagers break and lose phones far more than adults do). And obviously the iPhone 5 of June 2011 would then be another 'superphone' with the big leap forward for the flagship iPhone.

IS READY TO GO

I am nowhere near the first to suggest now that Apple should introduce a cheaper Nano iPhone. Those rumors have been on Apple forums and blogs since the iPhone 2G was launched in 2007. So Apple HQ has heard this story many times. I am sure there has been a feasibility study and there has been a 'rolling plan' of a Nano version, updated every few quarters as the tech specs change. I am sure Foxconn has had proposals for Apple on expanding Foxconn's business with Apple to do the larger market, larger volume iPhone Nano, totally in Foxconn's interests. And some poor Apple internal manager has been trying desperately to convince Steve Jobs to approve the Nano project but been ruled against, time and again. Early in 2007 and 2008 I said that it was not the time for the Nano. But since 2009 it became plausible. Now it is needed. This is the time for the Nano variant to the iPhone.

FULLY SUPPORTS APPLE PRODUCTS

There is no compromise in this strategy. I am not asking for a QWERTY version (which I have argued separately, would double the iPhone's market share, but thats another story. I a not convinced Apple will ever see this, and may be stubborn about it like it was for a decade with refusing to give us Macbook laptops, or even today, refusing to issue a 2 button mouse for the Mac). And it would not eat into the sales of the iPhone 4. In fact, there would be some, who would start to carry two iPhones. So for some existing iPhone users with one iPhone, now there is a reason to get a second. The main phone as the iPhone 4, and the second 'partying' iPhone for the evenings, as the Nano.

Note also the iOS family of products. Many of the developers have been fooled into thinking that Apple's iPhone (and/or iOS) reach is somehow the biggest smartphone platform on the planet. Apple has not particularly pushed this view, but have not bothered to correct it either. It has most of all been fuelled by faulty analysis of mostly US based analysts and reporters.

Meanwhile the tech bubble that started to form around iPhone apps somehow 'being the new gold rush', has subsided as many analysts are now pointing out that the iPhone App Store (and all other app stores too for smartphones) economy is not a digital eldorado. So the App Store myth is now breaking, and the truth is coming out about the iPhone not being somehow the world's most used internet surfing phone either. These facts have been knows to the real experts of the global industry and I've been among the many trying to inject some reason to the discussion over the years.

So there is still a strongly held myth, that somehow the iPhone is 'taking over the world' and the emerging truth that the iPhone only accounts for 2% of all mobile phones and even its peak market share in smartphones was a year ago in Q3 of 2009, when Apple had 17% of smartphones, and that market share has been in perilous decline ever since, now down to 13% or 14% - while the smartphone market itself is experiencing the biggest boom ever. The iOS developers will start to ask for answers and demand solutions.

What Apple needs is now a big boost to the iOS market and again, an iPhone Nano would instantly sell more than the iPad, and could well sell more than the iPhone 4 itself. The faulty but widely held view of most US based analysts and Apple loyalists is that the iPhone is the world's most used, or perhaps second most used smartphone. So most who 'believe in Apple' including many investors, think that the iPhone has achieved number 1 or number 2 status.

The truth is also out there. It is now being spread, that number one by a wide margin is Nokia on Symbian. The new number 2 is Android. RIM is number 3 and all three of these grew unit sales and kept or grew market share in 2010. The only big smartphone maker and platform that lost unit sales and is seeing big declines in market share is the iPhone, now at number 4. As this reality sinks in, many will be stunned and worried. What Apple really needs now is a good 'second act' to the iPhone story. The Nano iPhone is the story all Apple fans and followers (and investors) want to hear, now.

INEVITABLE, BUT WHEN?

Can Apple do this? I am certain that Foxconn can do this smaller 'updated' version of the 3GS very easily by Christmas. This is not the cutting edge technology like the iPhone 4 was with retina display. Some day Apple will do this. It is inevitable. They will split the iPhone into a range and my gut says the Nano will come before any premium super duper iPhones. By next year some analysts expect half of new phones sold in the USA to be smartphones and in Europe in some countries to be more than six out of every ten new phones. China is now rapidly falling in love with smartphones, after the 3G networks went live last year and China has become the second biggest country for smartphone sales where 1 in 8 smartphones are currently sold worldwide. In China, Apple's rivals like Lenovo sell iPhone clones. Will Apple release the Nano now soon, or will it come years too late, like so many other Apple changes (eg Macbooks)?

The iPhone 4 is a great smartphone. But it is expensive. The Nano would be the perfect China iPhone too. Apple can profitably do a far cheaper Nano model of the iPhone and reverse its decline in market share. The time to do that is now, when the smartphone market is still in hypergrowth stage and market shares are relatively easy to capture profitably, than a few years from now when the smartphone market has become more mature and price is the main way to compete. And because of Apple's big investment in design, Apple can never win the price war. The time to capture market share is now while the market is still growign strongly and price is not the main issue.

GREAT QUARTER NOW IN Q3

Do not be fooled by the numbers of Q3 in 2010. The iPhone is the world's most desirable smartphone. All major markets have now been opened to the iPhone as China and South Korea were added to the iPhone family last year. The Antennagate Death Grip did not have time to suppress Q2 sales because only 3 days of iPhone 4 sales were registered in the previous quarter. But Apple was fast enough to issue its apology and the 'band aid' solution of the free cases, that today the demand for new iPhone 4 smartphones is still far bigger than the supply.

The iPhone will have its best-ever quarter in unit sales and revenues and profits in Q3 of 2010, which together with strong demain for the iPad will no doubt produce a magnificent quarterly revenue and profit statement for Apple to report for the Calendar Q3 with Apple results out in October. The iPhone is definite to break its own unit sales record and I am confident they will far exceed 10 million iPhones sold in this quarter.

That all is good and well, but they are winning the wrong war. Apple could sell 50% more - even maybe twice the number of iPhones, if it had a Nano model in its lineup. And that Nano model as I defined in the above, would be exactly as profitable as the 3GS was. Today Apple is the most profitable mobile phone maker on the planet. It makes the most desirable phone and has the best loyalty of any phone maker in the market. It has been so for the past year.

WHY iPHONE FAILING THE MARKET?

Why is it that Apple saw a peak of market share in Q3 of 2009, and even as it releases the best iPhone ever, the iPhone 4, Apple's total unit sales went down from the previous quarter? Why has Apple's market share crumbled from a peak of 17% of all smartphones in Q3 of 2009, to 13% today. It is not because customers don't love the iPhone. Its because Apple has the wrong strategy now. They are abandoning the long term sustainable profits of major market share gains now, for the short term maximising of profit at the cost of market share, now.

