Dead Ink Vinyl

The excellent blog Going Private discusses Apple’s new iPhone revenue model, whereby Apple allowed AT&T to subsidize the price of the iPhone (leading to more iPhones being sold) but gave up the profit-sharing on new iPhone service contracts. The deal is analyzed entirely from the perspective of whether the increased sales volume offsets the lost service contract revenue:

I suspect the figures are pretty offsetting, leaving any future gain in iPhone revenue as a percentage of total revenue really subject to iPhone sales growth v. other sales growth at Apple… and not the new revenue model which is probably pretty neutral.

I didn’t see a way to leave a comment, so I’ll post my comment here. If the only components to this deal were subsidies and contract revenue, then it would be a nearly complete win for AT&T. But this analysis fails to account for the additional revenue that Apple will gain through the App Store selling applications to iPhone (and iPod Touch) owners.

The service contract revenue lost by the new deal is not offset against increased hardware sales—it is offset against App Store revenues. The more people who own iPhones, the more revenue the App Store can be expected to generate. Apple gave up contract revenue primarily in exchange for permission to run its own store selling software over-the-air directly to the iPhone device. In the traditional mobile marketplace, it is the carrier who sells applications and keeps a generous percentage of the application price. Apple negotiated with AT&T (and, apparently, dozens of other carriers internationally) to allow iPhones to purchase and download applications from Apple’s App Store. To secure this, Apple agreed to no longer take a cut of the iPhone service contracts. Additionally, Apple will allow AT&T to subsidize the iPhone, which is now good for both parties. (This new arrangement is apparently much more pleasing to carriers internationally as well, giving Apple more markets in which to sell its product.)

It’s a win for AT&T because they can attract (or retain) many more customers and they no longer split those contract revenues with Apple. Additionally, I suspect that AT&T even gets a small cut of the 30% Apple keeps for applications sold over-the-air through the App Store to AT&T customers.

Apple wins by dramatically increased hardware sales and the right to sell apps over-the-air to iPhones. And the App Store benefits from networking effects. The more people who own iPhones, the more developers will be attracted to build and sell applications in that marketplace. The more applications there are in that marketplace, the more people will want iPhones. The iPhone’s killer app will no longer be it’s revolutionary interface and ease of use, but rather be the applications that run on it. Finally, Apple wins by attracting huge numbers of new developers to its operating system, libraries, and development tools. John Gruber reports that “two engineers from Apple told me that [interest] wasn’t just for the iPhone — that they were seeing plenty of new-to-Cocoa developers in the Mac-specific sessions and labs, too”.

Everyone benefits.

WWDC isn’t over yet, but we learned a lot today. Let’s see how I did with my predictions.

Category	My Prediction	Correct?
iPhone
3G	Yes	Correct
GPS	Yes	Correct
Faster Processor	No	Correct
Video Conferencing	No	Correct
Thicker (face-to-back)	Yes	Correct1
iPhone mini	Yes	Incorrect
Higher Pricing	Yes	Incorrect
SquirrelFish	Yes	?
iPhone widgets	No	Correct2
Apple Software
OSX 10.6 Will Be Announced	Yes	Correct
OSX 10.6 Named Snow Leopard	Yes	Correct
OSX 10.6 Specifically be for Atom Devices	No	Correct
OSX 10.6 OSX 10.6 Will Drop PPC Support	Yes	?
OSX 10.6 Will Drop Carbon Support	Yes	?
New / Improved / Revamped .Mac Services	Yes	Correct
.Mac Rebranding	Yes	Correct
Apple Hardware
New Apple Device	No	Correct
New MBP Designs	Yes	Incorrect
New Displays	No	Correct
Pie In the Sky Prediction
OSX 10.6 Adds Resolution Independence	Yes	?

Outcome: 13 correct, 3 incorrect, and 4 unknowns. So my prediction accuracy is 65%-85%, depending on how the unknowns turn out. Not bad, given that 10% of my predictions were complete guesses.

¹ The original iPhone was 11.6mm thick, according to Apple’s support site and the new iPhone is 12.3mm according to the new iPhone site.

² No discussion of a DashCode for iPhone or HTML+JavaScript+CSS application development solution was stated during the keynote. If it comes to my attention that widget iPhone development is possible, I will toggle my answer’s correctness.

Welcome to my first publicized predictions for an Apple conference.

Preamble

To understand my predictions for WWDC 2008, you need to understand where I think Apple is going in the next 24 months. To view the iPhone as a stand-alone product is to miss the point. The point of the iPhone is to create a development ecosystem around Objective-C and Cocoa. This ecosystem will have spill-over benefits for the Mac, since more developers will be familiar with the platform’s development technologies, but the real point is to create a large population of developers already familiar with application development for Apple’s next device: a touch tablet. This is why Apple is suddenly pushing “OSX” instead of “Mac OSX” and “iPhone OS”—Apple wants to impress upon developers that the skills for developing on any OSX device carry over to the other Apple devices as well.

With that out of the way, on to my predictions!

Next-Generation iPhone

3G: Yes

This seems like a given.

