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by Fred Vogelstein
It
was a late morning in the fall of 2006. Almost a year earlier, Steve
Jobs had tasked about 200 of Apple's top engineers with creating
the iPhone. Yet here, in Apple's boardroom, it was clear that the
prototype was still a disaster. It wasn't just buggy, it flat-out
didn't work. The phone dropped calls constantly, the battery stopped
charging before it was full, data and applications routinely became
corrupted and unusable. The list of problems seemed endless. At the
end of the demo, Jobs fixed the dozen or so people in the room with
a level stare and said, "We don't have a product yet."
The effect was even more terrifying than one of Jobs' trademark tantrums. When
the Apple chief screamed at his staff, it was scary but familiar. This time,
his relative calm was unnerving. "It was one of the few times at Apple when
I got a chill," says someone who was in the meeting.
The ramifications were serious. The iPhone was to be the centerpiece of Apple's
annual Macworld convention, set to take place in just a few months. Since his
return to Apple in 1997, Jobs had used the event as a showcase to launch his
biggest products, and Apple-watchers were expecting another dramatic announcement.
Jobs had already admitted that Leopard — the new version of Apple's operating
system — would be delayed. If the iPhone wasn't ready in time, Macworld
would be a dud, Jobs' critics would pounce, and Apple's stock price could suffer.
And what would AT&T think? After a year and a half of secret meetings, Jobs
had finally negotiated terms with the wireless division of the telecom giant
(Cingular at the time) to be the iPhone's carrier. In return for five years of
exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin
slice of Apple's iTunes revenue, AT&T had granted Jobs unprecedented power.
He had cajoled AT&T into spending millions of dollars and thousands of man-hours
to create a new feature, so-called visual voicemail, and to reinvent the time-consuming
in-store sign-up process. He'd also wrangled a unique revenue-sharing arrangement,
garnering roughly $10 a month from every iPhone customer's AT&T bill. On
top of all that, Apple retained complete control over the design, manufacturing,
and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal
out of one of the largest players in the entrenched wireless industry. Now, the
least he could do was meet his deadlines.
For those working on the iPhone, the next three months would be the most stressful
of their careers. Screaming matches broke out routinely in the hallways. Engineers,
frazzled from all-night coding sessions, quit, only to rejoin days later after
catching up on their sleep. A product manager slammed the door to her office
so hard that the handle bent and locked her in; it took colleagues more than
an hour and some well-placed whacks with an aluminum bat to free her.
But by the end of the push, just weeks before Macworld, Jobs had a prototype
to show to the suits at AT&T. In mid-December 2006, he met wireless boss
Stan Sigman at a suite in the Four Seasons hotel in Las Vegas. He showed off
the iPhone's brilliant screen, its powerful Web browser, its engaging user interface.
Sigman, a taciturn Texan steeped in the conservative engineering traditions that
permeate America's big phone companies, was uncharacteristically effusive, calling
the iPhone "the best device I have ever seen." (Details of this and
other key moments in the making of the iPhone were provided by people with knowledge
of the events. Apple and AT&T would not discuss these meetings or the specific
terms of the relationship.)
Six
months later, on June 29, 2007, the iPhone went on sale. At press
time, analysts were speculating that customers would snap up about
3 million units by the end of 2007, making it the fastest-selling
smartphone of all time. It is also arguably Apple's most profitable
device. The company nets an estimated $80 for every $399 iPhone it
sells, and that's not counting the $240 it makes from every two-year
AT&T contract an iPhone customer signs. Meanwhile, about 40 percent of iPhone
buyers are new to AT&T's rolls, and the iPhone has tripled the carrier's
volume of data traffic in cities like New York and San Francisco.
But as important as the iPhone has been to the fortunes of Apple
and AT&T,
its real impact is on the structure of the $11 billion-a-year US mobile phone
industry. For decades, wireless carriers have treated manufacturers like serfs,
using access to their networks as leverage to dictate what phones will get made,
how much they will cost, and what features will be available on them. Handsets
were viewed largely as cheap, disposable lures, massively subsidized to snare
subscribers and lock them into using the carriers' proprietary services. But
the iPhone upsets that balance of power. Carriers are learning that the right
phone — even a pricey one — can win customers and bring in revenue.
