By 2005, the success of the iPod was fueling a rapid rise in Apple’s status and fortunes. People across the globe were purchasing the sleek portable music players in droves, especially college and high-school students.
Despite its success, Jobs was deeply concerned about the viability of the iPod business going into the future. His major concern was that music lovers, e.g. iPod owners, were being forced to carry around two devices: an ipod and a cell phone. At some point he expected the cell phone to gain the functionality of the iPod and essentially render it obsolete.
His worries were well-founded because, as he explained to the board, ever since cell phones had started shipping with built-in cameras, sales of digital cameras were in jeopardy. He was determined to not let the iPod suffer the same fate.
“The device that can eat our lunch is the cell phone.”Steve Jobs, speaking of the iPod to the Apple board in 2005
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iPhone Lesson One: Only the Paranoid Survive
The fact that Steve Jobs was worried to begin with was an incredibly important element in his drive and motivation to develop the iPhone. Too often business leaders can tend to get comfortable and in some cases complacent with regards to shifting market trends and dynamics, usually brushing new technology or trends aside as something that only appeals to niche markets or applications. This error of thinking can lead to substantial business losses.
“Only the paranoid survive…we all need to expose ourselves to the winds of change”Andrew Grove
One great way to foster a healthy sense of paranoia regarding your business is to be hyper aware of the dynamics inside your market. This awareness can be achieved by employing a few simple tactics such as the following:
- Consistent face-to-face customer engagement (e.g. Jobs noticed most iPod customers always carried a cell phone as well),
- Intense monitoring and experimentation with new or alternative technologies (e.g. Apple’s research team that was working on touchscreens at the time),
- Monitoring industry dynamics regarding horizontal structure or vertical integration (see my post on industry trend analysis for details)
- Observing any new or different business models rising in your industry
Paranoia and awareness are a great start but eventually you have to commit to a plan of action, and that plan of action will probably entail a lot of risk and cannibalization of your existing business.
iPhone Lesson Two: Cannibalize Your Own Products (Before Someone Else Does)
Steve Jobs had this famous saying:
“If you don’t cannibalize yourself, someone else will.”Steve Jobs
In business, especially in businesses that involve advanced technology, obsoletion and cannibalization are par for the course. The trick is to ensure that your core business evolves fast enough to meet the demands of the new market. Since we mentioned digital cameras, it’s worth noting that Kodak ultimately faced bankruptcy due to the collapse of the need for film and the rise of digital cameras.
For Kodak, the unfortunate part about these two graphs is that Kodak was heavily involved in the film and analog camera sales and not very involved in the digital camera sales line. Kodak could have succeeded and even grown further had they successfully transitioned over to digital rather than cling for so long to film.
But even digital cameras were not immune to the forces of new technology because in the year the iPhone first went on sale, 2007, digital camera sales peaked and ever since have been on the decline.
With the release of the iPhone, Apple positioned themselves at the center of the next wave of technology that would render both the iPod and consumer-grade digital cameras obsolete.
As the graph illustrates, even before iPod sales had peaked, Apple launched the iPhone which proceeded to directly cannibalize sales of the iPod.
iPhone Lesson Three: When Facing Market Shifts, Have a Plan A, B and C
Apple executives knew that at their core they were a computer company. Their engineering, manufacturing, sales, distribution, customer service and overall company DNA was in computer hardware and software – not mobile phones. In fact, most mobile phones were so different than computers at the time that Plan A for Steve Jobs was to partner with Motorola, the company that famously invented the cell phone, and create a phone that would have iPod functionality and run iTunes.
The result was a disaster. In September 2005 the ROKR released to the public backed by a substantial marketing campaign, including a personal endorsement from Steve Jobs. But despite high-profile marketing, ROKR sales were a disappointment and the critical reviews were terrible.
