Apple's iPhone Rings a Lot of Bells

The new phone will surely challenge rival handset makers: It also has the potential to change a host of other consumer devices

by Arik Hesseldahl

I have on my desk a two-inch-thick stack of printed research reports, all of them full of comments from industry and financial analysts on the implications of the iPhone. Best I can tell, virtually none of them seem to grasp the full implications of what Apple and its chief executive Steve Jobs did on Jan. 9.

Make no mistake: The iPhone appears on its face to be a potential game-changing product in the wireless industry (see BusinessWeek.com, 1/10/06, "The Future of Apple"). And now that the cat is out of the bag, you can expect every handset maker to try to find a way to legally emulate some aspects of Apple's (AAPL) look and feel, and at the very least hone how they deliver music and video on their own phones.

Now that they've seen the iPhone, Apple's new competitors have a few months to plan their response. "The competition is coming at Apple much more than vice versa," the CEO of one major handset maker told me. "Plus the device doesn't launch in North America until June at the earliest and early 2008 in Europe. This is too late." And Cisco Systems (CSCO), trademark owner of the name "iPhone," wasted no time firing off a trademark infringement suit against Apple on Jan. 10.

Tip of the Iceberg

But to me, it seems that the impending release of what promises to be the first of many iPhones is only part of a bigger Apple story that will become clearer in the years to come. The iPhone marks the opening of an era where consumer electronics that are physical descendents of the iPod and spiritual descendants of the Mac increasingly dominate the product lineup at Apple (its name newly shorn of the Computer appellation). I don't think this means the Macintosh computer takes anything resembling a backseat. The Mac accounted for $7.4 billion, or 38%, of sales during Apple's fiscal year 2006. That's still sizable, but the trend is clear: iPod sales accounted for $7.6 billion or nearly 40% of sales—and though I may be wrong, I think that's the first time that iPod revenue eclipsed that of the Mac in any fiscal year.

What about Apple's Jan. 9 announcement leads me to that conclusion? The most telling detail is that the iPhone itself is running a version of Apple's operating system, Mac OS X. This is the first time that the Mac OS will run on anything other than a desktop or portable computer. Speculation about the inclusion of Mac OS X had begun making the rounds in the final furious weeks of rumor-laden online chatter before the iPhone's introduction.

In fact, by my scorecard, that was one of two things that Digg.com founder Kevin Rose got right in his infamous, boozy iPhone monologue on his Diggnation podcast (ssee BusinessWeek.com, 12/08/06,"A Wish List for the iPhone"). Rose also nailed that the iPhone would come in 4GB and 8GB capacities, but he and his "source" turned out to be wrong on most of the other details, including a slide-out keyboard, deals with more than one wireless carrier, two batteries (one for music, one for the phone), and price.

Embedded OS X

Still, the operating system is a good detail to get right. Of all the new phone's features, this one is probably the most important, both strategically and philosophically. The iPhone will run what's known as an embedded version of Mac OS X. The term embedded is used to describe an operating system that doesn't run on a traditional computer. Think of it as a special-purpose computer with a limited set of functions, the type that's often built to fit into a small device. Examples include an MP3 player, including the iPod, your wireless phone, the router that connects all the PCs in your home to the Internet, your TV remote control, and in some cases your TV, your car—maybe even your thermostat.

Scores of companies build embedded software and operating systems. Sun Microsystems' (1 2 Next Page