iPhone Turns Ten

Today marks the tenth anniversary of Apple launching the iPhone. It would be an understatement to say that the iPhone has changed Apple and the broader mobile industry. The iPhone fundamentally altered the way Apple views the world and measures ambition when contemplating new industries to enter. At the same time, Apple's steadfast approach to controlling both iPhone hardware and software ended up being a bet that is still giving mobile competitors headaches a decade later. 

The Numbers

There are three sets of numbers that stand out when thinking about ten years of iPhone. 

Unit Sales

On a cumulative basis, Apple has sold 1.2 billion iPhones to date. The magnitude of this number is difficult to grasp and put into context. Prior to launching the iPhone in 2007, Apple had sold approximately 180M devices since being founded in 1976 (70M Macs and 110M iPods). Assuming Apple is able to ship at least 200M iPhones per year for the next few years, Apple is on track to sell its two billionth iPhone at some point in 2020.  

Exhibit 1: iPhone Unit Sales (cumulative)

Revenue

With an average selling price (ASP) exceeding $600, more than one billion iPhone sales translates to $743 billion of cumulative revenue. Apple is on track to report one trillion dollars of revenue from iPhone sales by the end of 2018. Even more remarkable, the iPhone's evolving role in our life has led to iPhone ASP increasing as time goes on. The probability of Apple unveiling the first $1,000 iPhone SKU in the U.S. this coming September is quite high.

Exhibit 2: iPhone Revenue (cumulative)

Profit

Apple has a monopoly on smartphone profits. Assuming an average gross margin of approximately 45%, Apple has earned approximately $330 billion of profit from iPhone over the past ten years. On a net income basis, the iPhone has brought in 1.5x more profit than the combined profits of Amazon, Facebook, and Google during the same time period.

Exhibit 3: iPhone Gross Profit (cumulative)

iPhone Lessons

The more intriguing impact from ten years of iPhone cannot be measured or quantified by sales, revenue, or any chart for that matter. Instead, the iPhone contributed quite a bit to preparing Apple for future pivots into new industries. Along those lines, there are three specific items that stand out when it comes to lessons Apple learned from the iPhone over the past 10 years: 

• Ambition
• Control
• Platform

Ambition. Prior to the iPhone, Apple was primarily a computer company selling Macs and Mac accessories. The company had only recently begun to see broader consumer appeal with iPod. Apple had no expertise in mobile telephony prior to developing the iPhone. On paper, Apple shouldn't have been able to come up with something like iPhone. The company just didn't have the required core competencies for selling a great phone.

Former Palm CEO Ed Calligan's now infamous words regarding Apple's entrance into the phone industry were based on the belief that Apple would never be able to learn as much as established phone players:

We've learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They're not going to just walk in.

There was one glaring hole found in Calligan's logic. Phones were going to become computers. Instead of Apple worrying about becoming a good phone maker, phone makers should have been worrying about becoming good computer makers. 

The innate desire to rethink a gadget that many people had trouble using drove Apple into smartphones. Of course, the fear of smartphones one day impacting iPod sales also pushed Apple management. This led to a more than two year process during which Apple learned quite a bit about phones, mobile carriers, and itself. The learning didn't stop after launching the iPhone in 2007. In subsequent years, Apple learned, at times the hard way, about the ins and outs of mobile telephony. Over time, Apple's long-standing strengths in building computer hardware and software gave the company its advantage over the Blackberries and Nokias of the world. 

Today, Apple's ambition continues to be underestimated. Apple is approaching new industries in a way that is similar to how it looked at the mobile phone arena in the mid-2000s. The Apple Watch was tasked with rethinking wrist watches. Apple had to learn quite a bit when it came to fashion and luxury in order to get people to want to wear Apple gadgets. Management now has its sights set on the transportation industry, a sector that hasn't seen much change in 100 years. In addition, Apple is moving into the health and medical arena at an incredible pace.

