[mattmaroon]

He's missing the #1 area where you can compete with Apple (at least for now) and why I think the Palm Pre will do well: carriers. Most people, even high-end smart phone users, choose their carrier first and their phone second. You'd lose sight of that reading TechCrunch or Engadget too much, but talk to people in middle America and you realize it's overwhelming. Be it due to laziness, marketing, employer discounts, customer satisfaction, not understanding how simple number portability has made it, whatever. I'd bet for every person who has bought an iPhone there are 1 or 2 who at least would consider it if it were on their network.

The Palm Pre and Android are both at a huge advantage here. That may not be true when Apple's deal with AT&T runs up though, but for now it's easily the biggest competitive edge available.

[mechanical_fish]

the #1 area where you can compete with Apple (at least for now)

Your qualifier here explains why Gruber doesn't dwell on this. He wants a competitor to Apple that can succeed in the long haul, not a bunch of scavengers who survive for another year or two, picking off the edges of the market that Apple hasn't gotten around to steamrolling yet.

Indeed, my off-the-cuff take on the state of the market is that Apple's carrier exclusivity is a positive danger to the competition. Because it means that the market sends all the wrong signals. You put out an iPhone knockoff that runs on another carrier, and a bunch of people sign up. Your product is a success! But: The reason your product is succeeding is that the playing field isn't level. And it's non-level in a way that Apple can fix, just as soon as the agreement with AT&T runs out.

My take on the smartphone market in the USA is that Apple's competition needs to race to come up with a product that can survive the day when iPhones are being offered on every carrier. Because I see no reason to believe that such a day will not come.

[raganwald]

+1

In the book "Marketing Warfare," Reis and Trout emphasize that a strategy should attack a competitor's strength, not its weakness.

Weaknesses will all be fixed over time, so attacking a weakness is simply making hay while the sun shines. Of course you should do it, but it shouldn't be a cornerstone of your strategy. It costs your competitor nothing to fix a weakness, they simply fix it and get better.

When you pick a competitor's strength and attack the strength, your competitor has a problem. Fixing the strength will cost them customers.

For example, it's a strength of Apple that they control the hardware and the software, so having Android run on multiple hardware devices from different vendors is attacking iPhone's strength, much as Windows attacks Macintosh's strength by running on commodity PCs.

Offering iPhone on other devices would cripple the user experience, so Apple can't respond without weakening itself. The AT&T deal, OTOH, is just a wekness. When it expires Apple loses nothing by offering iPhone through other carriers.

[mattmaroon]

Is it just a weakness? They presumably get a lot from the AT&T deal. The right to exclusive Apple branding on the phone. Visual voicemail, some untold but presumably high % of monthly contract fees (allowing them to plow tens of millions into ads, creating the virtuous cycle of users and app developer growth), an unprecedented degree of freedom over app distribution, commitments to building out the cell network, etc. Building the hardware and software themselves gives them better quality control over the end product, having tremendous upper hand in an exclusive deal with a national carrier performs a similar function.

I'm guessing that had they given in to whatever the hell Verizon requested, and has no reason to discontinue requesting, you'd be looking at a much different phone. That's why I still don't believe we'll ever see a CDMA iPhone.

[raganwald]

Well they got a good deal, but it doesn't strike me as an intrinsic strength in the product itself. I think they traded a product weakness for making money, just as if they had used cheaper materials or lower-quality processes.

[mattmaroon]

I'm not so sure Apple will fix this. I mean, why did Apple tether themselves to AT&T in the first place? AT&T was a giant turd that everyone hated 2 years ago, just like it is now. If anything it's gotten far better in that time, and the iPhone has racked up serious sales. It wouldn't surprise me if both parties are very happy with their relationship, and AT&T willing to concede even more for exclusivity.

They did it because they thought they'd make more money that way, and maybe they did, and maybe they still will. Maybe they knew they'd sell 1/2 as many phones that way, but make 3x more per phone and therefore come out ahead, and maybe that math hasn't changed. Certainly AT&T will cling to the iPhone the way the Cavaliers will to LeBron.

Verizon doesn't need Apple. They'll steamroll AT&T with turds like the Blackberry Storm if they have to because they're far and away the best network in the U.S. and everybody loves them. Apple needs Verizon far more though, which means they won't get anywhere near the deal there they will from AT&T in terms of money, control, etc.

So if I had to bet (with someone who doesn't have insider info of course) I'd say we see continued exclusivity with AT&T. I wouldn't lay odds on it, but I'd take even money.

[unalone]

They partnered with AT&T because they needed a company that would let it add things like visual voicemail to its existing system, and rolling that out with a single company would be easier. The argument against Verizon is that Verizon insists on adding branding to every Verizon phone, which Apple is against.

