Speaking at the Goldman Sachs Technology Investment Symposium this week, Apple's second in command Tim Cook talked at length about the upcoming iPhone, revealing some of the methodology that went into the product's development as well as the executive decisions that lead to the company's partnership with Cingular.
Q: Almost from the second Steve stepped off the stage at Macworld there are people in the press and other people basically coming up with reasons why Apple can't succeed in the phone market. Can you talk a little bit about why you think Apple will be a success?
A: Well, I think the iPhone is a revolutionary product. And Steve mentioned this at Macworld. And I think this is a very, very good point. Revolutionary products only come along so often. You know, Apple had the Macintosh in 1984 that reinvented the personal computer industry. The iPod in 2001 which reinvented the whole music industry. And we think the iPhone is that class product for the cell phone industry.
Step back and look at the [iPhone] and think about what it is. It's a very small, thin, lightweight device. It's a revolutionary cell phone. It has visual voicemail, which if you're not familiar with that, essentially looks like e-mail. So you can select precisely the voicemail that you want to hear, not the order they happen to come in. It's the best iPod Apple has ever done. And it's this really cool internet device that has desktop class email, browsing, maps and searching, all in one product. And so I think people are going to be amazed and delighted over it. So we'll have to see. Obviously there are people who would prefer us not to be successful in this. But I think this is a revolutionary product. And we'll see what customers think because that is the most important thing.
Q: Your stated goal for calendar 2008 is to ship 10 million units, which is about 1 percent of the overall market. But given the functionality and price-point of the product, it eliminates most of the low end of the market. How do you look at the available market for the first-generation of iPhone and what kind of market share do you think you could take in that market?
A: The traditional way that all of us were taught in business school to look at a market was, you look at the products you are selling. You look at the price bands that are curving the market. You think about the price band that your product is in. You assume that you can get a percentage of it. And that is kinda how you get to the addressable market.
That kind of analysis doesn't make really great products. The iPod would not have been brought to market if we had looked at it that way. How many $399 music players were being sold at that time? And so, today in the cell phone industry, a lot of people pay zero for the cell phone. Guess why? That's what's it worth! And so, if we offer something that has tremendous value, that is sort of this thing that people didn't have in their consciousness — it was not imaginable — then I think there are a whole bunch of people who will pay $499 or $599. And our target is clearly to get 10 million. And I would guess some of those people, and there are probably some in the audience, that are today paying zero because it's worth zero or going to pay a bit more because it's worth it.
Q: Could you go through some of the thinking of not putting 3G in the phone given that it is pretty much leading edge technology in every other aspect?
A: Our thinking first and foremost was that we wanted GSM. Because GSM is the world standard and that was one of the factors in selecting Cingular. Secondly, the product, as we announced, has Wi-Fi capabilities. And so many people, like in this room I'm sure there is Wi-Fi in this room as there are hot spots everywhere — at your home, where you have coffee, your place of work, etc., etc. — they're going to use Wi-Fi. And between these spots we are going to use EDGE because it is widely deployed. And we are confident it will give the user a great experience.
Q: Do you expect iPhone to cannibalize iPod. If so, when might that start to kick in?
A: You know, it's too early to tell. But I would make this point: We've sold 90 million iPods. 90 million. It still amazes me saying it. And these are being sold for a wide variety of usages. There's a wide variety of form factors. A wide variety of capacities. And a wide variety of price points. And so, you know, there a lot of people who desire the iPod, so we'll just see what happens.
Q: Can you talk a bit about — this has been an area of controversy — some of the plus and minuses of using only one carrier, an exclusive carrier, in the US.
A: Sure. Our thinking on selecting Cingular was 1) We looked at the carriers in the US and felt that Cingular was the highest quality. And that was very important to us from a customer experience point of view. 2) They were the most popular. They had 61 million subscribers. 3) Our goal was to use GSM — our decision was to use GSM — and that's what their network was based on. 4) The deal that we struck allows Apple to do the things that Apple is really good at, and it allows Cingular to do the things that Cingular is really good at. And so I think it is a really great partnership.
Q: This is a new product category for Apple. Some of the times in the past you've had a little bit of tough time ramping up given the initial demand for some products. Can you talk a little about what you're doing to make sure you can meet day one demand?
A: Sometimes this issue is a good issue. But in order to talk about day one demand and whether we have enough product, you have to know demand and you have to know supply. And let me be very frank: I don't know either of them today. Clearly, the customer response is significant on iPhone. A lot of people anecdotally are telling me [inaudible]. And on the supply side, as many of you know, we did 21 million iPods last quarter. So we have a reasonable amount of operational expertise on ramping and doing fairly well there. But what the first day is going to be like, I don't know because it's too soon to tell what the demand and supply will look like.