GPS: Yes

With all of the concentration on 3G capabilities, discussion about GPS seems to have died down a bit. While GPS technology takes away space and power from other solutions apple could provide in the iPhone’s form factor (such as video conferencing), I think that improved positional capabilities will create many 3rd party developer opportunities.

Faster Processor: No

I think there are so many other bells and whistles going into this revision that Apple will be happy to use a processor with the same speed and power consumption as the current model.

Video Conferencing: No

With 3G network speeds, this becomes possible and it is an intriguing possibility. But supporting (1) video capture, (2) video encoding before sending, (3) bi-directional communication over 3G (or WiFi), (4) video decoding what you’re friend is sending you, and (5) continual screen updates to display the video—all at the same time—will simply kill the battery life.

Thicker (face-to-back): Yes

Since the current iPhone is a 1.0 product, I’m willing to believe that Apple learned a lot during its development and—knowing what they know now—could redesign the current iPhone to be smaller with lower power consumption. Starting from that assumption and adding 3G, GPS, and a larger battery to the mix, I believe that the new iPhone will have to be more voluminous. It can’t get much wider without becoming uncomfortable to hold, and it’s current height seems about right, so I believe that the phone will grow a little thicker.

iPhone mini: Yes

Take the current 8GB iPhone, make it a little smaller, and offer it in a variety of colors for $350. Offer a 4GB model for $250. Pesto! You have a device that may attract the interest of my wife. Since I didn’t understand the point of the iPod mini until I witnessed my wife’s reaction, I’ve come to trust her judgement over mine for products Apple targets at non-technophiles.

Higher pricing: Yes

Components: there are more of them and they are more expensive. With the addition of the iPhone mini at a lower price point, Apple will have a little breathing room on the high end. I expect the 8GB model to retain its current pricing and the addition of a 16GB model for $100 more.

SquirrelFish: Yes

Squirrelfish helps the iPhone in two ways. First, Squirrelfish is fast, provides users with an improved Web browsing experience. Second, it is more efficient—getting the same end result accomplished in fewer clock cycles, so it requires less power to run JavaScript.

iPhone widgets: No

In the latest episode of The Talk Show, Dan and John kick around the idea that iPhone widget applications may make a comeback: applications for the iPhone written entirely in HTML+JavaScript+CSS, facilitated by a DashCode development tool specific to the iPhone. There is a lot of sense to this from the perspective that it would invite everyone skilled in Web design to be an iPhone developer. However, as I stated in my preamble, I believe Apple can use the popularity of the iPhone as a means to push Objective-C and Cocoa, thus building a larger community of developers skilled in the technologies that underlie all of Apple’s “software-expandable” offerings.

Apple Software

OSX 10.6 Will Be Announced: Yes

Steve is quoted (somewhere—sorry, no link) as stating that he wanted to be releasing updates to Leopard on a more frequent schedule than was indicated by the delay between 10.4 and 10.5. Announcing 10.6 at WWDC with it’s release due at MacWorld seems about right to me.

10.6 Named Snow Leopard: Yes

Sure, why not?

10.6 Will Specifically be for Atom Devices: No

This was posited by Josh Bancroft and I think he’s generally right that OSX is being pushed as its own brand to allow for OSX on a new device, but I don’t think it will be announced at WWDC.

OSX 10.6 Will Drop PPC Support: Yes

This completely sucks for PowerMac G5 owners. You’re the losers of an unexpectedly rapid and successful migration to Intel. As a life-long loser myself, I sympathize.

OSX 10.6 Will Drop Carbon Support: Yes

Apple wanted to drop Carbon support long ago, but the old-time Apple developers complained and—probably more importantly—Microsoft and Adobe were unable (and perhaps unwilling) to migrate off their Carbon code bases. Reading the tea leaves, Carbon’s now a goner. Apple used the Intel migration as leverage to push developers toward Cocoa, then Leopard didn’t include support for 64-bit Carbon. If the rumors that 10.6 will be 100% 64-bit are true, that rules out Carbon. Good bye.

New / Improved / Revamped .Mac Services: Yes

Please! I’ve had .Mac service since I purchased my first Mac and it was fine for a while—I didn’t mind the premium price at first because it “just worked” and that’s what I wanted. But each of the last three years I’ve been really close to canceling my membership and Apple would announce something that would make .Mac just barely worthwhile enough to continue holding onto. This year, though, if I’m not blown away, I’m canceling it. Or whatever they will call it.

.Mac Rebranding: Yes

It’s hard to sell something called ”.Mac” to a person whose only Apple product is an iPhone. Explaining that .Mac doesn’t require a Mac must be a nightmare.

Apple Hardware

New Apple Device: No

I believe that 2009 will be the year of the tablet, so no new devices this year.

New MBP Designs: Yes

I’m just guessing here.

New Displays: No

I think that the displays will be revamped when the Mac Pro is redesigned.

Pie-In-The-Sky Prediction

Every good WWDC prognosticator needs to go out on a limb and make an off-the-wall or out-of-left-field prediction.

OSX 10.6 Adds Resolution Independence

Despite the rumors that 10.6 will be focused on stability and performance instead of features, I think that this will be on the short list of enhancements.