Does this mean that Apple management is brilliant, or is perhaps a senior executive like Steve Jobs planning for retirement and maximising market evaluation now (to dump shares perhaps at a peak price?) at the expense of long term shareholder value? I am certain Apple has a ready strategy to launch an iPhone Nano type of cheaper iPhone and could do so within half a year. Why is it not doing so now? Apple has the wrong strategy for its iPhone.

Finally - This is the first in a series of analysis articles about the major rivals in the smartphone bloodbath wars and what I think of their current strategies. For those who want to see the 'grades' I gave at the half-year point of 2010, my first half review of all major brands is here. And if you want to get the stats and numbers for the mobile industry, please take a look at the TomiAhonen Almanac 2010 (available as immediate download as an ebook/mbook for your smartphone or PC or Kindle or iPad)

PS - TOMI DOESN'T KNOW WHAT HE TALKS ABOUT

"Tomi doesn't know what he talks about" Oh, do I not? When the US tech press was all gaga over the unveiling of the original iPhone 2G, in the Spring of 2007, before the iPhone had launched, this is what your humble mobile 3G consultant wrote on this blog:

On January 10 just days after the first prototype was shown by Steve Jobs on stage,I wrote my first major analysis of the iPhone - that the iPhone will reach its 10 million target for first year (not unusual forecast but clearly I was not one who said it will fail - as many did - nor did I fall all over the iPhone suggesting it will sell 20 million as others did). But I was the first analyst anywhere to give a mix of US vs World sales of the iPhone, and called that US/World split of sales for the first full year almost exactly, five months before the iPhone had even launched.

I said the iPhone 2G would fail advanced Asian markets until a 3G version was released (who else said this by January 10 of 2007?). I also said Apple's particular strengths were its marketing and PR spin machine, its loyal fans, and its exceptional skills in UI design. Which of the mobilists raised these issues when oogling over the first pictures of the large screen slim sexy iPhone. And I called it that there will be a touch screen iPhone clone by one of the major 5 before the summer - as LG did launch the Chocolate in Europe that spring. Not bad, two days after anyone saw the iPhone.

Then a month before the iPhone launched, on May 18, 2007, I wrote my definitive prediction about the relevance of the iPhone, in 'Entering the iPhone Era' - the blog that also is credited with inventing the term 'jesusphone' (something I never said, but was later mistakenly assigned to me and that blog). I said that from that point, the yardstick to measure any premium phones would be the iPhone (good call). I called it that there will be a migration from laptop use to pure iPhone use (correct). I said the use of the mobile internet will be (mistakenly) attributed to the iPhone (good call, even better that this was done mistakenly, but that the myth would prevail that the iPhone brought the internet to mobile). I called it that the media industries based in North America will wake up to mobile (correct call again and nobody made this call in May of 2007). I said that USA based advertising execs of Madison Avenue would also wake up to the cellphone, thanks to the iPhone (correct again). I said the iPhone would be a regular on latenight TV comedians and on 24 hour news (right). And I said that silicon valley, the PC and internet industries would discover mobile after the iPhone. When we look at Dell, HP, etc - that was clearly also the right call.

In that blog I predicted that in its first year the Nokia N-Series would outsell the iPhone (correct). This again, more than a month before the first ever iPhone 2G had launched, and nobody was yet testing the iPhone or reporting on it. Most analysts were still mesmerized by the outwardly slickness and sexiness. I was very deep into analyzing how the iPhone would change our industry and other industries.

And a few days before the iPhone 2G finally launched, on June 24 of 2007 I wrote my last analysis of the potential of the iPhone and pointed out that while excellent as a first attempt by Apple, the iPhone 2G was flawed with some of its biggest faults being no 3G, a puny 2MP camera, no ability to record video and no flash for the camera - all factors that Apple has since fixed in updates to the iPhone line. And on 24 June I wrote that what will end up being the biggest change in mobile - where Apple changes the whole game - is the user interface. This was again written before any press or tech reviewers had a chance to play with Apple's amazing multitouch iPhone.

And what of the 'seasonal' sales cycle for the iPhone that we now know exists, where it sells better in the second half of the year up to Christmas, than the first half of the new year, while waiting for the newer model? Who told you first there will be this seasonal pattern? I called it on June 24, before the first iPhone was sold! I do know my 'sh*t'.. And while many were suggesting an iPhone Nano within the first year, I said that was not possible because the next iPhone would need so many costly upgrades, it would end up costing more than the original - again 100% accurate as we see from the iPhone 3G vs 2G.

And do I understand the market that the iPhone was invading. I made an emphatic point that the iPhone would not impact the Blackberry (and that pundits would think it would) - both proven to be true. Of all smartphone brands, the Blackberry has been most isolated from any iPhone impacts, and grown by a healthy rate ever since. I did call it that the two brands most hurt by the iPhone would be Motorola and SonyEricsson (wow, that was a good call - both profit-making growing premium phone makers went into a tail spin, lost customers to Apple and lost market share and started to make losses). I called it in June 2007 that LG would gain more from the iPhone launch, selling its Chocolate touch screen phones (LG sold more Chocolates for two years after the iPhone's launch). And I called it that Nokia's N-series, in particular N-95 would gain from the launch of the iPhone - as it did also outselling the iPhone. And I called it that an Asian beneficiary for all those networks who won't carry the iPhone will be HTC.

I also called the problem of launching with multiple carriers in Europe and Asia, the need of 3G to make any meaningful sales in Europe and Asia and the need of multiple carriers in the same market(s). And I predicted that most European carriers would reject the revenue-sharing deals that Apple got out of AT&T. Of the Asian market I also pointed out that much of Asia is very price sensitive (witness iPhone's poor performance in China). And I called the clones to appear in Asia. And finally, that while the US market would love the iPhone 2G, the rest of the world would be underwhelmed by that near-obsolete device but that when Apple did its first full upgrade, with 3G, in the summer of 2008 - that would be the first true Apple world-winner smartphone (all turned out to be true). All this was written still before the iPhone had sold one unit in June of 2007.

Obviously I am not infallible, I have made many bad calls in the industry too, like anyone who is professionally involved in forecasts. So with the iPhone, I did get the Q1 quarter of 2010 (Jan-Mar calendar quarter) very wrong. I had forecasted a decline in the unit sales compared to the Christmas Q4 quarter as had been the seasonality pattern in previous years. The reality was that the iPhone actually grew unit sales from Q4 of 2009 to Q1 of 2010.