Now, in the pursuit of an Apple-like contract, every manufacturer is racing to
create a phone that consumers will love, instead of one that the carriers approve
of. "The iPhone is already changing the way carriers and manufacturers behave," says
Michael Olson, a securities analyst at Piper Jaffray.
In 2002, shortly after the first iPod was released, Jobs started thinking about
developing a phone. He saw millions of Americans lugging separate phones, BlackBerrys,
and — now — MP3 players; naturally, consumers would prefer just
one device. He also saw a future in which cell phones and mobile email devices
would amass ever more features, eventually challenging the iPod's dominance
as a music player. To protect his new product line, Jobs knew he would eventually
need to venture into the wireless world.
If the idea was obvious, so were the obstacles. Data networks were sluggish and
not ready for a full-blown handheld Internet device. An iPhone would require
Apple to create a completely new operating system; the iPod's OS wasn't sophisticated
enough to manage complicated networking or graphics, and even a scaled-down version
of OS X would be too much for a cell phone chip to handle. Apple would be facing
strong competition, too: In 2003, consumers had flocked to the Palm Treo 600,
which merged a phone, PDA, and BlackBerry into one slick package. That proved
there was demand for a so-called convergence device, but it also raised the bar
for Apple's engineers.
Then there were the wireless carriers. Jobs knew they dictated what
to build and how to build it, and that they treated the hardware
as little more than a vehicle to get users onto their networks. Jobs,
a notorious control freak himself, wasn't about to let a group of
suits — whom he would later call "orifices" — tell
him how to design his phone.
By 2004 Apple's iPod business had become more important, and more vulnerable,
than ever. The iPod accounted for 16 percent of company revenue, but with 3G
phones gaining popularity, Wi-Fi phones coming soon, the price of storage plummeting,
and rival music stores proliferating, its long-term position as the dominant
music device seemed at risk.
So that summer, while he publicly denied he would build an Apple phone, Jobs
was working on his entry into the mobile phone industry. In an effort to bypass
the carriers, he approached Motorola. It seemed like an easy fix: The handset
maker had released the wildly popular RAZR, and Jobs knew Ed Zander, Motorola's
CEO at the time, from Zander's days as an executive at Sun Microsystems. A deal
would allow Apple to concentrate on developing the music software, while Motorola
and the carrier, Cingular, could hash out the complicated hardware details.
Of course, Jobs' plan assumed that Motorola would produce a successor
worthy of the RAZR, but it soon became clear that wasn't going to
happen. The three companies dickered over pretty much everything — how
songs would get into the phone, how much music could be stored there,
even how each company's name would be displayed. And when the first
prototypes showed up at the end of 2004, there was another problem:
The gadget itself was ugly.
Jobs unveiled the ROKR in September 2005 with his characteristic
aplomb, describing it as "an iPod shuffle on your phone." But Jobs likely knew he had
a dud on his hands; consumers, for their part, hated it. The ROKR — which
couldn't download music directly and held only 100 songs — quickly came
to represent everything that was wrong with the US wireless industry, the spawn
of a mess of conflicting interests for whom the consumer was an afterthought.
Wired summarized the disappointment on its November 2005 cover: "YOU CALL
THIS THE PHONE OF THE FUTURE?"
The Apple Touch
Apple has created two music phones. The ROKR, made with Motorola in
2005, respected the traditional relationships between manufacturers
and carriers. The iphone, released last summer, completely overturned
them.
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ROKR -Won't
hold more than 100 songs, even if there's memory left. |
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iPhone -Can
hold about 1,500 songs — as much as its 8-GB drive allows. |
Even
as the ROKR went into production, Jobs was realizing he'd have to
build his own phone. In February 2005, he got together with Cingular
to discuss a Motorola-free partnership. At the top-secret meeting
in a midtown Manhattan hotel, Jobs laid out his plans before a handful
of Cingular senior execs, including Sigman. (When AT&T
acquired Cingular in December 2006, Sigman remained president of wireless.)
