INNOBLOG

Yesterday, Apple unveiled its long-awaited iPhone. Just before the announcement, we noted in an Innovators Insight that, as a late entrant in a category teeming with deep pocketed incumbents, Apples best chances of success came from taking a highly disruptive approach (read the Insight here). While theres a lot to like about the iPhone, the failure to move in a truly disruptive direction might inhibit Apples long-term success.

What we like about the iPhone
On Tuesday, we wrote that Apple needed to improve its cellphone offering along a dimension of performance that is not-yet-good-enough for some significant group of consumers. The iPhone clearly attempts to do so. Apple has set out to use its design wizardry to re-imagine how people can access both the Internet and a variety of entertainment content while on the go. Pundits predict that the stunningly clear, large iPhone screen and its unique sensor-based interface will provide a truly distinctive user experience.

CEO Steve Jobs said that Applewhich also yesterday dropped the word "Computer from its name to reflect the companys growing focus of a range of consumer electronicshopes to sell roughly 10 million cellphones by the end of 2008. Those expectations are high, but not unreasonable, demonstrating that Apple recognizes some of the challenges it is facing.

Finally, the iPhone is unquestionably cool. The thin design, novel screen interface, and cutting-edge touch-sensing technologies drew wide praise. The iPhone is positioned to be a highly aspirational product for the digerati.

Apples radical designthe iPhone has no keyboardprobably wont appeal to demanding business users who are used to plunking out messages on raised keypads. And thats not necessarily a bad thing: Instead of targeting the most demanding market tier, Apple is trying to appeal to entertainment-seeking consumers who want a better way to access content on the go.

What we dont like about the iPhone
Cramming in as many advanced features as Apple did resulted in a relatively high price for the device. Given that Apples design choices might knock out demand from business users, a $500 or $600 price tag is quite steep (discounts from wireless provider Cingular might knock that price down). Jobs pointed out that the iPhone is cheaper than purchasing a high-end cellphone and a separate iPod nano, but the high price tag will undoubtedly scare off some consumers. Some analysts already have argued that Apple actually set an artificially high price tag to minimize cannibalization of its profitable iPod line.

Secondly, Apple decided to be an arms-length provider to Cingular, Americas leading mobile operator. This approach minimizes Apples risks and allows it to get to market quickly, but it also provides fewer degrees of freedom for Apple to offer a truly breakthrough offering. Cingular is far from a perfect operator. Consumers accustomed to a seamless experience with Apple products might find themselves disappointed with the bumps and bruises that come from interacting with Cingular.

Additionally, Apples device will not initially be compatible with so-called 3G wireless networks, which provide the fastest available download speeds. This means that, despite Apples snazzy interface, users will still have to put up with relatively slow access to the Internet, unless they happen to be in an area with public WiFi access. Pundits expect that the iPhone will eventually have higher-speed capabilities, but in the short term consumers wont really enjoy a truly distinct wireless Internet experience.

Apple deserves a lot of credit for bring its reliably fresh perspective to mobile phones and for really thinking about how to simplify the user experience. However, the iPhone is not a perfect device. As such, some of its technological tradeoffscombined with the high price pointmight inhibit it from finding a real market sweet spot.

More fundamentally, Apple is following a sustaining strategy against deep-pocketed incumbents that have a lot to lose if the iPhone truly takes off. History teaches us that the odds that Apple creates anything akin to the iPod in terms of profits and market dominance are as slim as its new phone.

A reasonable comparison is Microsofts xBox gaming console. Like Apple, Microsoft was a late entrant in a well developed category. Microsoft has created a strong position in the market, but only after losing billions of dollars for several years. Apples approach means that it will have to spend heavily to market and constantly improve its product if it hopes to successfully ward off competitors.

The iPhone will undoubtedly make a splash, but is unlikely to create a profit pool for Apple that is anywhere comparable to the one created by the iPod. Of course, that might be okay if Apples efforts to move into home entertainment succeed, but thats a topic for another day.