Yes, I was clearly wrong - but that time, forecasts for iPhone unit sales prior to Q1 Apple quarterly results - every single published analyst (over 30 of them) had all forecasted a decline in sales, and my error in my forecast was one of the smallest of the forecasters. Even when I am wrong, I tend to have less error than most of the other analysts. In this forecast the average error in the forecasts was about twice the size of my error. And not one forecaster correctly predicted that iPhone would grow sales from the Christmas Quarter to Q1 of 2010, every one thought the sales would decline. And in Apple's biggest country market, the USA, that pattern did hold. AT&T sales declined by 13% from the Christmas period. How did most of the analysts react to Apple's surprising numbers? I did not see many of them acknowldeging that just days or weeks before, the analysts had been wrong.

I was on Twitter within minutes of the number being released, telling my followers that my forecast was seriously off, and I came onto this blog within hours with a blog article explaining that my forecast had been significantly off. I didn't see that by the other forecasters. And then, I did what I always do if I find my forecast did not meet with reality - I take it upon myself to research what went wrong and why my forecast did not happen (as I have done with such famous forecasts of mine in the past as the video calls, MMS picture messaging, 3G adoption rate etc). I think that is the professional responsibility of anyone who makes a living with forecasting.

I went digging for the facts and details, to discover where that unanticipated error was. I discovered it too, I believe I was the first analyst to point out that China had delivered a surprising one million extra sales for Apple for Q1, which accounted for the surprising up-swing in the unit sales compared to the expected decline. The China quarterly sales of iPhones in the Christmas period were about 300,000 units (according to China Unicom), the level that seems the standard for China, as that is the level of iPhone sales that Apple also had for this past Q2 of 2010 (under 280,000 units actually, according to Canalys). Then in Q1 of 2010 the China iPhone sales surged to about 1.3 million. A sudden, never-before-seen major surge in sales, four times bigger than normal level of iPhone sales. I found the missing number that caused all the forecasts to be wrong, but this was still not the reason why China happened in the first quarter of 2010.

I dug further and found that this was due to the Chinese holiday of the Lunar New Year (Chinese New Year) which falls in late January or early February of any year depending on the lunar cycle. The Chinese exchange gifts on Lunar New Year, which is the big gift-giving season similar to how people in the West give gifts on Christmas. Most Chinese gifts are 'red envelopes' of cash, but increasingly affluent middle class and wealthy younger Chinese also gift major gifts of 'goods' ie products, to close relatives including smartphones. This was why there was a huge surge in Q1 in China and I was definitely the first analyst to explain this. Since I did so, many other analysts and even other phone makers like Nokia have attributed Q1 strong smartphone sales to the Lunar New Year gift-giving in China. The reason we analysts missed this pattern, is that China only in 2009 started 3G operations and smartphone sales have only become significant in China since then. Today China is the world's second largest country for smartphone sales accounting for 12% of the total sales of smartphones worldwide (according to Canalys).

So I am only human, all of us forecasters make errors. But find me another mobile analyst who comes to his blog immediately when one of his forecasts is found to be in error - and who then also takes the effort to discover why it was wrong - and reports that finding too. That is Tomi Ahonen. I have gone through every major forecast error I have ever made in my career, and accounted for myself, in public, in my books and this blog, explaining where I had gone wrong. Most of the time, luckily, I have been quite accurate. And on iPhone related forecasts and predictions, I have been exceptionally accurate over the past three and a half years since the first prototype was shown by Steve Jobs in January of 2007.

Of the most important mobile phone of all time, and the most successful new phone maker launch of all time, I have been making correct calls most of the time, by far more correct calls than any other Apple follower or tech analyst or mobile specialist. I do understand the iPhone impact to the mobile industry and how the mobile industry is reacting to the iPhone.

And I am telling you the reader now, that Apple had a great launch strategy for the iPhone, but its follow-up strategy is now flawed. Apple has to split its product range and introduce a cheaper iPhone model alongside the main iPhone model soon. The longer they wait, the worse it will be for Apple in mobile in the long run. What do you think? Is it not time for the iPhone Nano?

ABOUT COMMENTS TO THIS ARTICLE

We find often with Apple related commentary, that some flood our blog to post pointless comments by visitors who clearly had not read the full article. If anyone leaves comments that clearly had not read the article, I will be eliminating those comments without mercy. I am happy to take any critical comments including those accusing me of being an idiot, as long as the person leaving the comment has clearly read the article.

This is the first in a series of analysis articles about the major rivals in the smartphone bloodbath wars and what I think of their current strategies. For those who want to see the 'grades' I gave at the half-year point of 2010, my first half review of all major brands is here. And if you want to get the stats and numbers for the mobile industry, please take a look at the TomiAhonen Almanac 2010 (available as immediate download as an ebook/mbook for your smartphone or PC or Kindle or iPad)

Comments

[Antoine RJ Wright]

Need to find you a developer who can add a button on your posts that says "download to read later." ;)

I like, but do have a (simple) question: isn't the iPad the execution of the Drug Dealer strategy you speak about? And digging a bit further, wouldn't the iPhone be such an execution of that same strategy for iTunes and eventual cloud services run by Apple?

[cycnus]

Hi Tomi,

Nice... very nice...
I think I owe you more than 1 cup of coffee :)

I have to argue a bit about strategy for apple.
I think that even though apple make the q or the n (nano) model, it would only raise it's market share in 1-2 years only. and it's already a bit too late too. because nokia right now is closing in with a VERY big teeth and claws.

Nokia (ans also samsung) ability in creating a AFFORDABLE product is surely make non-american market more challenging to concur for apple. For example, the nokia 5xxx series have a touch screen product ranging from US$ 150 - US$ 220. And samsung also have several touch screen product ranging from US$ 100. I know this doesn't compare to the high end market of apple iphone and other smartphone, but i'm just saying that apple nano could bring more sales to apple, but they should have done it a long time ago. but, hey... better late than never :).

And as you already said it..... it also seems that Symbain^3/Android/Bada would drag the price of multi-touch smartphone to a new low level. Apple can't compete in the country that doesn't have network subsidies. Not to mention iOS is only apple. So, Don't you think that apple need to license their iOS to other phone maker to gain more market? I know that Steve Jobs kill the Mac Clone when he reign the Apple empire again. And iphone clone using a real iOS might make him angry, but don't you think it might be the right strategy to do it? Look at nokia. Even nokia, with the biggest symbian market share, were trying to share symbian with others... and nokia try to do it when symbian is STILL HOT.

[Charles]

I don't disagree with the need to diversify the iPhone offerings and follow the strategy Apple eventually adopted for the iPod. I've always assumed they would at an appropriate time.