Jobs delivered a three-part message to Cingular: Apple had the technology
to build something truly revolutionary, "light-years ahead of
anything else." Apple was prepared to consider an exclusive arrangement
to get that deal done. But Apple was also prepared to buy wireless
minutes wholesale and become a de facto carrier itself.
Jobs had reason to be confident. Apple's hardware engineers had spent about
a year working on touchscreen technology for a tablet PC and had convinced
him that they could build a similar interface for a phone. Plus, thanks to
the release of the ARM11 chip, cell phone processors were finally fast and
efficient enough to power a device that combined the functionality of a phone,
a computer, and an iPod. And wireless minutes had become cheap enough that
Apple could resell them to customers; companies like Virgin were already doing
so.
Sigman and his team were immediately taken with the notion of the iPhone. Cingular's
strategy, like that of the other carriers, called for consumers to use their
mobile phones more and more for Web access. The voice business was fading;
price wars had slashed margins. The iPhone, with its promised ability to download
music and video and to surf the Internet at Wi-Fi speeds, could lead to an
increase in the number of data customers. And data, not voice, was where profit
margins were lush.
What's more, the Cingular team could see that the wireless business model had
to change. The carriers had become accustomed to treating their networks as
precious resources, and handsets as worthless commodities. This strategy had
served them well. By subsidizing the purchase of cheap phones, carriers made
it easier for new customers to sign up — and get roped into long-term
contracts that ensured a reliable revenue stream. But wireless access was no
longer a luxury; it had become a necessity. The greatest challenge facing the
carriers wasn't finding brand-new consumers but stealing them from one another.
Simply bribing customers with cheap handsets wasn't going to work. Sigman and
his team wanted to offer must-have devices that weren't available on any other
network. Who better to create one than Jobs?
For Cingular, Apple's ambitions were both tantalizing and nerve-racking. A
cozy relationship with the maker of the iPod would bring sex appeal to the
company's brand. And some other carrier was sure to sign with Jobs if Cingular
turned him down — Jobs made it clear that he would shop his idea to anyone
who would listen. But no carrier had ever given anyone the flexibility and
control that Jobs wanted, and Sigman knew he'd have trouble persuading his
fellow executives and board members to approve a deal like the one Jobs proposed.
Sigman was right. The negotiations would take more than a year, with Sigman
and his team repeatedly wondering if they were ceding too much ground. At one
point, Jobs met with some executives from Verizon, who promptly turned him
down. It was hard to blame them. For years, carriers had charged customers
and suppliers for using and selling services over their proprietary networks.
By giving so much control to Jobs, Cingular risked turning its vaunted — and
expensive — network into a "dumb pipe," a mere conduit for
content rather than the source of that content. Sigman's team made a simple
bet: The iPhone would result in a surge of data traffic that would more than
make up for any revenue it lost on content deals.
Jobs wouldn't wait for the finer points of the deal to be worked out. Around
Thanksgiving of 2005, eight months before a final agreement was signed, he
instructed his engineers to work full-speed on the project. And if the negotiations
with Cingular were hairy, they were simple compared with the engineering and
design challenges Apple faced. For starters, there was the question of what
operating system to use. Since 2002, when the idea for an Apple phone was first
hatched, mobile chips had grown more capable and could theoretically now support
some version of the famous Macintosh OS. But it would need to be radically
stripped down and rewritten; an iPhone OS should be only a few hundred megabytes,
roughly a 10th the size of OS X.
Before they could start designing the iPhone, Jobs and his top executives had
to decide how to solve this problem. Engineers looked carefully at Linux, which
had already been rewritten for use on mobile phones, but Jobs refused to use
someone else's software. They built a prototype of a phone, embedded on an
iPod, that used the clickwheel as a dialer, but it could only select and dial
numbers — not surf the Net. So, in early 2006, just as Apple engineers
were finishing their yearlong effort to revise OS X to work with Intel chips,
Apple began the process of rewriting OS X again for the iPhone.
