Yet another article on the 10-year anniversary of the iPhone

An extra-terrestrial alien visiting Earth in 2007 and returning, now, one decade later, might, at first glance, notice little difference in smartphones between times. For example, most-recent iPhone models superficially appear very similar to their predecessors including the first iPhone model in 2007. The external designs have remained fundamentally much the same including thin form factors, rounded corners and relatively large displays (with multi-touch operation) in comparison to featurephones.

                                                    Spot the difference

iPhone (2007)

iPhone 8 (as rumoured July 2017)

However, superficial appearances are very misleading: technological capabilities in mobile phones have improved massively with numerous valuable innovations from various contributors over the last decade, as did capabilities over the preceding couple of decades since the introduction of the first cellular “bricks” in the mid 1980s.

Another major milestone in cellular technology developments towards 5G

Recent new technology deployments with Gigabit LTE at Telstra in Australia, Sprint in the US and EE in the UK highlight how much cellular communications technologies have improved since the introduction of mobile data services with circuit-switched and then packet-switched offerings from around 20 years ago. Peak and average user data speeds on cellular networks have increased by a factor of 10,000 over 20 years. By way of comparison, microprocessor performance doubling every couple of years, as predicted by Moore’s Law, has increased only one thousand-fold over that period. Cellular performance improvements are therefore quite spectacular given the vagaries of connecting through the ether up to hundreds of metres, as well as processing those signals in the confines of around one square centimetre of baseband processor silicon!

2016 iPhone 7 is 1,000 times faster than the 2007 model

Whereas Apple has done an outstanding job in improving its iPhones in various ways and in motivating its customers to upgrade to later models, it is significantly dependent on other companies for many technical innovations that it includes in its devices.

While marketing departments and the press look for eye-catching new features on specific device models that might surge demand for the latter, it is relentless standards development work with innovations and performance improvements in cellular technologies to increase speeds, network capacity and reduce power consumption that provide the crucial underpinnings for these ––particularly for HD, 4K or even 8K video that sends or receives very large volumes of data over the mobile networks.

Inspiration and perspiration

Development work for this including 4G and 5G technologies is largely undertaken by a hard core of several major technology-developing firms. Research on attendance records of all the 3GPP working group meetings between 2005 and 2014 reveals that a few highly-active firms are largely responsible for the technical developments in that standards development organisation. Over this period, a total of 3,452,040 man hours were spent in 825 working group meetings, mostly in the development of 3G and 4G standards. Distribution of contributions to 3GPP is highly skewed, with a few firms submitting the vast majority. For example, the top two percent of firms (i.e. 9 of them) are responsible for submitting 60 percent of all contributions. Furthermore, approximately one-third of all participating firms (i.e. 161 of them) have not submitted a single contribution to 3GPP.

However, most of the activity in the public records of standards development organisation 3GPP is the mere tip of the iceberg in terms of the total amount of development work undertaken, with even more extensive other activities submerged from public view.

As I noted in a report on innovation and intellectual property protection, it is a popular misconception that innovation is random or serendipitous. In fact, it takes many ideas to find a few initiatives worth experimenting with, which may then enable some to be identified that are worth investing in significantly and might ultimately lead to a winner or two with sufficient development effort and investment. This work is largely undertaken outside of SDO meetings.

The numbers of patents and patent applications declared to the ETSI IPR database as possibly being essential to these cellular standards are also very skewed. A small number of mostly the same companies as above account for a large proportion of patent declarations. When I last checked, seven companies including Ericsson, Huawei, Nokia, Qualcomm and Samsung accounted for 70 percent of the many thousands of patents declared in the period 2008 to mid 2015.

Value for money in cellular patent licensing

Licensing fees paid in the smartphone industry are substantially for standard-essential patents and in some cases for non-SEPs. Total patent licensing costs for Apple and other smartphone OEMs at around only a few percent of revenues are good value given the development efforts and performance improvements delivered by technology developers.

Licensing fees pale in comparison to the profits generated by Apple. The original iPhone was introduced in June 2007 at a price of $599 in the US. This and subsequent iPhone models have generated very large profit margins, as illustrated by the difference between retail prices and manufacturing costs.

Substantial mark ups and profits to Apple on iPhone

	2007	2011	2016
Model	iPhone	iPhone 4s	iPhone 7
Standard/technology	2G EDGE	3G HSPA	4G LTE- Advanced
Version (storage)	8GB	16GB	32GB
Full retail price*	$599.00	$649.00	$649.00
BoM cost*	$222.55	$178.82	$246.91
Markup ($)	$376.45	$470.18	$402.09
Markup (%)	169%	263%	163%

* Source: TechInsights/Portelligent

According to Strategy Analytics, Apple sold 231 million iPhones with an operating profit (i.e. after some other operational costs) averaging $239 per phone in 2015. That represents 36 percent of its $669 average selling price that year.

