What the iPhone Needs to Keep the Android Hordes at Bay

A couple of days ago, a friend was trying to key my email address into his aging feature flip cellphone. He was muttering about how painful the process was and how stupid the phone was, and he remarked that he was getting a new phone for his birthday -- can't wait. Me, being the tech-curious guy I am, asked him what he wanted.

"I don't know," he asked. "What do you recommend?"

"Who's your service provider -- AT&T (NYSE: T), Verizon ... ?"

"Verizon."

And here's where my answer deviated from an iPhone 3GS recommendation to the new Motorola (NYSE: MMI) Droid, which is the first smartphone to be based on Google's (Nasdaq: GOOG) Android 2.0 operating system. It debuts on Verizon Nov. 6.

"Look at the new Droid. It's not an iPhone, but it's similar to an iPhone -- touchscreen -- and it's based on Google's Android operating system. Plus, it's got a slide-out keyboard. I'd say iPhone, but you need AT&T for an iPhone."

Should be a couple hundred bucks, I said, with a service contract.

Simple as That, Apple Lost Another Potential Customer

And herein lies the problem for Apple: The computer company from Cupertino has rapidly gone from smartphone newbie to market share contender and the indisputable mindshare leader. I could list a bunch of studies, show you some graphs, but jeez, why waste the time? It's the iPhone, and we know it's been kicking butt and taking names.

Yet in the course of 90 seconds, a guy who was ripe for buying an iPhone had the decision swept off the table due to a fact that Apple (Nasdaq: AAPL) has little control over: The service provider. If a customer doesn't have AT&T and doesn't want to switch, the iPhone might as well not exist.

Meanwhile, there's the Droid. I haven't held one yet, but it's already stacking up to be an impressive device -- it's one of the thinnest full QWERTY slider phones available, it has a handy four-way navigation pad on the slide-out keyboard (read: could be handy for games or apps), it sports a five-megapixel camera, a snappy Web browser, a sweet 480-by-854 pixel display, an accelerometer, WiFi, Bluetooth, etc. ... and, oh yes, GPS.

In fact, it's got some cool GPS features ready to implement, like the new Google Maps Navigation. If you place the Droid in a car window mount -- which is a separate accessory -- it'll automatically enter a "Car Mode" so that it'll look and feel more like a standalone GPS device.

Nice.

Still Not an iPhone

The point: There are plenty of great features packed into Android 2.0 and the new Droid hardware, but none are compelling enough to make me deviate from my iPhone 3G. I've got the iPhone 3GS to look forward to upgrading to, though I'm guessing I'll skip it and snag the next iPhone release. (That's right, so far common sense has continued to beat out 3GS lust -- I'm still running the 3G.)

More importantly, we're starting to enter a phase where Android is becoming more and more capable -- and smartphone manufacturers are starting to catch on, as well as innovate ahead of Apple in some instances. The point isn't which phone represents the best hardware, the best operating system, the best apps ecosystem, or the coolest design. And it's not even so much about cost of acquisition.

The point is that the Apple iPhone is heading toward a battlefield where it'll be one smart phone facing an army of Android-based phones available on any network. Will any of these devices be fundamentally better than an iPhone, in all aspects of the iPhone world? Probably not.

But imagine a field of consumers looking at options, trying things out, knowing they want a smartphone that does email, browses the Web, plays movies and takes decent pictures.

Once my buddy shells out US$200 bucks for a new phone, I don't see him changing any time soon -- and you can thank Verizon's handy contracts for that, too. In the meantime, he's learning Android 2.0. He's learning his phone. If it's a halfway decent experience, the next time he looks to buy, Android and Motorola will take up a good chunk of his personal smartphone mindshare.

And what'll happen when one of his friends asks for some buying advice?

1 vs. 100?

At what point will Apple need to offer different flavors and variations of its iPhone? Will it ever? Does the iPhone need a physical slide-out keyboard? An elegant Apple-developed snap-on keyboard? Does Apple need an iPhone nano?

Now those are tough questions. It's hard to see Apple deviating much and possibly risk diluting its own brand; it's easy to see Apple creating a bigger screen, a thinner slab, better battery life, new software, and snazzier looks.

And when it comes to a multi-iPhone product line, Apple has to step carefully so it doesn't disrupt its App Store ecosystem: Apple's consistent iPhone form factor has enabled it to run fast and far -- the developers in Apple's iPhone and iPod touch developer program have been able to count on a consistent screen size and a consistent touch interface. There's a reason the App Store has been a huge success, and part of it has been the overall consistency of devices over three generations of product.

The same basic form factor has also helped stoke a raging accessory marketplace -- iPhone and iPod touch owners have a wide variety of options for cases, stickers, speaker systems and car components.

All in all, there's a good chance Apple will be able to compete very well by offering essentially a single top-of-the-line iPhone form factor.

One thing is clear, though: If Apple wants to win more than a battle here and there, it's going to have to deliver iPhones to more than one cellular service provider in large key markets like the United States. Will that be in the latter half of 2010, as Verizon rolls out is next-generation LTE networks? Verizon's upgraded network infrastructure will mean that AT&T's new networks will share a common network technology with its competitor. Once the networks are deployed, Apple can theoretically manufacture essentially a single iPhone that could work with both Verizon and AT&T.

If Apple forgoes the exclusive AT&T contract in favor of options for consumers, it'll have to work out new equations for its profitability for each device. For instance, it's unlikely that Verizon will subsidize iPhone purchases at the same rate as AT&T, and it's unlikely that AT&T would continue to shell out a premium without an exclusive deal. Plus, customer support may become more complicated. Taking on the world is not completely without new challenges.

Back to the battle. Despite gains with Android -- not to mention other competitors out there like Microsoft (Nasdaq: MSFT) with Windows Mobile and RIM -- can you imagine a world where Apple's iPhone isn't limited by the network? Do you remember what happened when Apple released its first iPod with the starkly bright white headphones?

That's right -- domination to the tune of 70 percent market share in the U.S.

If Apple sheds the consumer decision factor it can't control -- the provider -- even an army of Androids won't make much difference.