iPhone Followup - Innovation in a Box

My initial iPhone article highlighted why the iPhone will not be a success in its first incarnation. Make no mistake though, the introduction of the iPhone will revolutionize the mobile telephony market. Let's answer some of the criticisms of the most innovative mobile handset in the history of mobile telephony:

Drawback #1: The lack of a keyboard with real keys is a drawback
Answer: There is no reason why somebody couldn't design a very sleek bluetooth keyboard is there?

Drawback #2: The AT&T Edge network is slow
Answer: People use mobile phones a surprising amount in their own home and the prevalence of free WiFi will continue to grow (including city networks). Not only that, but I'm sure AT&T will look to build a faster network, or partner with a WiMax network at some point (or at least offer it as an option).

Drawback #3: You can't assign a song as a ringtone
Answer: Just wait, it's coming...

That's the thing, unless the drawback is a hardware drawback like the camera they chose to go with, it can be added or fixed using downloaded software updates.

The most important impact that the iPhone has the potential to have, is to finally (dare I say finally again for dramatic effect), finally tip the balance of power in the industry to relegate the mobile telephony service providers to their deserved utility status. The iPhone has the potential to end the stranglehold carriers have had on application innovation and make the other carriers open up. Once the carriers begin to cooperate and actually help next generation handsets succeed, then we will see iPhone like features come to other carriers via other handset manufacturers and raise the mobile telephony experience for everyone.

If we are all lucky, then maybe at some point we will see Apple, and the competition that will inevitably emerge, gain the freedom to allow third-party software application developers to build direct OS applications and not just web applications.

Finally, the network operators need to accept the fact that it is bad for everyone to continue to try and control innovation in mobile telephony. The network operators need to accept that they are utility companies first, and potentially software companies second. The network operators have a big advantage over the handset manufacturers, and that is direct access to customers. They should leverage this access to uncover problems that need solutions and build a world class software organization around this access to seek their non-commodity profits and competitive advantage. If the network operators use their direct access to the customer to build better applications for the Smartphones they support, and stop trying to stifle innovation that they can't control, then we all win.

I look forward to owning an iPhone v3 in late 2008 or early 2009 for $299 and $40/month for unlimited data, unlimited text messaging, and 1000 voice minutes!

The Growing Housing Divide

I was speaking with a friend of mine recently and he brought up an interesting point. He asserted that there was a widening gap in home prices between where people want to live and where people have to live. How else can you explain the housing price fall in most of the country while places like Seattle continue to have rising prices?

Let's examine this for a moment. How could home prices be increasing in Seattle while falling elsewhere? The first answer is that there are "lies, damned lies, and statistics." You may have heard this quote before, but in this case it comes down to home price trends being based on median sale price comparisons. The subprime mortgage fiasco, rising interest rates, and tightening credit policies are for the most part pinching off the demand at the low end of the market. Fewer people are now seeking or in fact qualifying for a loan. So what's the result?

If the low end of the market contracts, while other areas of the market remain strong (or contract less), then the median home price shifts up. So despite inventories of homes for sale rising by more than 50%, and the number of home sales falling while the number of condo sales is increasing, median home prices still continue to go up. Why does the middle to upper end of the market remain stronger?

The answer is that while certain labor-intensive or lower skill job markets contract in the area, high technology companies like Microsoft and Google, and companies in other industries like bio-technology are still looking to hire more people (if they can find them). With unemployment under 5% in the area, most of these new hires for expanding knowledge-intensive industries in the Seattle area are likely to come from out of the area. As a result, the metropolitan area continues to grow and demand for housing increases because these people will need a place to live. Many of these people come from other high-cost places like New York, San Francisco, Los Angeles, and San Diego and so can afford to add to the demand at the middle to upper end. So what's happening in Seattle with some industries contracting while others grow is a microcosm of what is going on around the country, and the result is that stratifications between different American real estate markets are increasing.

No longer are people moving to places like Detroit for high paying unionized factory jobs. Now people are moving to places like San Francisco, Los Angeles, and San Diego for high paying technology and bio-technology jobs in industries that continue to grow while others continue to contract. Places like Seattle that are relatively cheap in comparison to San Francisco or Los Angeles, will continue to increase until they are just as expensive.