“You call this the phone of the future?”Wired cover on the Motorola ROKR
Several glaring flaws with the design doomed the ROKR from the beginning. These included:
- Complicated software interface
- Slow song transfer rates due to the lack of support for Hi-Speed USB
- An arbitrary song limit of 100, regardless of how much memory is available
- Aesthetics that made it look like it was “designed by a committee”
Walter Isaacson’s biography explains well what happened next:
“Jobs was furious. ‘I’m sick of dealing with these stupid companies like Motorola,’ he told Tony Fadell and others at one of the iPod product review meetings. ‘Let’s do it ourselves.’…So Job’s and his team became excited about the prospect of building a phone that they would want to use. ‘That’s the best motivator of all,’ Jobs later said.”Steve Jobs by Walter Isaacson
As a hedge against future embarrassments, Jobs’ new plan (Plan B) was to build the entire phone themselves and shop the device around to any wireless service provider that’s interested, such as AT&T (then Cingular), Verizon and T-Mobile. But even if a carrier decided to turn him down, he was prepared to purchase wireless minutes wholesale and create his own wireless company (Plan C), similar to what Virgin Mobile was doing at the time.
After meetings with several carriers including Verizon, who flatly turned him down, and AT&T, Jobs finally secured AT&T as his wireless carrier partner in the deal. After launch, sales of the iPhone grew AT&T’s subscribers and revenues substantially. Verizon would later live to regret their mistake to the tune of roughly $3B.
iPhone Lesson Four: Have A ‘Bet the Company’ Moment
In late 2004/early 2005 Apple began assembling a team to execute plan B – make their own phone and partner with AT&T to do it. Given the hardware experience Apple had at the time with iPods and Macs, to make the iPhone Jobs figured that he had two choices: 1) Enlarge the capabilities of an iPod into an iPhone or 2) Shrink the capabilities of a Mac into an iPhone. To make the decision, an internal competition was setup that pitted the iPod team led by Tony Fadell against the Mac team led by Scott Forestall.
“Around 2005, Jobs faced a crucial decision. Should he give the task of developing the device’s software to the team that built the iPod, which wanted to build a Linux-based system? Or should he entrust the project to the engineers who had revitalized the software foundation of the Macintosh? In other words, should he shrink the Mac, which would be an epic feat of engineering, or enlarge the iPod? Jobs preferred the former option, since he would then have a mobile operating system he could customize for the many gizmos then on Apple’s drawing board. Rather than pick an approach right away, however, Jobs pitted the teams against each other in a bake-off.”BusinessWeek, Scott Forstall The Sorcerers Apprentice At Apple
Development of the “Trackwheel P1”
For six months Tony Fadell’s team worked on turning an iPod into an iPhone prototype. The software would be Linux-based and the controls were similar to the iPod. An Apple patent filing shows drawings of these early prototypes which in hindsight look primitive compared to the touchscreen version that was finally released.
As shown in these images, the major challenge Fadell’s team had in going this route was how to dial using the iPod’s trackwheel. Despite what look to be some clever attempts, ultimately this approach would fall out of favor with Jobs as he saw more potential in using the mulit-touch screen that Scott Forestall was working on.
Development of the Multi-Touch P2
Scott Forestall’s main concern with creating the Multi-Touch P2 was to figure out how the Mac software, OSX, would work (navigation, phone calls, etc.) on a lower-power ARM-based CPU with a mulit-touch screen. To solve this problem, he recruited a small team of engineers and created a development platform that mimicked these conditions complete with an old PowerMac G3 computer that had close to the same computing specs as the iPhone would. The picture below was obtained by the Wall Street Journal which wrote an article on the development of the iPhone during Apple and Samsung’s patent litigation proceedings.
Note the similarities in specifications between the setup above and the eventual specs of the first generation iPhone:
|PowerMac G3||Gen 1 iPhone|
|Processor (CPU) Speed||333 Mhz||412 Mhz|
|RAM Memory||128 Mb||128 Mb|
|Hard Drive Capacity||4, 6 or 8 GB||4 or 8 GB|
According to the Journal article, Forestall recruited Greg Christie to join his team and create the iPhone software.
“In late 2004, Mr. Christie was working on software for Apple’s Macintosh computers when Scott Forstall, a senior member of the company’s software team, walked into his office, closed the door and asked if he wanted to work on a secret project, codenamed ‘purple.’ The team would develop a phone with an integrated music player, operated by a touch screen…
Mr. Christie’s team pored over details like the perfect speed for scrolling lists on the phone and the natural feel of bouncing back when arriving at the end of a list. He said his team ‘banged their head against the wall’ over how to change text messages from a chronological list of individual messages to a series of separate ongoing conversations similar to instant messaging on a computer.
