Monday Note

No, no, not Steve Jobs but an even higher entity smiling upon the company. As I hope to show, Apple’s hard work years ago is now about to pay huge unexpected dividends on the iPhone. When the iPhone first came out of Steve Jobs’ quasi-divine hands in January 2007, it was a hack, the result of clever handcrafting by Apple engineers, a crazed last-minute rush to the show deadline. As such, it lacked the basics of what we call a platform, an industry term of art – or BS. Here, a platform means a combination software, or hardware, or both on which software developers build applications. A platform requires documentation, where the building blocks are, what they do, how to use them. The platform also comes with tools, software to build and test the applications. Last but not least, a platform implies some stability, meaning it works often enough, and it’s predictable, it doesn’t take brutal turns that undo the work of developers.

Early 2007, the iPhone had none of these attributes. So, Steve resorted to proven industry maneuver: If you can’t fix it, feature it. No need for “native” (meaning running on the iPhone itself) applications. This is the New World of Web 2.0, bleated the propagandastaffel. Use the iPhone’s browser (the best in the business, it helped immensely) to run server-based applications. No need to download anything, centralized maintenance, easy updates… The faithful heretics would have none of that and a new game started. One week the hackers managed to break Apple’s barriers preventing the installation of native applications. A few days later Apple issued an update to the iPhone firmware that broke the hacks.

Let’s pause for a lemma, a building block in the story: from day one, the iPhone had something no competitor had: iTunes. Apple made having an iTunes account a sine qua non requirement for using an iPhone. For downloading songs and movies, just like its younger brother the iPod? That and more. With iTunes you backup your iPhone, you bring it back to “factory settings”, helpful if a hack “bricked” it, meaning if it became as lively of a brick, you install software updates, most of which defeated the impudent hacks.

Moving forward, the pressure was building: Apple made a very smart move by using a trimmed down version of OS X (the Mac’s software… platform) as the software engine for the iPhone. We know and love OS X, said the developers. Mr. Jobs, tear down that wall! It now looks like Google’s Android helped Dear Leader make up his mind. Rumors were mounting: RSN (Real Soon, Now), Google would announce a free, open-source platform for smartphones. Just as Steve smartly turned around and touted Intel processors after years of expounding the superior PowerPC architecture, on October 17th, 2007, he stood up and announced the SDK (Software Development Kit) for the iPhone. Availability by the end of February 2008.

The belief in Providence benignly smiling on Apple now comes in. In 2001, Apple sweated the servers, the legal agreements with publishers, the one-click payment system, the client software on PC and Mac. All this to create the still-unequaled iTunes experience. Now, one bright 2007 morning, they have an epiphany: Songs are zeroes and ones. One click and they land in a bin, a directory in the iPhone. But applications are also strings of zeroes and ones. If we put up iPhone applications in the iTunes store, they land in a different bin inside the iPhone but the one-click purchase and download is the same. Halleluiah! All the work to build the iTunes business now pays off for the applications. We must be The Chosen Ones. This is no small detail. Today, if you’re an independent software developer, writing good code is the easy part. The Evil S&M, Sales and Marketing, await you. Shelf space, physical or on the Web, is very expensive. Setting up download and payment systems isn’t for the faint of wallet either. With the iPhone, Apple removes (most of) these hurdles. All you have to do is write good code.

Picture the young developer still living in his mother’s basement, he sells 50,000 copies of his work for $10, the price of an iTunes album. Apple keeps $3, he gets $7. Times 50,000, he makes $350,000 and can now pay rent to his mother and buy her a car. (For perspective, the current forecast is for between 30 and 45 million iPhones sold by the end of 2009.) Picture also the competition. No one else has such a well-oiled, widely known system to add applications to a smartphone as Itunes. (Google says they will eventually offer one for Android.) This is a billion dollars business. Actually, $1.2 billion in 2009, according to Gene Munster a Piper Jaffray analyst. (For a healthy counterpoint, see the snarky comments on TechCrunch.) Regardless, the arrival of native applications on the iPhone is a big event, one made possible by an unintended – and rather amusing – consequence of the iTunes music distribution system. How will this be written up in books and Harvard Business School case studies? –JLG

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