However, I think you do your argument harm by trying to show parallels with Apple's PC history. From about 1989 to the return of Steve Jobs, Apple was one of the most poorly run companies ever. It wasn't the premium brand that we know now - that is an artifact of the 2nd Steve Jobs era. It's also not even remotely an even comparison, since the PC industry has always been wide open, where the mobile industry (especially in the U.S.) is straight-jacketed. This has been my chief complaint of the market share argument: the lack of the iPhone access for most carriers in the world artificially limits the extent of market share Apple could enjoy. Adding an iPhone Nano won't change this. Meanwhile Android, being divorced from hardware and carrier, has a much larger potential market share.

Frankly, I'm not convinced that consumers care about mobile operating system as much as we believe they do. I think the rise in Android has much more to do about manufacturers and carriers than it has to do about consumers. Consumers are simply responding to what is available from their carrier - and Windows Mobile is terrible.

[kevin]

Tomi, you are an anti-Apple idiot. Haha!

Seriously, thank you for spending so much time and energy thinking about mobile strategy. My evening (or evenings) is now shot, as I will have to set aside megatime to read it carefully, think about your "facts" and your interpretation, and respond.

For now, even though I expect I will disagree with you on several points, I just wanted to thank you for this, and say I will be looking forward to the rest of your strategy articles.

[Riccardo]

Thank you for this insightful analysis!

Recently I noticed that people who bought an iPad are pushing friends and collegues to buy one, given its fair price and extreme versatility. This looks like the Drug Dealer strategy (as Antoine noticed).

Maybe Apple wants to keep its premium position in the phone market (and consequent small MS) while trying to dominate the emerging "portable gadget market" with iPad.

[Alexander]

Spot on, all the way. (with maybe 10% fat to trim ;))
This is one of the posts that really bring a lot of things together in one cogent picture. Not anti-Apple (or pro-Nokia) in any way - just facts.
Thanks a lot!

[Why you're promoting yourself so hard?]

"The math is devastating"... hmm, not to Apple for sure. They get a share of the revenue from the operator, something I never heard was custom before apple did it. Second point, if you replace every 24 months instead of 18 (assuming you upgrade 100% of install base), you lose 1/4th not 1/3. Lastly, it's not really important for a company that is also trying to leverage the service side (ie. for a company not that is not a pure OEM).

You're not an idiot but you definitively come across as someone who's trying to make self-promotion. Last time I comment and visit this site, sorry (I'm sure you are thinking that I should be sorry for myself)

[Sebastian Werner]

Toni, thank you for the article. Looks like a lot of time went into this. Would really like to have more compact reports from you. If one reads more than just this single article buy you, then there is clearly a lot of facts repeated all over.

But let's continue to the bare facts. You basically say that the current strategy of Apple is wrong for 2010. You say that Apple should offer at least one alternative iPhone e.g. a nano version with slightly reduced screen size and features.

I must say that the attention to detail, which went into Apple products, is outstanding in the whole industry. Even if it wouldn't be bad to have another model to choose from I am not exactly sure whether Apple would be able to keep the product quality at the current level. This is the thing which you seem to overlook here like maybe other analysts do as well.

You say that the N8 or Galaxy S are comparable. Yes, they came close, at least for a five minute inspection. Sure they might be successful with these products. Still it does not seem that the customers are as happy as iPhone buyers. And here comes the problem: what does it help me, as an Apple customer, to have more products to choose from when all of the offerings are not quite on the same level like the products today. We do not really need another HTC. I have the feeling that a lot of people at Apple think the same. There are so many ugly unusable products out there. It's good to have Apple with it's current quality level.

Finally: They focus. They focus on quality. They focus on outstanding products. They focus on customer satisfaction. They might not focus on growing to the biggest mobile phone player in the market. Without knowing the exact reasons behind there acting it might be problematic to suggest them doing anything other. They are profitable. They make customers happy. Why should they grow if it might risk these ideals?

[Slimjim]

Hi Tomi,
I found your blog by way of the link from brianshall (smartphonewars) and, I must admit, did tend to agree with his assertion that you were making excuses for the nokia CEO and that that particular post seemed naive. 

However, as a long time Mac user and iPhone 3G and 4 user (who is now using the iphone4 at home to surf the net in preference to my MacBook pro, iPad, and iMac due to it's screen, portability, and speed) I must admit that your last couple of posts on your blog have been very interesting and convincing. 

I am concerned that apple could lose enough market share to android that a similar situation to that which happened with Adobe producing substandard apps on the Mac (late with Osx support, insistence on staying with carbon instead of cocoa) could happen with the iPhone with the majority of developers. 

I thought that the selling of the prior gen iPhone at $99 subsidized was a brilliant move but can see and agree with your point about needing a cheaper non-contract phone that is somewhat current gen but distinct from the flagship model so as not to cannibalize sales. I have read the iPhone nano rumors and always thought that anything smaller than a 3.5" screen was too small but the palm centro proved that there was a market for a cheaper than flagship smartphone with a smaller screen not being a hindrance. Admittedly this did have a hardware keyboard but I believe the example works. 

Anyway, I did nit agree with your rose tinted nokia view on the smartphone market but I did bookmark your site on my iPhone and am glad I did because I much prefer reading this kind of analysis. 

Btw, Antoine, instapaper is exactly what you are looking for but it is for iphone only. I hit my read later link in firefox or mobile safari all the time and when i open up instapaper on my iPhone, formatted articles get uploaded quickly for reading offline. I do this all the time for reading long articles on the NYC subway. I can even hit link in an instapaper saved article while on the subway and it will give me the option to read later so I can keep queuing up articles even when underground with no data connection. It has really changed my life. 

[Tomi T Ahonen]

Hi Antoine, cygnus, Charles, kevin, Riccardo, Alexander and Why

I will respond to each individually as we do on this blog

Antoine - thanks. Good quetion about the iPad. In a way, the iPad is the 'drug dealer' strategy yes, but not for the iPhone, more for the Macintosh haha.. The strict text-book drug dealer strategy is to give the first addictive samples for free, and then when the customer is hooked, you start to charge. SMS is often marketed this way, you give new users a couple of months for free - tell them its a trial period - and before they know it, they are hooked and will be addicted and will pay. Now, my Apple version is the paid 'discount' version so for the Nano, the point is to be significantly cheaper than the iPhone to get a similar effect. That way the iPad really isn't valid, its too expensive. But it would work for the Mac.. On eventual cloud services and iTunes, well yeah, kinda..

cygnus - we do agree, Apple should have done this in 2009 but yeah, if Chrismas 2010 or spring 2011, its better late than never. But they have already gifted a good deal of the market to rivals. I do think that the 'smart' move by Apple is to stay in the mid price smartphones that Apple can today do profitably, rather than join the race with Nokia, Samsung, LG, ZTE, Lenovo etc to the cheapest smartphones. Of licencing iOS - I think that would be a good idea and a major brand like say Lenovo (or before they bought Palm, HP for example) would be a natural partner for Apple, premium, kind of PC oriented, West Coast, apps-oriented 'pocket computer' type of companies. Why not. They'd love the affiliation with the most desirable smartphone and Apple would build reach. But yeah, probably won't happen with Jobs in charge haha.

