February 15, 2008

What is Apple doing with the iPhone?

Bruce Schneier has a good article from the technical side of "lock-in" in this month's Crypto-gram. If you wish to understand the forces on technology suppliers like Apple, it is a good read. It finishes with:

As for Apple and the iPhone, I don't know what they're going to do. On the one hand, there's this analyst report that claims there are over a million unlocked iPhones, costing Apple between $300 million and $400 million in revenue. On the other hand, Apple is planning to release a software development kit this month, reversing its earlier restriction and allowing third-party vendors to write iPhone applications. Apple will attempt to keep control through a secret application key that will be required by all "official" third-party applications, but of course it's already been leaked.

And the security arms race goes on...

What Apple are doing is neither full lock-in nor full open. That's the confusion. Why?

The answer is from marketing, and more specifically, the product life cycle or product roll-out economics. Let's assume that there is no competition for the iPhone (as this makes it easier to model).

In a rollout of a new innovation, there is a huge problem with market understanding. The product can't sell because nobody understands what it is about. So the need is critical for what is called "early adopters" which are the relatively clever, relatively rich people who buy any toy for the fun of it, and for the "first on the block" effect. These are around 1-3% of the market, depending.

Then, these early adopters will, if the product is any good, sell it to the rest of the people around them. Your sales force is your early adopters. So this means it is critical to please the early adopters, because without them, the product won't sell.

Who are the early adopters for any new and expensive phone? Phone hackers is one good answer. (Business geeks is another.) People who hack phones won't achieve too much but they tend to be quite influential as their sex-appeal is high to the media and their knowledge is wisdom to the public. Their enthusiasm sells phones.

The challenge for Apple is revealed. They have to attract the hackers, but not so much as to lose control. The mass market wants lock-in because they want a simple solid product with few choices. The early adopters want open, the reverse. Apple therefore walks the line between the two.

So far successfully. Of course, this whole model gets much more complicated when there are competitors, which is why watching the google phone and the gnu designs are interesting ... there you will see the Apple model being challenged.

But for now, it is fairly clear that this is the strategy that Apple is following. And, in the future, Apple will simply wind the lock up a bit. Not fast, just fast enough to keep the mass market locked in, and the early adopter enthusiasm keen.

It's good stuff, my hat off to Apple, this is what strategic marketing is all about. The only thing better than watching a great strategy unroll is creating one :)

Posted by iang at February 15, 2008 08:14 AM | TrackBack
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