Market Insight

Five years of iPhone disruption

July 22, 2012

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In June 2007, the first iPhone went on sale. Apple shipped a total of just 1.5 million units in the iPhone's first two quarters. Many commentators at the time viewed the iPhone as a substandard device, let alone a revolutionary product. Since then Apple has sold over 218m iPhones (up to the first quarter of 2012).

Five years on, it's easy for hindsight to cloud our view of the original iPhone. At the time, many in the industry did not classify the iPhone as a smartphone because users could not install third party apps. RIM and Nokia were complacent because it lacked other key features that they knew, absolutely, were critical for success. This belief hindered their ability to respond. Their response is a classic characteristic of market disruption from the case studies in Christensen's various books.

Author of the Innovator's Dilemma, Clayton Christensen argued in 2007 that the iPhone was not a disruptive innovation and instead it was an evolution of existing mobile phone trends, or in his taxonomy it was a 'sustaining innovation'. The situation is more complicated in practice. Let's reflect on how Christensen defines different kinds of innovation. Christensen's taxonomy sets out two types of innovation:
(Note this differs from everyday usage of the word "disruption")

  • Sustaining innovations are extensions of existing products as companies add incremental features, for example to increase speeds, add more memory, and so compete within an existing market framework. Over time this process leads to products that overshoot the needs of consumers. Modern PCs are arguably an example of this kind of innovation.
  • Disruptive innovations are where a product focuses on under-served needs. These innovations are often written off initially by existing market players as underperforming and so not a threat, but they appeal to consumers precisely because they are different. Over time the disruptive products improve on conventional metrics too and then replace products created through sustaining innovation. The iPad's affect on the PC market is an example of this kind of innovation as it competes on different performance measures to the PC.

The reason that many are wrong in their iPhone analysis as not a disruptive product is because of the way the original iPhone competed with existing phones. The iPhone focused on the Internet throughout, rather than making phone calls.

In 2007, the industry considered certain features to be essential on a premium smartphone. The original iPhone failed to deliver on many of these features because it:

  • Was 2G, not 3G as the industry expected. This was a time when competing smartphones such as the Nokia N95 or HTC TyTn were fully broadband 3G, and in some cases offered 3.5G HSPA speeds.
  • Lacked the ability to install Apps as competitor models could. It's perhaps astonishing given Apple's subsequent success with its App Store to remember that in 2007 Apple believed native apps to be unimportant. Instead, Apple positioned the iPhone to be a web platform with only web apps. By contrast, all competing smartphones could run native apps, although the installation process was cumbersome and usually involved a PC to sync apps.
  • Included a very poor 2MP camera unlike rivals' 5MP cameras. At just 2 megapixels it compared very poorly with the standard 3 to 5 megapixel cameras of rivals. And, unlike all leading Nokia's the iPhone lacked video recording, had primitive optics unbranded -- rather than Carl Zeiss -- and had poor colour accuracy.
  • Had no physical keyboard. Competing smartphones were defined by their reliance on physical buttons. BlackBerry and Windows Mobile devices almost universally offered a full QWERTY keyboard. Nokia's smartphones split between full keyboard designs and consumer-centric models with extra media buttons such as the two way slider N95.
  • Lacked enterprise connectivity. The iPhone was unsuited to business because it had no ability to connect to corporate Microsoft Exchange email systems or be administered by IT departments.
  • Had poor signal performance. Early iPhone adopters complained of dropped calls and network connection issues. This issue re-surfaced with the controversy over the iPhone 4 antenna. Neither appears to have had any impact on iPhone sales.

So, on at least six criteria, the original iPhone was poor compared to rivals. But it bettered them on user experience, Internet web browsing, and with the launch of 2008's App Store on apps, games and extensibility too. The iPhone was targeted at an underserved audience that benefitted from the unlimited data tariffs that operators offered as standard with the original iPhone.

Five years on we live in a mobile world transformed by ubiquitous touch screen phones, where smartphone keyboards are the exception not the norm, and where Apps are widely used. As a result, we're in the process of a shift to data becoming the main driver for mobile operator business models. Previous market leaders that failed to respond to market disruption are struggling: Both RIM and Nokia have a very sudden drop off in sales, posting significant losses for the first time in over a decade during the past year.

Subsequent iPhone models have delivered a period of sustaining innovation. The iPhone now has evolved to have one of the best phone cameras, better enterprise connectivity, and has a massive App store. The most recent updates to the software are evolutionary, not revolutionary; which is clearly seen by the changes to the maps function highlighted in the upcoming iOS 6.

Similarly, competitors have now made up the ground to Apple. The latest version of Google's Android OS has evolved to be close to parity with iOS 6, if not exceeding it in some aspects. The mobile OS upgrade cycle now revolves around incremental updates and a feature war between iOS and Android reminiscent of the PC feature war.

All of these changes are not sufficient to guarantee Apple's continued success. Apple must be on guard against new disruptive products that could threaten the iPhone, or Apple could take the first step and launch products that disrupt Apple's own business, as Apple did when the iPhone disrupted its iPod line, or the iPad arrived in (partial) competition with the Mac. Disruptive innovation in the mobile market will continue for the next five years, at least, everyone needs to be prepared for further rapid changes.

Apple Inc. HTC Corp. Nokia RIM
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