The conversation about which operating system to use was at least one that
all of Apple's top executives were familiar with. They were less prepared to
discuss the intricacies of the mobile phone world: things like antenna design,
radio-frequency radiation, and network simulations. To ensure the iPhone's
tiny antenna could do its job effectively, Apple spent millions buying and
assembling special robot-equipped testing rooms. To make sure the iPhone didn't
generate too much radiation, Apple built models of human heads — complete
with goo to simulate brain density — and measured the effects. To predict
the iPhone's performance on a network, Apple engineers bought nearly a dozen
server-sized radio-frequency simulators for millions of dollars apiece. Even
Apple's experience designing screens for iPods didn't help the company design
the iPhone screen, as Jobs discovered while toting a prototype in his pocket:
To minimize scratching, the touchscreen needed to be made of glass, not hard
plastic like on the iPod. One insider estimates that Apple spent roughly $150
million building the iPhone.
Through it all, Jobs maintained the highest level of secrecy. Internally, the
project was known as P2, short for Purple 2 (the abandoned iPod phone was called
Purple 1). Teams were split up and scattered across Apple's Cupertino, California,
campus. Whenever Apple executives traveled to Cingular, they registered as
employees of Infineon, the company Apple was using to make the phone's transmitter.
Even the iPhone's hardware and software teams were kept apart: Hardware engineers
worked on circuitry that was loaded with fake software, while software engineers
worked off circuit boards sitting in wooden boxes. By January 2007, when Jobs
announced the iPhone at Macworld, only 30 or so of the most senior people on
the project had seen it.
The hosannas greeting the iPhone were so overwhelming it was easy to ignore
its imperfections. The initial price of $599 was too high (it has been lowered
to $399). The phone runs on AT&T's poky EDGE network. Users can't perform
email searches or record video. The browser won't run programs written in Java
or Flash.
But none of that mattered. The iPhone cracked open the carrier-centric structure
of the wireless industry and unlocked a host of benefits for consumers, developers,
manufacturers — and potentially the carriers themselves. Consumers get
an easy-to-use handheld computer. And, as with the advent of the PC, the iPhone
is sparking a wave of development that will make it even more powerful. In
February, Jobs will release a developer's kit so that anyone can write programs
for the device.
Manufacturers, meanwhile, enjoy new bargaining power over the carriers they've
done business with for decades. Carriers, who have seen AT&T eat into their
customer bases, are scrambling to find a competitive device, and they appear
willing to give up some authority to get it. Manufacturers will have more control
over what they produce; users — not the usual cabal of complacent juggernauts — will
have more influence over what gets built.
Application developers are poised to gain more opportunities as the wireless
carriers begin to show signs of abandoning their walled-garden approach to
snaring consumers. T-Mobile and Sprint have signed on as partners with Google's
Android, an operating system that makes it easy for independent developers
to create mobile apps. Verizon, one of the most intransigent carriers, declared
in November that it would open up its network for use with any compatible handset.
AT&T made a similar announcement days later. Eventually this will result
in a completely new wireless experience, in which applications work on any
device and over any network. In time, it will give the wireless world some
of the flexibility and functionality of the Internet.
It may appear that the carriers' nightmares have been realized, that the iPhone
has given all the power to consumers, developers, and manufacturers, while
turning wireless networks into dumb pipes. But by fostering more innovation,
carriers' networks could get more valuable, not less. Consumers will spend
more time on devices, and thus on networks, racking up bigger bills and generating
more revenue for everyone. According to Paul Roth, AT&T's president of
marketing, the carrier is exploring new products and services — like
mobile banking — that take advantage of the iPhone's capabilities. "We're
thinking about the market differently," Roth says. In other words, the
very development that wireless carriers feared for so long may prove to be
exactly what they need. It took Steve Jobs to show them that.
© Fred
Vogelstein
January 9, 2008