Thomas Hazlett: The iPhone Turns Five
Forget the shouting about 'open' or 'closed' systems. The magic is in the dynamics of platform competition.
By THOMAS W. HAZLETT
On June 29, 2007, thousands of fan-boys and -girls camped in long lines to inhale a wisp of sweet techno fairy dust. The new iPhone rocked the world. Revolutionary in design, function and ecosystem, it set off the mobile data tsunami. In three days, Apple sold a million of them. The Economist asked: "Where would Jesus queue?"
The iconic innovation of the Information Age, however, inspired a fierce counterattack. Columbia University Law Prof. Tim Wu condemned the iPhone business model as "iPhony." The handset was cool, he said, but the business model tied the customer to AT&T's wireless network (where Apple struck a four-year exclusive deal) and to iTunes (Apple's content store). Soon the Apple App Store would deepen the master-slave relationship.
This supposedly condemned users. "The closed iPhone," wrote Prof. Wu, "stands in contrast to the open-platform design that has been the bedrock of both the personal computer and Internet revolutions. . . . Once Big Brother's foe, [Apple is] now more like Little Brother, happy to sell cute little devices that are easy to use, make money, and spread false consciousness."
"False consciousness" is an excellent way to characterize this view, too—a perspective that arbitrarily divides markets into "open" and "closed." Gold stars are pinned to the former; the latter are dubbed anti-innovation and referred to regulators for investigation.
Are you kidding me? The iPhone—the "defining consumer item of its age," as the Atlantic recently dubbed it—is craved by consumers who have shelled out (at hefty premiums) for some 200 million of them. These happy campers presumably include Prof. Wu, who announced that he was unable to resist the 3G iPhone in 2008.
Steve Jobs introduces the iPhone in 2007.
The novelty has not worn thin. In the first quarter of 2012, iPhone global sales doubled, according to industry data, accounting for more than 400,000 activations per day. These "locked" models bolted to a "closed" platform are opening fantastic opportunities for others. Downloads from the proprietary Apple App Store reached 30 billion this year, with 650,000 applications available. Independent software developers who create those apps are feasting in the Apple ecosystem. They receive 70% of store revenues, so their share is more than $5 billion thus far.
Apple's genius—maniacally detailing and bundling the "user experience"—is not the only inspirational theme music heard in the market. While Apple smashed RIM BlackBerry with its disruptive entry, it inspired another competitor. In 2008, Google launched the open-source Android operating system, licensing mobile software to any and all device makers (at no cost), allowing others to tweak their code and innovate without permission. The foray has been hugely successful, crushing Nokia and its Symbian platform. The Google approach—give away the software, let others make the devices, and make your own money in mobile ad revenues—positioned the search giant as the "anti-Apple."
The late Steve Jobs, pledging to go "thermonuclear" over this "stolen product" (Android), touted Apple's distinctiveness: competitive superiority in building an ecosystem. Leaving product design to others who may not share the Apple dream would be crazy. Yet the Jobsian vision was anticompetitive, argued policy experts, and a business error, thought Google. Former Google CEO (now chairman) Eric Schmidt, citing the advantages of open business models, flatly declared: "Android will beat the iPhone."
Not today. The iPhone is not only the world's single most popular smartphone, it is insanely lucrative. Apple sells just 9% of the cellphones out there (smart or otherwise) but accounts for 73% of industry profits. Meanwhile, the tablet—a new industry invented by Apple in 2010—features a 68% share for the iPad. Since June 2007, Apple has increased an astounding $422 billion in market cap; Google shares, by about $13 billion.
As of now, the Android universe is fragmenting. The hands-off "openness" of Google lets device makers put out whatever products might generate sales for them without giving thought to what makes the whole ecosystem better. This has some distinct advantages (ask Bill Gates), but also some drawbacks, as when the platform splinters, confusing consumers and making app developers work harder for the same returns.
Now top developers, according to numerous reports in the tech press, are ditching Android for Apple—for a company that maintains dictatorial control over its content. That very coordination is yielding unmatched benefits, particularly in customer ease-of-use that drives iPhone and iPad owners to be truly massive consumers of apps and online media.
Call the company's latest quest "business model search." Google has purchased the major cellphone maker, Motorola Mobility, and will be supplying devices directly to mass-market consumers. It has redesigned its app store, Android Market, branding it "Google Play" and tying it to other company products. It is bringing Google TV more tightly into the Android mix, engineering complementary components of in-home networks to improve ease-of-use for online content.
There is no guarantee that this enhanced vertical integration will improve products, or that Apple's rival platform will continue to print money. All business structures are a mix; there are no pure strategies. "Closed" Apple relies on thousands of suppliers; iTunes sells the artistic works of a diverse marketplace. The App Store thrives on software written by developers who couldn't find Cupertino even if they logged onto Google Maps or Apple 3-D.
The magic is not in a particular model but in the dynamics of platform competition. Shouting out "open" or "closed" as a prescription for categorical success is at best a mirage and at worst a predicate for anticonsumer public policy, like the government's long antitrust crusade against Microsoft.
The late Joseph A. Schumpeter put it well: Capitalism "never can be stationary. . . . The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates."
That relentless innovation process delivers the goods.
Mr. Hazlett is a professor of law and economics at George Mason University, where he directs the Information Economy Project. He was chief economist at the Federal Communications Commission from 1991 to 1992.