Charles - great point about the carrier relationships. It would yes, increase Apple's market share. But there are not that many significant markets where it can be done in a meaningful way. In many advanced markets like the UK, France, Australia etc the iPhone is on all networks. So in many cases its already been done. In other markets, very relevantly the USA, China, Japan - there are other standard networks which would make it very costly to release a parallel version (and then to maintain both versions). And they are not the same networks either.

So in America its CDMA if you want Verizon or Sprint (ie both obviously). But in China if you want China Mobile, you have to do TD-SCDMA.. These different 3G radio interfaces would be very expensive to develop, and potentially generate very modest gains. In the USA, if the iPhone is given to T-Mobile, it would be another GSM network and theoretically nearly double the reach of the iPhone (not quite, as T-Mobile is the smallest of the big 4). But that could be done without a new technology version. In Japan, if they expand to NTT DoCoMo - thats another WCDMA network (the 3G version of GSM) like Softbank but DoCoMo is twice the size of Softbank in subscribers, so without doing the CDMA version (for KDDI in Japan) - keeping the current GSM version, iPhone could go to DoCoMo.

The issue to expand from AT&T to T-Mobile or Softbank to NTT DoCoMo is primarily a contractual situation, between Apple and their current network partner. The issue to expand to networks on rival technologies like CDMA (Verizon, Sprint, KDDI and for example other South Korean networks, some in India, Taiwan, Canada etc) or TD-SCDMA (China Mobile the world's biggest operator) are not just contractual with the current exclusive partner, but also technical. I think the addition of a 'second' network in any one country will not 'double' iPhone sales, because currently many who 'really want' the iPhone will get a second subscription on the current network. And after 2 networks, the third or fourth network per country brings ever diminishing returns.

I do agree Apple should expand the availability, but compared to the Nano strategy - that would work in every market and even more pronouncedly in Emerging World markets where price sensitivity is greater - the networks expansion would not yield nearly as good gains to Apple, while creating probably contractual and possibly technical issues..

As to 'consumers don't care about OS' - I almost totally agree. They don't know about it and care about it. In the US market most of all, some 'technically savvy' consumers do care, but its a small minority of smartphone buyers. Why most in the US, because it has the longest mass-market history of the PC and a similar OS and apps environment. But even there, most get a phone based on the cool things they can touch and feel - the screen, the camera etc - not what OS it has.

kevin - haha, great! you did know that my surname, Ahonen, if pronounced 'Aho-Nen' in Japanese means literally 'I am crazy' (as in cooky, weird, loopy, not so much insane as in the clinical term). So yeah, love being the idiot. And can't wait to read your considered comments. I will try to make the rest of the series as thorough too haha..

Riccardo - good observation. I do think that Apple is the master at 'creating new market spaces' as we made the iTunes the case study in the signature book to this blog, Communities Dominate Brands. Its a classic case of creating market space - in that case you have no rivals (until they discover the space and try to compete). So with the iPad, there were many tablet PCs prior to the iPad, but Apple managed to make it 'different enough' and yet so desirable, that it became the 'media tablet' which kind of has been promised by technologist and futurologists but the Kindle etc has not really become it. The iPad is now fulfilling that prophesy and Apple seems to have the market all to itself. Rivals will come of course. But yes, this is what they did very successfully with the iPad, but not so successfully with the Mac or the Newton or the iPhone. They DID succeed a year after the iPhone with the App Store but now all are jumping on that bandwagon so Apple's exclusivity in it is ending..

Alexander - thanks! And about the 10% fat, sorry about it but after 3 days of editing it down, I had reached the point where I could not edit it anymore haha..

Why - on the math devastating. Yes its for Apple. They are abandoning sales to loyal Apple owners who want a new iPhone. The 24 / 18 math is simple - if I grow from 3 phones per 6 years to 4 - that is growth of one third. So Apple lost a third. But if you decline from 4 phones per 6 years to 3, then you lost a fourth. The typical percentages error, sorry, you better check your math again. Yes, if Apple did what I suggested, Apple would gain a THIRD not a fourth.

As to the services side, come on, the same reach applies. If Apple makes 30% on the 5 billion downloads now, they'll make the same 30% on the bigger market they'd have if they had sold more iPhones. That Apple earns service income in no way invalidates the benefits - and profits - of selling those services to a far bigger reach.

About promoting myself, sorry about that, yes I am an arrogant son of a b*tch, but I am an old geezer, have written my bestsellers and have my gold plated reference customers. I do this blog with no money out of it, we have no advertising here, we don't sell our mailing lists, I don't even have a newsletter. So this blog has been here for 5 years purely to share information. Try to find someone else who has written 2 million words on mobile and offers so much free info. In exchange for that, you gotta put up with my wordiness and my arrogance. Some of my readers are regular and would have it no other way. If you feel this blog gave you no value, please do not come back and spend so much time here. I hope only to talk to those people who honestly are interested in digital convergence, the future of media and tech and their strategy and marketing.

Thank you all for writing

Tomi Ahonen :-)

[HCE]

Not a bad article and I agree with quite a bit of it. Yes, Apple needs to change its strategy a bit (and probably will). However, there are certain things that they will simply not do - and one of them is violating their sense of what is aesthetic. So, we will never see a phone with a physical keyboard - not while Steve Jobs is in charge at least. However, I do believe that there are a bunch of things we will see sooner or later.

1. A model with a smaller (say, 3.2 inch) screen. Perhaps, one with a larger screen. I know that Steve Jobs made fun of the 4.3 inch screen phones but I think that, nonetheless, they are a possibility.

2. More frequent model updates. I think there is a reasonable possibility that they might put out new phone models twice a year.

3. Availability on more carriers. This will almost certainly happen. Apple needs to be on every carrier that has an Android phone.

That said, I do not think Apple is in any danger of losing market share any time soon. Looking at the Canalys numbers, it looks as if they are growing faster than the market (if you do year-over-year comparisons rather than comparing consecutive quarters). That growth will slow but unless Nokia, RIM and Microsoft can get competitive in the next year or two, I don't think it will stop. RIM's latest efforts with the Blackberry Torch have been underwhelming as have Nokia's with the N8/Symbian^3. Windows Phone 7 looks promising and we don't know enough about Symbian^4 and MeeGo. So I don't see that there is any tearing hurry to make big changes to their business but it could become necessary - particularly if Nokia and Microsoft get their act together (after what I have seen of the Blackberry Torch, I have few hopes for RIM).