We have yet to see the full effects on our society of the price run-ups in these areas, as many people who lived in these talent meccas before the price run-ups occured, have been protected from them. The real effect will be seen in changes experienced by the younger generation. Saddled with student loans, even our more upwardly mobile youth in these communities will be forced to live at home longer, share rental housing longer, live in rental housing more of their lives in general, start families later, be forced to have someone else raise their children, and ultimately face a 25,30, or even 50 year mortgage when they do manage to buy a home.

So, as the rest of the world catches up and drags down the rich countries as they do, will our children have any hope of having the same or better quality of life than what we enjoyed?

The easy answer looking at all of this would be "No!", but with bold and strategic leadership, that doesn't have to be the case. We need leaders with courage, leaders with a long-term vision, but more importantly leaders that can make voters invest in the long-term.

We need government to become more innovative, not just in how they plan to provide the conditions to keep our communities competitive, but more importantly in finding ways to sell its citizens on investing in reshaping our cities now so the world's brightest will continue to aspire to come to America. The time is now for cities to think strategically, for great business minds to provide innovative ideas for improving their communities, and our country's long-term viability as a leader in creativity, entrepreneurial spirit, and quality of life. I've got my hand up! Is anyone listening?

The Evil Downside of Gift Cards

This past holiday season I saw probably one too many articles trumpeting the value of gift cards to retailers and how they are a great thing for retailers. My skeptic side starts coming out as I see article after article appear, and I have to start asking "Is the increasing prevalence of gift cards as a holiday gift (primarily Christmas) a good thing for retailers?"

First, let's look at timing:

Gift cards are primarily purchased before Christmas in lieu of a more than likely full-priced gift. The gift card is then held by the purchaser for a week to a month before given to the recipient on Christmas (or slightly before). This means that the recipient cannot possibly purchase something before Christmas when average discount levels are much lower and instead will likely redeem the gift card immediately after Christmas (or within a couple of weeks) when the discount levels are much higher. So, by encouraging people to purchase gift cards, the retailer is actually giving away margin based on average discount levels.

Next let us look at psychology:

There are two psychological trends potentially at work in purchases made with a gift card. The first is the gift giver versus conscious shopper mentality. A gift giver is potentially less likely to give a discounted gift because they don't want to feel that they are giving the recipient a cheap gift, or for the recipient to perceive it is a cheap gift because they might have visibility to the fact that it may have been on sale.

The conscious shopper mentality comes out in people who think "Now I'm going to get as much out of this gift card as possible." The conscious shopper mentality will result in the consumer ultimately acquiring more highly discounted goods than the gift giver likely would have purchased. Where the gift giver looks for perceived value (often including paying a higher price), the conscious shopper looks for value for money (often including paying a lower price).

There is one more piece of psychology related to the conscious shopper, and that is the notion that to a conscious shopper actually buying a gift card seems like a bad deal "Everything else in the store is discounted except gift cards, so gift cards are a "rip-off" or a bad deal so I won't buy one." This puts a cap on a retailer's potential gift card sales unless they are willing to discount their gift cards during their promotional sales as well.

We will conclude this section with a piece of psychology that may lie in the minority, but still warrants merit. For some people gift cards don't seem like real money and people that would otherwise be frugal and seek discounts might become luxury shoppers and buy something at full price that they wouldn't otherwise buy. Retailers of course hope that this is the majority, and for their sake, let's hope they are right.

Finally, let us look at competition:

Gift cards are seen as a retailer's last line of defense against "walking" a potential customer. The potential customer has been all through the store and hasn't found quite the right thing and so you try and convince them that a gift card fits the bill. And if the customer doesn't buy the retailer's gift card, there is a real danger that they might buy some other retailer's gift card, so now they are offering incentives. Buy a $100 gift card for retailer X and get a $10 gift card for yourself. Buy a $100 gift card for restaurant Y and get a $20 promotional gift card for yourself. Sometimes they are using gift cards themselves as an incentive (Spend $50 before December 24 and receive a $10 gift card). So instead of offering a discount on the current full-priced or less-discounted purchase, they are giving you money to come back and spend when everything is marked down to clear it out.