He also said the team was ‘shockingly small.'”Apple Engineer Recalls iPhone's Birth from the Wall Street Journal
The major downside to Forestall’s approach was that even though the software and touchscreen showed a lot of promise, the hardware to make it all work would need to shrink down to the size of something that could fit in your pocket. Think of it as needing to take all the equipment in that room and stuffing it into an iPod.
With Fadell’s approach, on the other hand, the hardware and software was very similar to the current iPod hardware and software of the time which gave them confidence that they could build and ship something fairly quickly without too much risk. Only trouble was that the trackwheel was an awkward thing to dial with.
After several iterations and demos of how the Mac approach with a touchscreen would work, Jobs was smitten with excitement over the possibilities and gave Forestall and Fadell direction to move forward with the touchscreen with OSX approach.
“‘We all know this is the one we want to do,’ said Jobs, pointing to the touchscreen. ‘So let’s make it work.’ It was what he liked to call a bet-the-company moment, high risk and high reward if it succeeded.”excerpt from Steve Jobs by Walter Isaacson
It’s important to realize that most risk averse companies would have gone the safe route of modifying the iPod and turning it into a phone. That would have been the easy path. Why take the risk of devoting so many engineering resources to something that might never work? That’s why it was a bet-the-company moment, one that eventually paid off in droves.
In product management and product marketing there are times when its tempting to go the safe route, get to market quicker and “make a few bucks.” The trouble is that approach won’t wow the customer and won’t truly drive growth for your business. Thank goodness Apple took the risk they did.
iPhone Lesson Five: Continue Connecting The Dots
With the touchscreen approach Apple would need to devise a new hardware design concept. Up until this point the demos given by Forestall’s team on the Multi-Touch P2 were basically touchscreens attached to an old Mac computer. A hardware concept still needed to be fleshed out and it was Fadell and Ive’s job to come up with ideas.
During the Samsung vs Apple patent litigation trial in 2012, Samsung submitted documents pointing out that the eventual iPhone design was actually inspired by an article Tony Fadell read in BusinessWeek where Sony designers described a design concept they had for a consumer device, the excerpt is below:
“For its part, Apple’s ‘revolutionary’ iPhone design was derived from the designs of a competitor — Sony. In February 2006, before the claimed iPhone design was conceived of, Apple executive Tony Fadell circulated a news article to Steve Jobs, Jonathan Ive and others. In the article, a Sony designer discussed Sony designs for portable electronic devices that lacked buttons and other ‘excessive ornamentation,’ fit in the hand, were ‘square with a screen’ and had “corners [which] have been rounded out.’ Right after this article was circulated internally, Apple industrial designer Shin Nishibori was directed to prepare a ‘Sony-like’ design for an Apple phone and then had CAD drawings and a three-dimensional model prepared. Confirming the origin of the design, these internal Apple CAD drawings prepared at Mr. Nishibori‘s direction even had the ‘Sony’ name prominently emblazoned on the phone design, as the below images from Apple‘s internal documents show:”Samsung vs Apple patent litigation trial documents
These drawings clearly resemble the iPhone 4, even though that wasn’t the first design that was actually built. Samsung’s claim that Apple’s design was derived from a Sony design is a bit outlandish given that the Apple designer created the above design based solely off the verbal descriptions Sony gave of a design concept, not an actual design itself. Turns out that the actual design Sony ended up creating with this concept was the Sony-Ericsson Walkman phone below:
Not quite as striking of a resemblance to the iPhone after all.
But the point of this is that when Fadell came across that article he started connecting the dots between what he read and what he was trying to build. After this “Sony style” (what Apple started calling it internally) design was drawn, it changed the course of the project and laid the foundation for the eventual embodiment of the iPhone.
“When you ask a creative person how they did something, they may feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things.”Steve Jobs
iPhone Lesson Six: Don’t Ship It Until You ‘Love’ It
Somewhere along the way during development, Apple executives including Steve Jobs had approved moving forward with a design where, according to Walter Isaacson’s Steve Jobs, “had the glass screen set into an aluminum case.”