Finally, enough with the Mac vs PC and VHS vs BetaMax comparisons - particularly since you insist that apps are unimportant. The barrier to switching from VHS to BetaMax was that I could not play my VHS tapes on my Betamax player. The barrier to switching from PC to Mac is that I cannot run my PC apps on OS X. Is there any reason at all why one would stick to a particular mobile phone platform? The only significant reason I can possibly think of is apps - but if everything becomes web services then this reason goes away. If apps remain important then Apple is the one in the driver's seat. Lesser reasons for sticking with one platform could include user experience and brand loyalty - Apple does better in these areas than anyone else.

To put it another way, the game at the high end of the smartphone market is Apple's to lose. They could screw up - which is unlikely, given their track record since Steve Jobs returned to the company - or the market could get commoditized, in which case Apple will move the business to the back burner.

- HCE

[David E. Albert, MD]

tomi:

Incredible piece of work! Bravo! While I don't agree with many things you say, I agree that Apple needs to broaden its product line. While the Android hoardes are going bigger, Apple should be going smaller. The iPad is going nuts for ebooks and email and workplaces like healthcare but Apple needs to push its counter-culture and counter-intuitive strategy. Make a iPhone nano-- absolutely! I still believe that the Apple "community" and "network" including Macs, iPads, iPhones, appstore, iTunes, Macbooks, etc has everyone else on the ropes-- the Apple Community is dominating others' brands. Q3 will certainly be huge for Apple with giant sales (back to school) of all product lines (except ipods). With all that money, they need to double down. Now I want to know what kind of coffee you have been drinking because your post was voluminous.

thanks for sharing it with us.

Dave Albert, MD

[Fernando Guillan]

Hi Tomi, give me a minute please. Hi Mr Why you're promoting yourself so hard? or whoever you are. Why don´t you have the "balls" to promote yourself just a little bit and show us your real name. If you don´t like what you see here, do all us a favor and don´t ever come back if all you are going to post here are comments with no added value for the rest of us.Rest in peace, smartass. Amen.

Tomi another masterpiece from you. I am fascinated by your attention to detail. If only Steve Jobs or anyone close to him would read your post... Well you would have to charge them millions of dollars just for the free advice. What makes me real sad is that some idiots come here and post comments that are simply a waste of time and show clearly their lack of knowledge of the mobile business and yet they have the balls to doubt you with nonsense arguments.
Definitely, Apple are on the wrong path. They think they are the best right now,and they can make no wrong. And that is a problem in business and in your personal life. It´s been a smooth ride for them the last three years. We will see how they manage from now on the bumps they will encounter along the way. So far, with the Antennagate thing it was a disaster. If this is a sign of things to come, I would be concerned if I was Apple.
Tomi thanks for all your hard work on this blog and sharing your wisdom with us(free of charge).I hope someday you get all the credit you deserve in this business.You are the best in the business bar none.
( I am not Tomi Ahonen nor do I get any money from him).

[Matt Johnston]

That was a lot of text to tell us that Apple needs to bring out a cheap iPhone - much the same way that Apple has been told for years to bring out the sub $500 Mac that everyone apparently wants.

There's too much poor logic in here to warrant a full reply. The App Store is much like the iTunes store - it's not much more than a break even business for Apple - put in place essentially to provide the ecosystem that the market failed to provide for the Mac twenty years ago.

Apple doesn't have to have a dominant market share to 'win'. They're still probably two years ahead of Android (even though they debuted within months of each other) and the average consumer is already balking at carrier-mandated software installs and anti-hack systems like eFuse. In the future mobile market, Android also has a place and it may (when you take into account all of the different flavours) have a larger market share than Apple. So what? We're still talking hundreds of millions of devices across dozens of countries. It's obvious that iOS isn't going away. Therefore they don't need to differentiate to win in every niche. Look at Nokia - their average price on their handsets is $61 and the average profit per handset is $2. Apple doesn't want to be in that market - where they have cannibalised their own profits in order to fit into every niche.

And they have hurt RIM. RIM is the only company which the UK government has given a security classification. Therefore Blackberry is the only device used for mobile messaging in the government. But this does not extend across all business and public sector where we have need immense interest in iPhone. Entire universities standardising on the iPhone at the expense of NOKIA and RIM. In the future I see RIM, Apple and Android (representing many companies and occupying the lowest common denominator role). That race to the bottom will be hotly contested by RIM and Android clones; they already offer Buy One Get One Free in many stores which serves to inflate market share (and provide a steady stream of phones for eBay).

You have to remember that iOS is not about the OS. Nor really about market share. It's all about the carriers. And the battle in the future will be between the companies which treat the carrier as god (Android) and the companies which treat the carrier as data lines (Apple, RIM).

BTW Apple has a cheap iPhone already - it's called the iPod touch. Add in Fring, Skype and you've got a mobile phone for when you want to be called.

[Sachendra Yadav]

Completely agree with you that Apple needs to lower the price of iPhone to cater to a larger market that Android is all set to eat up alone. However, the biggest strength that iPhone now has is the App store... how will the the apps fare when you have a iPhone nano with a smaller screen

[Mark]

@Matt

"There's too much poor logic in here to warrant a full reply."

And yet you manage 7 paragraphs. It did make me smile ironically though although I'll leave it to Tomi to tell you why. :)

Anyway...

Good post, Tomi. I've felt that Apple have needed to diversify for a while now because the current model is approaching saturation - the increasing repeat customer rate indicates this. I had it pegged a a 25-30 million a year product but it looks like a 35-40 million now. However peak it will.

[Magnus]

My take on this:

Apple is where they are today because they keep challenging traditional wisdom.

Apple came in and disrupted the smartphone business (maybe even the mobile phone business) by not doing what the experts said they had to do. I seriously doubt that their strategy going forward is to start doing what the experts tell them they have to do.

/Magnus

[Fernando Guillan]

@Matt "There's too much poor logic in here to warrant a full reply." Mark I agree with your 100%. It is better to wait for Tomi reply to this comment. I enjoy his replies immensely.

Oh well, Matt you do not know what you are getting into. Please next time you come around check your facts, as they are full of inaccuracies to say the least. I leave you to Tomi, he will take good care of you and shred your arguments to pieces. Poor boy.

[Tomi T Ahonen]

(doing replies in sets again, so many comments here..)

