The future of Apple

By Arik Hesseldahl and Peter Burrows

updated 6:40 p.m. ET Jan. 10, 2007

If there was anything on the minds of higher-ups at wireless handset manufacturers on Jan. 9, it was very likely what to take for a headache — a pounding one caused by a new competitor, the company formerly known as Apple Computer.

In unveiling a device called the iPhone — the subject of rumors and speculation for years — Apple also officially changed its name, dropping the "Computer" that had been part of the moniker since the computer maker was founded in 1976. At the same time, the newly incarnated Apple stormed into new markets, turning the biggest names in cell phones — Nokia, Motorola, Research In Motion, and Samsung — into overnight competitors.

The new name and device represent Apple's strategic shift away from its origins as a personal computing company that has at points struggled both to survive and to set the computing world's agenda. The shift was enabled by the five-year-old iPod line of digital media products, which have produced enormous sales and profit growth, propelled Apple into the forefront of the digital media age, and now leave it poised to set the wireless phone industry on its ear. "This is a day I've been looking forward to for two and a half years," Apple CEO Steve Jobs told the capacity crowd at the MacWorld Expo trade show in San Francisco. "Every once in a while a new product comes around that changes everything."

It certainly reflects the change in Jobs' thinking from a half-decade ago, when Apple had embarked on a turnaround fueled by new iMacs. Asked by BusinessWeek in 2000 whether he'd stray into new areas, Jobs said it was possible — but not so far afield as the cell phone market. There were plenty of huge players that already had that industry wrapped up, he said at the time. Some of those players may soon wish Jobs had kept his promise.

In an address that easily overshadowed news from the much larger International Consumer Electronics Show in Las Vegas, Jobs revealed the iPhone, which combines a wireless phone, a music and video player, and a mobile Internet browsing device into a single handheld unit. He also announced a Feb. 1 ship date for Apple TV, an attachment for TVs that will wirelessly grab and play movies and other digital media purchased on Apple's iTunes Store via a Mac or PC.

Apple's stock added more than $7, or 8%, to close at $92.57 Tuesday. Meanwhile RIM dropped by more than $11, or 7%, settling at $131. Palm, which makes the popular line of Treo smartphones, dropped 84 cents, or more than 5%, to $13.92. Motorola and Nokia also slipped more than 1% each.

The iPhone won't be available until June, but its effects will be felt long before then. Eager consumers may hold off on buying new high-end phones in anticipation. And when it does launch, the phone will be available only from Cingular Wireless, owned by AT&T. The phone will be released in international markets including Europe and Asia in 2008. Jobs said in his remarks that Apple's goal will be to sell 10 million units by 2008, which would account for roughly 1% of the phones that will be sold this year. It's an aggressive goal, but hardly audacious, given that Apple will pass the 200 million mark in iPods sold sometime this year.

Embedded OS X
But it is Apple's effect on the somewhat smaller market for "smartphones"—phones that make calls, handle e-mail, and include organizational features such as calendars and to-do lists—that may prove particularly onerous for companies like RIM and Palm. Last year, RIM said 7 million people were using its BlackBerry wireless devices globally, and its latest handheld, the Pearl, includes a camera and music-playing capabilities. Palm's latest device, the Treo 750, was released on Jan. 8.

Market research firm M:Metrics estimates that fewer than 6.2 million smartphones were in use in the U.S. as of the end of November. Of those, 2 million were based on Microsoft software, 1.76 million were BlackBerries, 1.72 million were Palm devices, and some 669,000 ran the Symbian operating system from London-based Symbian Limited, which is jointly owned by several companies, including Nokia, Ericsson, Siemens, and Panasonic.

Unlike other smartphones, the iPhone will have no actual keyboard but will have a touch-sensitive screen from which users will type messages, launch various applications, dial phone numbers, and manage other tasks. The screen measures 3.5 inches diagonally, while the body is 4.5 inches high, 2.4 inches wide, and less than a half-inch thick. Its operating system software is a slimmed-down version of Mac OS X, which had been the subject of a final round of rumors that hit the Internet in the final weeks before the device's release.

Known in the computer industry as an embedded operating system — because it's not intended to run directly on a personal computer or serve r — this represents nothing less than a radical shift for Apple. An embedded version of Mac OS X could conceivably show up on any kind of wireless handheld device in the future, providing the guts to drive whatever newfangled user interface Apple comes up with for a given market. A wireless phone may be only the first step of a longer-term strategic thrust into all manner of consumer electronics devices, some more sophisticated and involved than the iPhone, some less so. "I firmly believe this is the first of many products," says Shaw Wu, an analyst at American Technology Research in San Francisco. "And I would not be surprised to see more products in the next few quarters and the next few years."

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