Thanks again to information revealed from the patent litigation, several prototype images emerged and it’s likely that even though the “Sony style” design had set the foundation, Apple initially planned to launch a design that was pictured below that matches Isaacson’s description:
Despite having made the decision to move forward with one of the designs above, not long before the planned launch, Jobs decided to hit the reset button. Isaacson’s book tells the story well…
“One Monday morning Jobs went over to see Ive. ‘I didn’t sleep last night,’ he said, ‘because I realized that I just don’t love it.’…Ive, to his dismay, instantly realized that Jobs was right…The problem was that the iPhone should have been all about the display, but in their current design the case competed with the display instead of getting out of the way…’Guys, you’ve killed yourselves over this design for the last nine months, but we’re going to change it,’ Jobs told Ive’s team. ‘We’re all going to have to work nights and weekends, and if you want we can hand out some guns so you can kill us now.’ Instead of balking, the team agreed. ‘It was one of my proudest moments at Apple,’ Jobs recalled.”Steve Jobs by Walter Isaacson
This story illustrates one of the most valuable traits of Steve Jobs: demanding excellence without compromise. For benefit leader companies like Apple, having someone in charge of product decisions with these characteristics is essential. Cost leaders can get away with not having the absolute best in quality and design (think WalMart) but benefit leaders will not be able to get away with it for very long. In this regard, Steve Jobs seemed to be exceptionally rare.
“Be a yardstick of quality. Some people aren’t used to an environment where excellence is expected.”Steve Jobs
In a commencement speech at Stanford, Jobs explained how loving what you do will help you do great work…
“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know it when you find it.”Steve Jobs
Steve Jobs loved what he did and that passion fueled his demand for excellence.
On a related topic, it’s important to note that this philosophy flies in the face of the popular Lean Startup movement created by Eric Ries. According to the lean startup methodology, you should ship a product as soon as it reaches “MVP” (which stands for “minimum viable product”) status and get valuable feedback from customers on what should be improved and then go and improve those things. The reason this method is not recommended for a company like Apple is because Apple’s strategy is benefit leadership and the Lean Startup methodology is more applicable for cost leaders. The whole crux cost leadership strategy is to provide benefits that are “good enough” at a much lower cost than the competition. Benefit leaders, such as Apple, on the other hand must provide benefits that are far superior to other alternatives and as such can’t be shipping things that are minimally viable. Eric Ries’ method is great for startups that want to become cost leaders but if a startup is trying to make something with far superior benefits, it would be better for them to follow Steve Jobs philosophy rather than Eric Ries.
iPhone Lesson Seven: Breakthrough Products Integrate Functionality In A Simple and Easy To Use Way
When Jobs announced the iPhone in January 2007, he started the meeting by saying that he was going to announce 3 exciting new products: an iPod, a phone and an internet communicator. That video is below.
This introduction is important because it clearly conveys the value of the iPhone in terms of two things:
- The combined functionality of an iPod, phone and internet communicator
- Ease of use
Below is a picture from the iPhone announcement…
To illustrate ease of use, Jobs used a perceptual map to show how most phones, even phones that were called “smartphones” at the time, stacked up:
By combining the power of a small computer with a user interface that was easy enough for a child to use, Apple was able to create a game-changing device.
iPhone Lesson Eight: Sometimes To Create A Breakthrough, You Must Do Everything (e.g. Be Vertically Integrated)
Another important thing Steve Jobs mentioned when he announced the iPhone was the idea that only a company like Apple could have created the iPhone. To drive home the point, Jobs showed a quote by Alan Kay about software…
“People who are really serious about software should make their own hardware.”Alan Kay
Creating both the software and hardware has always been a cornerstone of Apple’s product design philosophy but never was this strategy better executed than with the introduction of the iPhone. Previous “smartphones” such as the Motorola Q, Palm Treo and Samsung Blackjack were all the product of a horizontal value chain. In the case of the Treo, Intel made the CPU, Microsoft created the software (the dreadful Windows Mobile) while Palm did the design and assembly and Verizon provided sales and distribution. When Apple introduced the iPhone, Jobs demanded virtually full control of the value chain by controlling the intricacies of the hardware, software, design, marketing and distribution of the device. Apple even went so far as to control the way iPhones were sold and displayed within AT&T stores. In general, these efforts represented a massive shift in the smartphone industry to vertical and because of the complexities involved with the iPhone (integrating an iPod with a cellular radio, etc.), it’s likely that only a vertical company such as Apple could have created such a breakthrough.
