How the IPhone Breaks Industry Rules

The Apple iPhone is shown at the MacWorld Conference after the announcement of the phone in San Francisco, Wednesday, Jan. 10, 2007. Among consumers, the excitement around Apple Inc.'s iPhone, launching on Friday, centers on its cool looks and innovative interface. In the cell phone industry, the iPhone will be closely watched because it breaks several conventions governing the relationships between handset manufacturers, carriers and consumers. If successful, Apple could end up changing the way phones and the industry work. (AP Photo/Paul Sakuma) (Paul Sakuma - AP)

The iPhone won't run third-party applications except through its Web browser, meaning they are likely to be quite limited. By contrast, smart phones running Palm or Windows Mobile software have a wealth of third-party applications available that do everything from expense tracking to horoscopes. The quality of those applications varies a great deal, however, and it's not surprising that Apple wants tighter control.

In perhaps the most striking example of how Apple is taking over the carrier's role, the iPhone will not be activated by AT&T salespeople in the store, but at home by the owner, through iTunes.

To top it off, analysts believe Apple will be getting a share of subscriber revenue from AT&T.

"This is absolutely unprecedented," said In-Stat's Chamberlain. For other cell-phone makers, "once you've sold the handset, that's it. That's the end of your relationship with the customer."

Even so, Chamberlain doesn't think the iPhone represents a big shift in power away from the carriers.

"The carriers have been at the center of the universe and will maintain that position for a long time," he said.

Indeed, while AT&T may be giving up a lot of its customary control of the handset's operations, Apple has given it a five-year U.S. exclusive on the iPhone, another unheard-of deal for the industry, where six months is a more common exclusivity period. And while sharing revenue with Apple, it's not subsidizing the retail price of the phone, which is otherwise the practice.

Apple's cachet isn't the only reason it can shake up industry conventions. The company's also new to the business.

"They are coming from the outside, they are certainly not bound by any previous expectations at all," Chamberlain said. "Apple certainly knew that they were absolutely a fresh start."

"If they're rewarded for that in a different way, then I think that kind of opens the world up for some entrepreneurs, who say: 'Let me design something, let me come up with something as hot or hotter than the iPhone, and get a share of that revenue,'" he added. "That's a world that hasn't been touched."

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On the Net:

http://www.apple.com/iphone