Hi Sebastian, Slimjim, HCE and David

Sebastian - first, I hear you about repetition. Secondly that 'articles without repetition' desire, well kind of haha, beware what you ask for, you might get it.. (I've told many of you that I am working on my 50 year birthday and 1 million page views to this blog and starting 10th year in consulting - gift - to all the visitors of the blog, so yeah, something is coming but its not ready yet.. you'll like it)

Now on the practical side. The repetition. Those who are here regularly (most who posted comments here for example haha, you know each other here virtually already, right?) will recognize the regular repetition, subscription rates are counted per capita, blah-blah-blah, or the real price of an iPhone is 600 dollars, not 199 dollars blah-blah-blah etc. The reason for that, is that this blog attracts a very broad readership, many who are new to mobile and often my articles are widely referenced. Just this week the smartphone market share blog was referenced with excerpts, on a Fortune article, etc. The blog is widely syndicated from NY Times and CNBC to Brighter Side of News and Motley Fool. So we get a very eclectic mix of visitors, often who are quite new to mobile.

Early on when I was blogging I found that when I skipped parts, I would then have to explain them in the comments anyway. So yes, its tedious for you regular readers - but at least I try to subtitle my longer blogs to help you skip the parts you know by heart haha...

Getting to your points. The quality issue is a great point and needs to be carefully managed. But here is my counter. I would make it a 'stealth clone' of the 3GS. EVERYTHING internally the same, except we upgrade iOS to 4 (that was already cleared by Apple that it works fine on iPhone 4, and will work on an upgrade to 3GS. With that, add processing power and memory if needed to make it snappier on the Nano version, but otherwise keep the innards of the Nano pretty much exactly the same as the 3GS. Only add the LED flash from the 4, and thats about it. Package it into a smaller case with the 3.2 inch screen - which eats up less battery power so with 18 months of improvements in battery capacity, we have a better battery for the same space, and ample power to cover the more powerful CPU.. With Moore's law the innards electonically can be made essentially into half the space, not in reality obviously but at least 10% smaller. So I am not asking for any new design, just shrink the existing 3GS, and use all of it in the Nano. Yes, its still a redesign job, but clearly the 3GS was an excellent smartphone - even the picky Japanese and Koreans loved it - so if thats essentially what we now recreate, the risks for tech errors are modest at best. Apple do manage multiple lines of products easily with the iPod and Mac..

On Galaxy and customer satisfaction - I am TOTALLY with you on it. Yes, the Samsung is still just a Samsung and it endears nothing like Blackberry or iPhone style addiction and loyalty. Samsung is there in the same class as Motorola and SonyEricsson and Nokia, nothing to write home about. If the consumer of a smartphone were allowed to take a phone for an 'overnight test drive' and compared an iPhone and a Galaxy, I am certain in 90% of the cases the customers went to the iPhone - they are night and day.

But also, like you said, the decision in the store is often made in that 5 minutes that the salesguy pushes his 'hot tip' phone of today (which means the one for which he gets the best commission, usually, not the best phone for that customer) the typical customer will not hold the two rival phones for more than 5 minutes before one is discarded - and remember, its not just iPhone vs Galaxy, its also vs Droid X and N8 and Blackberry Torch and whatever other similar phones are in the store. The customer mostly spends less than a minute on most phones until considering the final 2 or 3, on which the customer might then seek the salesguy's advice..

But you seem to be an Apple loyal customer already. You are pretty well committed, seriously speaking. You appreciate the value you get out of the iPhone and almost no matter what wonder-phone was released by the gods of mobile, you'd still go to the iPhone. That is typical of Apple loyalty. Once you start to use their products, you really appreciate the little aspects that make them so much better. You are not the target customer for the N8 or the Galaxy or Droid X or - in my blog case - the Nano either. You will love the iPhone 4 and you will love the next iPhone 5 even more. The Nano is not for the existing iPhone users.

But think of this - if you are an iPhone user, and are not a millionaire, and you have three teenage kids - and they all love your iPhone, all have iPods and Macs and all are begging to get iPhones. Wouldn't you LIKE it, if there was a 'kids' iPhone, the Nano, which does 'everything' a proper iPhone does, it is a clone of the 3GS of today, except with a slightly smaller screen - and half the price of the iPhone 4? Wouldn't you love to be able to give that as the first iPhone to your kids, rather than a full priced iPhone - in case they break it or lose it etc..

Finally on the 'why grow' question. The opposite of growing is shrinking. 8 million smartphones sold per quarter may seem like a lot, but if Apple now starts to shrink - that turns far too easily into 6 million soon, 4 million later and 2 million and before you can say Palm or Motorola, there you go. This is a very fast-moving industry, and its expensive to design and market smartphones in all countries of the world. Each new phone has to be approved by the domestic carriers/operators and their local regulator - for operation in that country, that network, that environment. Even as most of the world is all on GSM, that still means almost every country has peculiar differences in antenna heights and transmission power requirements etc etc etc and getting your phone approved per country is a headache - every time. If you have a solid pipeline of new prodcuts, and a standard system for doing this, you get good at it and can do it efficiently - and with scale you can distribute those costs across millions of phones. But if you turn from growth to shrinking market share (in significant numbers, over a couple of years) - it means all your organization is scaled way too big - and you become unprofitable remarkably fast - like Motorola or SonyEricsson when they saw catastrophic declines in market share after the original iPhone 2G launched.. What I mean, is that the phones business is so complex and expensive and dynamic, if you are not growing with it, you are dying. Witness Siemens, Sony, Philips, Ericsson, Alcatel, etc..

Slimjim - great to have you here and I appreciate the honesty in your evaluation. I just went back and re-read that OPK piece, here is what I suggest for you. I know you thought it was far off the mark. Why not try to re-read it in about a month from now. You may find, that some of the points I made in it, have actually 'matured' in your mind, and don't seem so absurd, and that there is evidence to what I was talking about, that you will have discovered in the mean time. There are many - real experts of mobile, I mean published authors in it etc - who say its one of my best articles. I don't mean it is, I mean, since you felt it was so alien to how you saw the world, and made me seem biased and out of touch, perhaps its possible I was right, but you were not quite in tune enough with the situation, to fully appreciate it. Or not. You can well come to the conclusion a year from now that Tomi is still way off on Nokia, looking at the company with his blue-colored glasses haha, an Ex Nokia guy, what else can you expect.. :-)

I do appreciate your honesty, and even more, that inspite of it, you gave me a chance and stayed to read more of my horribly long rambling blog articles haha..