Neither Verizon nor Apple is stupid. If network choice really starts hurting the iPhone, which it isn't because iPhone sales are insane, then Apple will bend slightly to accommodate Verizon. If AT&T continues gaining Verizon users on virtue of the iPhone itself, then Verizon will look for a deal with Apple. The point of the ancestor post is that if your strategy to compete is "we're shittier but use a different network", then you aren't focused on the product, you're focused on making money. John Gruber is writing about product, not about market competition.

[mattmaroon]

Wrong and wronger. You can't say that because the iPhone sells very well, network choice isn't hurting it. There might be 2x as many iPhones in consumers hands in the U.S. if they were on Verizon too, and 3x if it were on the other majors on top. I'm clearly just making those numbers up, but they seem reasonable.

The exclusivity was about a lot more than visual voice mail. It had to do with sales channel and profits from ongoing contracts as well, which were probably far larger issues and ones Verizon has absolutely no reason to cave on. And my point was that it might be in both Verizon and Apple's best interest to not work together.

The network is a huge part of the product when it comes to phones. A phone that is constantly dropping calls, one of the iPhone's biggest complaints, or out of fast data range is an inferior product through no fault of its own. In the mobile industry by being on a better network you have a better product.

Nonetheless, the best and worst thing about capitalism is that inferior products win all the time when the salient point of competition isn't product "quality" as you're meaning it here. We in the tech industry love the idea of a Google or an Apple making a better mousetrap and slaying the entrenched competition, but the reality is that for every one story like that, there are 20 of a better product that died due to vendor lock-in, marketing, or some other form of differentiation. Apple's been on both sides of that equation.

[unalone]

I didn't say network choice wasn't hurting it, Matt. I said network choice wasn't hurting it enough to make a difference to Apple.

I agree that part of a product is its network. However, neither Apple nor its competitors manufacture networks. It would be incredibly lazy to hope to make money solely because you use one third-party network rather than another. In this case I agree with you, it might work, but Gruber doesn't just want a phone that makes money. He wants a phone that competes.

[stepherm]

What I think a lot of people tend to forget is that Verizon and AT&T have based their networks on differing technology (GSM vs. CDMA).

Apple seems to like keeping their product lineups relatively simple. GSM tends to be the worldwide standard. Fracturing their product lineup for (generally speaking) one market doesn't sound like the sort of thing Apple would do. I imagine if Verizon was the major GSM network in the U.S.A., we'd see Verizon + Apple instead of AT&T + Apple.

[qhoxie]

Most people, even high-end smart phone users, choose their carrier first and their phone second.

I think there is a lot of truth to that, but I also have seen a big shift since the iPhone. Countless friends and colleagues of mine have said something along the lines of "I would never use AT&T if it were not for the iPhone."

[mattmaroon]

The numbers indicate that it's a small shift at best. People switch carriers every 3-4 years on average (usually citing employer discounts, pricing plans, family networks, etc,) meaning that for any given phone, you'd expect 25-33% of purchasers to be new customers. The iPhone is somewhere between 30-40%, meaning that it's probably outperforming the average by 5-10%, which is great but not indicative of a sea change in consumer habits.

It's probably more effective at keeping people on AT&T who would otherwise have left than in bringing new people on.

[stcredzero]

Hmm, aren't you forgetting the mathematics of compound interest? A 5 to 10% conversion advantage over your competitors, combined with a higher retention rate -- this is going to really hurt competitors after several years. After 10 years? Ouch!

It's a good thing that AT&T sucks so much. Otherwise, the iPhone would be unstoppable.

[mattmaroon]

Oh it's great, and if I'm a shareholder in AT&T or Apple I'm pretty damn happy about it. (The retention rate is a total unknown for a device that's 2 years old. Even a shitty free-after-contract clamshell has a 2 year retention.)

But it's not a massive change in the power balance between carriers and phones. Carriers aren't going to offer massive concessions for something that brings in a few % more users than the other 50 phones in their lineup average. Don't forget that overall, the iPhone isn't even in the top 10.

[qhoxie]

Similar to the sibling, I see 5-10% as being a fairly solid impact.

[whatusername]

The Palm Pre runs on 2 major US networks. 2. And just about no-where else in the world.

I can go to Optus, Telstra, Vodaphone, Virgin, 3 - and get a subsidised phone (even free upfront). Or I can even go to http://www.apple.com/au/iphone/buy/ and buy one - and put in whatever random sim card I like.

While googling for this comment I found that palm are looking at releasing a gsm phone soon - that might change things - but for now - the iPhone has a major advantage in carriers - it's called GSM.

[sp332]

The latest Hak.5 episode (The Content-Free Episode http://www.hak5.org/episodes/episode-526 - Skip to 9:30) has instructions to fix this.

Hint: it's a MiFi http://www.engadgetmobile.com/2009/05/13/verizon-mifi-2200-r...