This pattern of industries shifting from horizontal to vertical and back again was described well by Clayton Christensen in his theory of “Value Chain Evolution.”
“Before a product or service is good enough to meet mainstream customer needs, integrated firms that control the entire production and delivery process are best suited to coordinate the complexities developers will confront when trying to improve the product. Companies that solve these problems are rewarded with a disproportionate share of industry profit. To improve products, companies often must use new and unproven technologies or put existing technologies together in new ways, creating new patterns of interaction and new problems. Pushing the frontier of what is possible requires proprietary, interdependent architectures, and in this circumstance, integration gives firms a full platform to run engineering experiments to wring out continued improvements.”Clayton Christensen, Seeing What's Next
This sounds like a great description of what Apple did when they created the iPhone.
It’s important to note that vertical value chains eventually morph back into horizontal as standards develop and cost/speed to market become critical. This explains the rapid rise of Android phones a few years after the iPhone was announced.
“As companies overshoot their customers’ needs, companies no longer need the benefits that integration brings…In an effort to develop products or services more quickly, companies tend to standardize interfaces between various parts of the product or service. These standards eventually morph into industry-wide standards and allow product architecture to become modular.”Clayton Christensen, Seeing What's Next
Note how the smartphone industry value chain has evolved in the 7 years since its introduction…
This pattern seems to repeat itself in many industries. The graphic below illustrates a complete view of value chain evolution in the computer industry in general and how it shifted from vertical to horizontal and back to vertical. For more on this, see my post on industry trend analysis.
Now that we’ve explored why Apple was able to create the iPhone, the question of how they did it remains. Disruptive innovation falls short but I’m going to suggest a new theory grown out of the research on this blog and my own experience…
iPhone Lesson Nine: Not All Innovations Must Be “Disruptive” To Be Successful: Introducing The Theory of Integrative Innovation
It’s important to note that the situation Apple created with the iPhone was vastly different than what was predicted by Christensen’s model of disruptive innovation, even though in hindsight his theory of value chain evolution was spot on. That’s why after the iPhone was announced, Christensen predicted the device to fail.
“The prediction of the theory would be that Apple won’t succeed with the iPhone…it’s not [truly] disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited.”
According to Christensen, in order for an invention to be truly “disruptive”, it must start out as something with lower performance but over time achieves good enough performance to capture the majority of a market at a much lower price. That’s not what Apple did. From the very beginning the iPhone has shown to be a high-performance and high-price solution that people flock to year after year.
Below is a summary of the theory of disruptive innovation…
Next is the prediction of the theory with reference to the iPhone (note that there are few people at the very premium end of the market)…
Now below is the actual results…
So where did the theory of disruptive innovation break down with regards to the iPhone? For one, disruptive innovation theory is best suited for the transition from a vertical industry to a horizontal industry when cost leader companies emerge and take over a market. However, “disruptive innovations” do not explain well the transition when an industry goes from being horizontal to vertical when benefit leader companies (such as Apple) emerge with a breakthrough product and take over a market.
To resolve the issue, I think it has everything to do with the fact that the iPhone was not just “a better phone” as Christensen assumed. Rather, as discussed earlier, it is three devices integrated into one: 1) an iPod, 2) a phone and 3) an internet communicator. Having three devices integrated into one is a vastly different strategy than classical “disruptive innovation” but it can still succeed and the reason is because multiple jobs to be done have now been combined into one solution and the cumulative value (or price) of getting those jobs done is combined as well. Steve Jobs knew this perfectly well and he explained it while walking people through how Apple was going to price the first iPhone. Below is a screenshot of this part of the announcement…
Below is the video of this part of the announcement…
Below is another screenshot from that part of the announcement…
His thought process was as follows:
A 4GB iPod = $199 price
A Blackberry = $299 price on a 2-year contract
The 4GB iPhone = $499 price on a 2-year contract and consumers get to have a host of other benefits such as video, widescreen, multi-touch, Wi-Fi, Safari browser, HTML email, Cover Flow, visual voice mail, and more all for no added premium.