Now to your points. Yes, that is something thats been crawling in the back of my mind, I KNEW there was more to the Mac/PC war that I had forgotten - yes, once the platform war shifted clearly, then some developers did give Apple lip service, poor versions of the same apps. Of cousre that made sense too - if the majority of the users - and the money - was on another platform - that is where any prudent developer puts their biggest investment (all other things being equal, obviously). EXCELLENT POINT ! I remember that vividly too (early in my career I worked for an Apple authorized reseller on Manhattan which happened to become the first ISP on the East Coast, so I Was there in the trenches witnessing the PC/Mac battle as well as the birth of the consumer internet in person haha)

Then on the older 99 dollar iPhone. That looks very good as a value proposition, to a US consumer on AT&T. Get the new hot iPhone for 199 dollars or last year's model that used to cost 199 dollars, now discounted to 99 dollars. The price ratio to age seems 'about right'. But consider non-subsidised markets. The unsubsidised iPhone 4 costs 600 dollars, the unsubsidised one year old 3GS costs 500 dollars (same 100 dollar difference). The old model is hideously overpriced. Note this is what Apple tells us in the conference call, that the average price they get for the iPhone line is 600 dollars, so after some international shipping costs and currency fluctuation insurance etc, the real prices end up probably at 650 dollars unsubsidised iPhone 4 and 550 dollars unsubsidised 3GS.. The price differential is completely out of whack. But equally, imagine what happens to the iPhone profitability if the price of the iPhone 3GS was 'really' cut in half? Yes, the iPhone product line profitability would be cut roughly by a fourth. Huge damage. This is where the subsidies dramatically distort the picture. But a new Nano phone designed today with today's parts can be made for half the cost of the 3GS in summer of 2009 - thanks to Moore's Law - therefore its profitability would not be damaged if sold at 300 dollars (unsubsidised) and in China, India, Russia - that is a HUGE price difference..

HCE - THANKS ! Nice to see someone whose been coming here for a long while and having many Apple related arguments, to find a lot to agree in this one. We are growing to appreciate each others' thoughts? Hey, I hear you about QWERTY. It will probably never happen. But imagine, if Steve Jobs gave that mission to the Apple engineers to do the best physical slider keyboard on any phone - it would be magnificent! It would be a sheer delight to use and you'd think, why isn't my laptop keyboard this good...

On the larger screen - yeah, me too. It could well be part of iPhone 5. The rivals are now moving the goalposts in size, while Apple did the Retina display. By next year, with miniaturization continuing, Apple should be able to fit rather easily a 4 inch screen on the iPhone 5, but obviously, do that with retina display to keep ahead of the Joneses...

I do think there is space in the market for a 'Maxi' iPhone, a 'super iPhone' in the 999 dollar price range. Move the goal posts again, do some truly spectacular bits into it (pico projector maybe, 3D display maybe) and beef up all the other parts, and go 'upstream' with the product range, for a true 'flagship' iPhone. The 'envy product' that everybody wishes they had, but at a ludicrous price (and profit). Something like what the early Nokia Communicators were. But that is far less than 1% of the market. The big move they have to make is down-stream to the 300 dollar bracket, roughly.

HCE, on the Canalys numbers and year-on-year growth - first, note that it is by definition at least 12 months lagging any possible peak. If there was a peak in 2009, we won't know until 15 months after the peak happened, in any YoY stats. Its physically impossible to measure the peak prior to that, because of the metric of YoY. Now, the signs to look for, before that is revealed in YoY is, obviously, is there a 'slowing down' of the growth rate prior to the expected peak. And Canalys shows clearly that the market share comparing Q1 2009 to Q1 2010 was strong growth - but comparing Q2 2009 to Q2 of 2010 - shows a slight DECLINE. IF there is a slowing of the growth, the Canalys data is consistent with a possible peak in 2009. It is NOT consistent with Apple continuing to grow.. (market share, obviously Apple grew unit sales YoY)

Carrier availability - yes, Apple is striving to open every market. It seems their contract with AT&T has some severe exit clauses by the AT&T lawyers haha, or unbelievable benefits to Apple on the revenue-sharing side (something no other country gave to the same degree and where they did, mostly have been already abandoned. AT&T was by far the most willing to surrender revenue sharing of data traffic to Apple, perhaps reflecting the fact the US market was so backwards, the Europeans and Asians knew more the value of what they were negotiating about and wouldn't give as much to Apple haha)

On the market share, we will know by January 2011 if the peak I have found, really existed and if Apple is now in real decline in market share, on annual basis. Its still possible it isn't but all numbers suggest I was right. We'll see. I am totally sure the Q3 of 2010 will be Apple's best iPhone quarter ever well passing the 10 million unit sales level somewhere to 11 to 12 million or so. But thats not enough to recover from the hole they've fallen into in Q1 and Q2..

Dr Dave - Thanks! Oh, my coffee haha, I alternate between the neighborhood coffee shop Cappuchinos, my home brew instant coffee, the several cans of Pepsi and the occasional boost of Mountain Doom to keep me reasonably caffeinated haha.. I even remember to eat something every few days or so haha..

On the points, we mostly agree obviously. I love the point about counter culture, yes the rebel has to live in Apple and the iPad is perfect example of where Apple did better than following the advice of some old farts like Mr know-it-all Ahonen haha begging for a QWERTY iPhone. The iPad was pure brilliance. And I am pretty sure we have not seen the last surprise attack of the iOS cousins. But they are not phones. They do not satisfy the 'ringing in the pocket test' as I teach as the second stage beyond McGuire's Law (that increasing mobility incrases utility). So they are good for Apple yes, but will not help in the big battle. Its a bit like American aircraft carriers - they are great for fighting an enemy near the sea, but if your enemy is Switzerland or the Central African Republic or Mongolia, then you have to send in the army to fight them, and the investment in the expensive aircract carrier is useless..

That was a lot for a quick reply haha, you guys are forcing me to think, ouch haha..

Keep it coming, great discussions and will be back with more!

Tomi Ahonen :-)

[Manu]

@ Tomi :- Thanks for the mamoth info/observation.

I have had a decade long association with Nokia as a customer. But last year in beginning of Q3, I gave up Nokia for HTC & Apple. Now using "Legend" & iPhone 3GS. So basically, i won't be saying that I don't see any Nokia bias bcoz I can feel soft cornor for Nokia here at this blog.

I enjoy reading good discussions with decent counter-arguments. In  recent months, I've enjoyed reading discussions here especially Kevin & HCE do provide worth reading stuff. 

However, I wasn't excited to see @Kevin, your reply in this article. Please I'm not trying to single you out here but you can imagine that as a reader of this blog as a whole which surely comprise comments of regular & relatively more aware readers, I expect decent expression. Not to mention, I'm bit disappointed to read your comment.