In summation:

1. Gift cards are going to have to be increasingly discounted to be sold
   
2. With most gift cards being sold during the winter holiday season, timing results in the retailer moving goods after the holiday at a higher discount
   
3. The shift in psychology that accompanies the gift card changing hands, results in the holiday purchase being put in the hands of a more cost-conscious, bargain-hungry consumer
   
4. Three strikes you are out!
   
   • Oh, wait, it's a prisoner's dilemma, and retailers are going to be forced to take this bad deal and try to make it up elsewhere

Why the iPhone will not succeed - Yet

The new Apple iPhone is set to launch on June 29, 2007 and the press and investors are making it a darling. Investors have run Apple's stock price up from about $85 per share before its announcement to $125 per share recently, but the iPhone still will not succeed - at least not yet.

The problem with all this media hype is that it ignores the simple fact that the iPod was not a success. I mean, it was eventually, but it was far from a success out of the gate. "Blasphemy" you might say, "everyone has an iPod" you might say, but the fact is that the iPod was not successful until about the third generation. The iPod was not a success until its killer application was available to the masses. The iPod was not a success until the Windows version of iTunes came out. Then and only then, did iPod sales skyrocket and install the iPod as a cultural icon.

It's the software that made iPod a success - the Windows version of Apple's jukebox software that enabled easy synching and organizing of songs. Apple of course has noticed, and this time around they have decided that Safari (Apple's web browser) will be the iPhone's killer application. As a result, Apple has launched a Windows version of its Safari web browser. This is to help facilitate development of 3rd party applications for the iPhone. To the groans of developers who were hoping to be able to write stand alone applications for the iPhone, Steve Jobs announced at Apple's Worldwide Developer's Conference that the only way to write applications for the iPhone was going to be to build a browser-based application. So, having a Windows version of Safari expands the universe of people with the ability to build and test web applications that will work on the iPhone. Apple may have noticed that cross-platform software is key to iPhone's success, as it was for the iPod, but Apple is still wrong...

While it will help to give developers using Windows machines the chance to build Web applications that will work on the iPhone, Safari is not the cross-platform application that will make the iPhone a success. Instead the killer application (once available across Mac/Windows/iPhone) will be iChat AV. The iPhone already has H.264 Compression hardware on-board that it is using for a YouTube application and unless I'm missing something there is no reason that iChat AV on the iPhone wouldn't be possible. A cross-platform version of iPhoto would also help the phone gain adoption, but it will be video iChat, and a hardware revision or two, that will lead to ultimate success for the iPhone. Cross-platform iChat AV and maybe some great next generation Bluetooth headphones, and Apple will finally be on its way.

Look for the iPhone to be a success in its third revision (late 2008 or early 2009) with these key features:

• 5-megapixel swivel camera (or paired with a 2-megapixel screen-side video-enabled lens)
  
• Video iChat capability (iChat AV)
  
• Next generation Bluetooth
  
• A slightly bigger screen (every millimeter counts) - if the bevel can be reduced
  
• 16gb or 32gb of flash memory
  
• Hopefully a faster 3G or WiMax network connection
  
• 802.11n WiFi
  
• Faster processor with lower power needs
  
• Improved battery life
  
• Lower price - $299 or less

Postcript

There are a few other possibilities that I don't hear anyone talking about with the iPhone:

1. One of the weaknesses of the iPod as a music player, is that it has never had a radio. But now with a network behind it (and an Internet connection), the iPhone could have access to receive every Internet radio stream that iTunes can
   
   • Reducing the viability of portable satellite radios as a competitor
   
   
2. Zune introduced the concept of music sharing. The iPod still can't do music sharing, but again, with a network behind it, the iPhone could allow users (with approval of the music labels) to send songs to other iPhones for single play or purchase.
   
   • Just imagine scrolling through your library, picking a song, picking a recipient, and clicking send. Effortless song sharing in a matter of clicks to all your friends with an iPhone, not just those nearby.
     
   • The recipient could listen to the song and then either choose to buy it or not (in which case the song would be automatically deleted from their library) and then have the option of replying to the sender by text message, and possibly even submitting a vote of whether you liked it or not.
     
   • These votes could be tabulated and shared as top ten most shared songs, top ten liked songs, and top ten disliked songs, thus creating a community and extra stickiness on either Apple or AT&T's Web site
   
   
3. People don't talk about how much easier it will hopefully be to send photos (at least to other iPhone users). I must admit that I gave up trying to send photos to my wife, even from Motorola RazR to Motorola RazR, after the first try. It was unsuccessful, and not being free, there is no way in hell that I am going to waste money trying again.