As shown in an earlier graph, Apple went on to sell millions of iPhones and now the product represents the bulk of Apple’s revenues. The bottom line takeaway is that if you want to create a breakthrough innovation, one way to do it is to combine the functionality of multiple products into one in a way that is simple and easy to use. This is exactly what the iPhone did and because of it, Apple was able to charge dearly for the device and make incredible margins. Keep in mind that the $499 price is a subsidized 2-year contract price from AT&T!
All these conditions and results combine to prompt a new theory of innovation…
Theory of Integrative Innovation
The main thesis of “Integrative Innovation” is the idea that a market’s ability to adopt more performance and absorb higher prices will increase according to the number and value of jobs to be done that have been integrated into one device in a way that is simple and easy to use. Christensen’s theory of disruptive innovation assumes that in order to be disruptive, products must focus on one job to be done, start at the low-end, improve performance over time and eventually become good enough to capture a large portion of the market. This new framework is basically the opposite of that. Instead of starting out as not good enough and moving up in performance and cost, Integrative Innovation is about combining multiple jobs into one and creating a very high-performance/high-cost solution to begin with and quickly moving down in cost to capture large portions of the market.
As the above graphic illustrates, the iPhone fits this theory quite well. In September 2007, just a few months after launch, Apple reduced the price of the iPhone substantially and within a few years even developed a lower-cost model called the 5C.
This also explains, to a large extent, the progression of iPods. The iPod started out with high capacity and a large screen but as time went on Apple introduced smaller, less-expensive models and eventually the iPod Nano became the most popular iPod sold.
The good part about Integrative Innovation and Disruptive Innovation is that they can co-exist peacefully together and simply represent two opposing types of game-changing innovations. I am still a firm believer in disruptive innovation theory but it clearly falls short in explaining the iPhone – one of the most important innovations of our time.
There are many other examples of “Integrative Innovation” which I’ll explore in future blog posts.
iPhone Lesson Ten: Create A Platform For More Innovation
Last but certainly not least, because the iPhone ran a dumbed down version of OSX (later to be called iOS), it was capable of running far more programs than just those that shipped with the device. At first, Jobs was reluctant to introduce a level of complexity to the iPhone by allowing third-party applications but as they worked through the security and performance concerns involved, Apple eventually opened up the device for third-party development. This new functionality with the iPhone eventually led to the formation of an entire industry around mobile apps. As developers found new and creative ways to utilize the power of the iPhone’s sensors and always-on access to the internet, people started downloading apps in droves.
But it wasn’t just the technology that enabled the formation of a new industry – it was the way that technology was packaged and sold. In this case, the Apple App Store represented a clean, safe and organized environment to sell software applications. For years Windows and even Windows Mobile had third-party applications and even a horde of developers but until Apple created the App Store there was no easy (or safe) way to browse and purchase them. To a large extent, Apple taught the software industry how to sell software.
With the ability to create and sell mobile apps for the iPhone as a platform for innovation, Apple gained a number of compelling advantages:
- Developers learned to develop for iOS first, allowing for a significant lead against eventual competitors such as Android and Windows
- iPhone had more applications available for it than any other platform – a lead that was held clear up until last year when the number of Android apps hit 1 Million
- The opportunity and motivation to create another breakthrough mobile device – the iPad
And there you have it. The iPhone was nothing short of a monumental, game-changing device. Since its announcement, it has decimated older products and industries such as digital cameras, flip phones, iPods (ironically), GPS devices, etc. and even put a fairly sizable dent in the traditional PC industry. Not only that but it also defied the very best in management and innovation thinking of the time. I think it’s fair to say that creating the iPhone alone could qualify Apple for making the claim that they “put a dent in the universe.”
But fortunately for consumers the iPhone wasn’t the last great product Steve Jobs would announce. There was “one more thing…” which I’ll explore in the next post.
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