Just a few years ago, this kind of product pipeline would have been labeled an ambitious pipe dream for Apple. Something changed over the past 10 years. The iPhone showed Apple how a single product with a rethought user experience can change an entire industry to make it much more hospitable for the company. At this point, it is fair to say that Apple is willing to compete in any industry as long as there is room for someone to rethink the user experience. The same couldn't be said prior to iPhone. 

Control. The iPhone taught Apple quite a bit about the power found in controlling one's destiny. While the iPhone did not introduce the company to the idea of controlling both software and hardware, the iPhone played a major role in showing Apple benefits associated with owning the core technologies powering a device. Some of the early bets Apple placed in this regard, such as the P.A. Semi acquisition in 2008, are still paying dividends.

Here's Tim Cook talking to Businessweek following the WWDC keynote earlier this month:

Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO. Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the ­simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, “insanely great,” that we should own the proprietary technology that we work with because that’s the only way you can control your future and control your quality and user experience.

It says a lot that Cook looks at owning core technologies as an inherent aspect of Apple's culture. The iPhone contributed quite a bit to that reality. There is now an increasing amount of evidence pointing to Apple working on its own GPU solution in addition to LTE modem chips. We are moving to the point at which it will no longer be enough for Apple to just own the most important components powering a device. Rather Apple will need to come up with its own solutions that combine the most important components to power increasingly smaller, wearable gadgets. 

What were once hardware and software bets that gave Apple a five-to ten-year head start on the competition are now turning into technological bets that will give the company advantages measured in decades. 

Platform. While Wall Street remains infatuated with iPhone sales, Apple continues to see a strengthening iOS platform thanks to robust new iPhone user growth and an engaged developer community. The iOS platform has afforded Apple a new way to think about the world. There are signs of Apple management being well aware of the power and influence found with iOS.  

Here's Eddy Cue in August 2016: 

[Apple] can’t be everything. One of the reasons we’ve been highly successful is that we focus. We can’t be great at everything; nobody’s great at everything. I mean, come on. So, if you want to be great at something, you have to focus and do a few things. We’ve been lucky. We’ve had a few, and not just one. That’s the only way we know how to work. So we don’t want to be Amazon and be Facebook and be Instagram and so on. Why? Or Uber. Why? I think it’s awesome that Travis [Kalanick, Uber’s CEO] and his team have done Uber on our platform. It would not exist without our platform, let’s be clear. But great for them for thinking of that problem, and solving it. We would never have ever solved that problem. We weren’t looking that way. We would have never seen it.

It's easy to read Cue's response as Apple taking responsibility for Uber's success in rethinking personal transport. However, Cue is correctly pointing out that the iOS platform served as the breeding ground for innovative ideas and business models. With the iOS platform, Apple has played a major role in creating a number of new industries. In the coming years, management will determine which parts of the iOS platform are worth Apple playing in themselves. Management has already determined a need to play in music and video streaming in addition to messaging and mobile payments. It's not yet clear if ridesharing or another larger industry will one day make sense for Apple. Even more importantly, the iOS platform has given Apple a fighting chance to create the most attractive platforms for third-party developers around a new suite of products including Apple TV (tvOS) and Apple Watch (watchOS).

Defining Legacy

A great deal of iPhone's success can be traced back to the fact that Apple bet on a very big product category at just the right time. The smartphone redefined a computer for billions of people in just a few years. 

While some people are convinced that nothing will match the smartphone in terms of its influence on our lives, such prognostications end up selling future innovations short. Odds are very good that a new device, or series of devices, will one day serve as a viable smartphone alternative. It's likely that these new devices will achieve even greater market penetration than smartphones.

Regardless of where technology is headed, we are already starting to get an early glimpse of the iPhone's legacy. The iPhone spawned an industry that redefined a computer, transforming it from a niche tool into a mass-market phenomenon. For Apple, the iPhone went further than any other Apple product before it in terms of making technology more personal. The iPhone was Apple's first genuine mass-market product. All of this occurred in just ten years, which ends up being the most remarkable part of the story. 

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