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Apple's Mobile Platform: The Car

Another rarely mentioned advantage is Apple's so-called developer program. Once iPod sales began skyrocketing in 2003, the company worked with makers of portable speakers, music-player cases, and other add-on gadgets. And Apple is working on the most mobile platform of all. Since BMW first added an optional iPod connector in the glove compartment of many of its 2004 models, carmakers including Chrysler (DCX), Ford (F), and Honda (HMC) have followed suit.

General Motors' (GM) 2008 Cadillac CTS will come with a center console that features the iPod's "rotate and click" interface, not only for pulling music off an iPod but also for playing the radio or listening to CDs or satellite radio. "It's about getting to your music, not having to learn a new set of tricks for each service," says James Grace, the 27-year-old GM (GM) manager who leads the project.

With the iPhone, Apple seems ready to open up opportunities for software developers who were mostly shut out from the iPod. On June 11, it announced that any Web 2.0 program designed to work with Apple's Safari browser would work on the iPhone. That means such popular sites as MySpace (NWS), Digg, or Amazon.com (AMZN) will be able to adapt their services to take advantage of the device—say, by adding a virtual button on their sites so that iPhone users could actually place a phone call with a fellow Netizen, rather than just trade e-mails or post messages.

"Insanely High Bars"

To be sure, many developers gripe that this approach is a far cry from letting them create applications designed from the ground up to work directly with the iPhone. That's a privilege Apple has conferred on only a few partners, such as Google. But "it's a good first step," says Digg Chairman Jay Adelson, who expects Apple to become more inclusive as time goes by. "For now, it's a very strange kind of controlled system—because they have these insanely high bars [for reliability and user experience] that they want to hit."

Many partners won't wait for a formal invite. Despite doubts about the iPhone's usefulness to serious businesspeople, Salesforce.com is working on an iPhone version of its sales management software. "It's not just about market share, it's about showing what is possible and what is cool," says CEO Marc Benioff. And more than 150 developers have registered to attend an ad hoc "iPhone Developers Camp" in San Francisco on July 6, to trade ideas and create new applications.

But if the Apple orchard is growing, it is still no Eden. For those partners that make the cut, Apple enforces a brutal perfectionism. "The stereotype is that they're this loosey-goosey California company, but nothing could be further from the truth," says Gary Johnson, the former CEO of chipmaker PortalPlayer, which roared to prosperity by providing the electronic brains of the first generations of iPods. Johnson says that whenever a project fell off track or a part fell short of Apple's needs, its engineers were demanding "root cause analysis" and explanations within 12 hours. "You could pacify other customers by putting 10 engineers on a plane to see them. Not Apple."

Hollywood's Wariness

Working with Apple can be exhausting. Johnson says the company almost never issued documents outlining its technical requirements, preferring to keep things oral to avoid a paper trail that might be leaked. And no supplier was given a full picture of what exactly Apple was working on: Everything was on a "need to know" basis. "There's an unreasonableness," says Johnson. "It's as though your entire reason for being is to serve them."

Yet he adds he has no hard feelings: "It wasn't a malicious thing. It's almost machine-like. You may have friendships or business relationships, but they don't really count." Johnson found that out on an April morning in 2006, when he learned Apple had decided not to use a chip that had been under development for more than a year and was expected to bring in half of PortalPlayer's sales. The company's stock crashed 50% when Johnson told Wall Street a few days later. Seven months later, it was purchased by Nvidia (NVDA) for $357 million—half of its peak market cap.

Suppliers of TV shows, movies, and other video content have their own reasons for being wary of joining the Apple ecosystem. They know what happened in the music industry. Jobs created a kind of reverse razor-and-blades model with the iPod, where Apple sells lucrative razors (music players) and the studios are stuck selling cheapo blades (music).

Hollywood has resisted Jobs' vision for placing movies on the iPod and iPhone. Only movies from Walt Disney (DIS) (where Jobs is the largest individual shareholder) and Paramount Pictures (VIA) have licensed movies to iTunes. The 52 million TV shows and movies sold so far by Apple amounts to fewer than two videos per iPod.

AT&T's Interesting Deal

This makes Apple's newest partnership with AT&T for iPhone service all the more intriguing. Since the iPhone was announced in January, many observers have wondered if Jobs pulled another fast one, using his consumer cred to win unprecedented influence over the $140 billion cellular-phone business. Normally, carriers in the U.S. control how cell-phones are priced and marketed, right down to deciding whether they will turn on capabilities built into the phones, such as wireless music downloading. But that's not how Apple rolls. Apple defined the 16 services that are highlighted on the iPhone homepage, and users sign up for them via iTunes, not on AT&T's homepage or in its stores.

Has AT&T set itself up to be marginalized? The carrier stands to steal subscribers from its rivals; CEO Randall L. Stephenson said on June 19 that of the 1.1 million people who had inquired about the iPhone, 40% were not currently signed up with AT&T. But analysts say Apple will earn a luxurious 35% gross margin on each of the $500 devices. AT&T is offering a $59 base plan for phone and data services—roughly $20 less than the cost for corporate e-mail devices like Treo. Besides potentially taking a bite out of AT&T's margins, this could cause its other handset makers to demand sweeter deals, too.

But the real test will be whether Jobs can change the way consumers think about a phone. This is Apple's first entry into a preexisting mass market, and those other phone manufacturers can't afford to let Jobs rewire things to suit Apple's strengths. Some already have rolled out cheaper products that, if not exactly as capable as the iPhone, may be close enough.

Will most consumers eventually choose to save money, even at the expense of a bit of elegance? History says they will, according to Harvard Business School professor Clayton M. Christensen: "The world always ends up thanking innovators for their cool products—but won't pay for them. There are forces of gravity at work."

Now there's a matchup worth watching: Steve Jobs vs. gravity.

With Arik Hesseldahl in New York and Roger O. Crockett in Chicago
Peter Burrows is a senior writer for BusinessWeek