Apple 2007: The iPhone Bet

Situation

It is early 2005. Apple has just passed 50 million iPods sold and dominates the portable music player market with a 75%+ share. Revenue for FY2004 hit $8.3 billion, up 33% year-over-year, driven almost entirely by the iPod and the iTunes Music Store. The Mac is profitable but a rounding error in the PC market.

Steve Jobs is watching three threats converge:

1. Mobile phones are eating the iPod. Every carrier wants music on phones. The Motorola ROKR — a collaboration between Apple and Motorola — is a disaster (Jobs calls it "a bag of hurt"). If music goes to phones, the iPod's core function disappears.
2. Smartphones are ugly and broken. The BlackBerry dominates enterprise email. Nokia owns the global handset market at ~35% share. But every smartphone requires a stylus, a hardware keyboard, or a carrier-imposed UI that is years behind desktop software. The experience is painful for normal people.
3. The internet is going mobile. Google is working on mobile search. Yahoo has mobile email. Whoever owns the mobile internet interface owns the next decade of computing.

Jobs has two internal prototypes under secret development by 2005: a touchscreen tablet (the "iPad" predecessor) and a modified iPod with phone capability. He decides to kill the tablet and focus entirely on the phone — a decision that will delay the iPad by four years.

The core technical bet: replace every physical button with software. One screen. No stylus. A phone that is also a computer. The Motorola fiasco taught him that he cannot co-design with a carrier or a hardware partner. This has to be entirely Apple — hardware, software, OS, application layer.

The decision moment

It is January 3, 2007 — six days before the Macworld keynote where Jobs plans to announce the iPhone publicly. The product is working, but barely. Engineers are still fixing bugs 72 hours before the demo. Three decisions remain unresolved:

1. Carrier exclusivity. Cingular (soon to become AT&T) has offered a 5-year exclusive deal in exchange for an unprecedented agreement: Apple, not the carrier, controls the software, UI, and pricing. No carrier has ever agreed to this. Verizon refused. Is Cingular the right partner?
2. Price point. The 4GB model at $499 and 8GB at $599 with a 2-year Cingular contract. This is 3-5x the price of a standard smartphone. Jobs wants to price it as a premium computer, not a commodity phone. Every carrier analyst says this will kill volume.
3. Third-party apps. The iPhone will launch with no App Store, no third-party native apps. Developers who want to build for the iPhone will use the web browser. Jobs does not want unknown code running on a device that is also a phone. Is this the right call?

You are Steve Jobs.

Key financial datapoints (for reference)

Frameworks invoked

• Blue Ocean Strategy. The smartphone market in 2007 is not a red ocean — it is a broken ocean. Nokia and RIM compete on features (more buttons, better email). Apple redefines the product entirely: a pocket computer that also makes calls.
• Jobs-to-Be-Done (Christensen). Consumers don't want "a phone." They want to communicate, navigate, entertain, and access information — jobs being done poorly by all existing devices simultaneously.
• Platform Strategy. The long game is not the device — it is the platform. App Store (launched 2008) converts the iPhone from a product into a marketplace. The device margin subsidizes the ecosystem.
• Vertical Integration. Apple controls chip (A-series), OS (iOS), hardware design, retail (Apple Stores), distribution (AT&T exclusive), and the digital marketplace (iTunes/App Store). Each layer is a moat; no competitor can replicate the whole stack.

Discussion questions

1. Jobs chose AT&T exclusivity over Verizon's larger network because AT&T gave Apple full software control. Was the network quality trade-off worth the control? How do you model that?
2. Launching without an App Store meant developers couldn't build native apps at launch. What was Jobs protecting, and was the risk worth it?
3. At $499-$599, the iPhone was priced as a luxury computer, not a mass-market phone. What happens to Apple's market position if the price point prevents mainstream adoption?
4. Nokia had 35% global market share and factories in 15 countries. Why couldn't Nokia copy Apple's model once the iPhone launched?
5. The iPhone also cannibalized the iPod. How do you value that cannibalization against the new market being captured?

The real outcome (revealed at session end)

Jobs announced the iPhone on January 9, 2007 at Macworld. The crowd reaction was unlike anything in tech product history. Phones were never the same.

First year: Apple sold 6.1 million iPhones — below the 10M target, but the AT&T exclusivity and $499 price point proved less damaging than analysts feared.

2008: Apple dropped the price to $199 (subsidized), launched the iPhone 3G, and opened the App Store with 552 apps on day one. 10M units in the first year of 3G.

The App Store thesis: Within 18 months, the App Store generated more economic value than Apple had predicted. By 2010, developers had earned over $1 billion from App Store sales.

Nokia's response: Nokia CEO Olli-Pekka Kallasvuo called the iPhone "a niche product." Nokia peaked at ~40% global market share in 2008 and filed for bankruptcy of its mobile division by 2013, selling it to Microsoft for $7.2B.

RIM's response: Co-CEO Mike Lazaridis in 2007: "The economics of the iPhone don't make sense." BlackBerry peaked at 20M subscribers in 2012; by 2016 it had stopped making hardware.

Long-term: The iPhone became the highest-revenue product in business history. iPhone revenue alone in 2023 was $200.6 billion — larger than all of Apple's revenue in 2011.

Sources

• Walter Isaacson, Steve Jobs (2011).
• Apple earnings releases Q1-Q4 2007.
• Horace Dediu / Asymco analysis of iPhone launch economics.
• Tony Fadell, Build (2022).
• Wharton School case: "Apple's iPhone Launch Strategy" (2009).