Following the introduction of a new model every year at gradually increasing prices, “the 10th anniversary iPhone, the next model, expected to be massively redesigned and packed with state-of-the-art technology, could sell for as much as $1,200 to $1,400, according to some estimates”.

Analysts also estimate patent licensing fees paid to Qualcomm average about $10 to $20 per iPhone. Apple has stated that Qualcomm charges it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined."

On that basis, Apple is paying a total of between $12.50 and $25.00 per iPhone in fees for licensing from all cellular patent licensors. That is equal to between two percent and four percent of iPhone prices. Licensing fees as a percentage of consumers’ total cellular expenditures over a smartphone's approximate two-year service life, including operator service fees averaging around $40 per connection per month in the US, for example, are considerably lower.

Happy anniversaries

It is also ten years since I published my abovementioned report, noting as well that innovation can occur in many ways, with a variety of different business models and that fully vertically-integrated companies had become a rarity in technology industries. I stated that explicit recognition of value through licensing was increasing innovation, competition and customer choice with third-party supply of IP, in addition to that for components and manufacturing. That conclusion still holds.

The Branding Wars in Smart Phones.

The media-hyped recent coverage of Steve Jobs, as he discussed the bells and whistles that adorn the 4g iPhone, stands in stark contrast to a sombre article that appeared on Bloomberg.com on 12 May. Entitled "Nokia Goes 'Back to the Future' in Attempt to Topple iPhone" and written by Diana ben-Aaron here, it discusses the appoint of Anssi Vanjoki as head of the company's smartphone unit. Vanjoki's mission: make Nokia competitive in the smartphone space. His challenge (as described by Carolina Milanesi of Gartner, Inc.): "It's a bit back to the future ... [and] he doesn't have much time, so Nokia needs to deliver."

The company's recent history in this area is grim. While the company worldwide is the largest manufacturer of handsets, it has become a laggard in the up-scale smartphone business. In a field with compressed timeframes and ferocious competition, how long ago March 2007 seems now. Then, Nokia launched the N95, the company's first handset with GPS. It reported sold more than 10 million units and enjoyed an operating profit of more than 21%. That was then, however.

In the face of the onslaught of the BlackBerry by Research in Motion, and the iPhone of Apple, not to mention Android-based devices such as those of HTC, Samsung and LG Electronics, operating margins plummeted to just over 10% in Q1 2010. There seems to have been a subsequet model N97, being a combination touchscreen and keyboard phone, but that model has not enabled Nokia to overcome the Blackberry or iPhone products.

Against this backdrop, analyst Tero Kuittnen (MKM Partners) has offered Nokia only luke-warm encouragement: "The stakes couldn't be higher. The iPhone is a luxury juggernaut that can no longer be defeated, but Nokia still have a shot at snuffing out the challenge of its Aisia midrange rivals." Another analyst, Ben Wood, of CCS Insight, was more pointed, observing that "[i]f these people don't suceed, they will be doing something different in three years."

The competition in the handset industry generally, and the smartphone
business, in particular, has been the subject of countless articles and is a favoured topic for business school case studies. I want to mention an IP-based one aspect that tends to be overlooked, namely the role of trade marks. We noted above that the N95 handset was eclipsed by the Blackberry and the iPhone and that the N97 failed to buck this trend. To counter this, Vanjoki plans to roll out a new slim touchscreen device. And what is the name for this new product? Are you ready for this ...? None other than the "N 8."

I simply don't get this branding move by Nokia. First, it is a mystery why a newer model bears a lower number than an earlier model. Weren't we all conditioned to expect that the 386 Intel chip would be an improvement on the 286 product, and that the 486 chip was in improvement on the 386. I know--Intel was unable to register these later chip models as trade marks, at least in the U.S., but that does not change the basic principle that consumers expect higher model numbers or numeric brand names to represent a more advanced product than its lower-numbered predecessor. If my assumption is correct, then the rationale for the progression from N95 to N8 remains a mystery.

Second, the very choice of the series of markets based on "N" plus a number seems odd. Compare it with the Blackberry name, which is a garden-variety (no pun intended) use of an arbitrary name that has planted deep branding roots in the consciousness of consumers. It does not really matter if the consumer knows that Research in Motion (or RIM), stands behind the product. It is enough that one asks for a Blackberry. It is a wonderfully strong arbitrary mark.

The selection of the iPhone suggests an antipodal branding strategy.

Here, Apple has built a stable of strong marks, each of which is comprised of the prefix "i" together with an arguably descirptive noun. Fear not--acquired distinctiveness has or will ensure that each of these family of marks can be protected in its own right, as well as being used together the Apple mark. Both the product name and the house mark come out as branding winners.

Now let's consider N8 (or N95 or N97). Unlike the Blackberry name, there is nothing distinctive about such an alphaneumeric combination. There is ready reason for a consumer to know (and remember) that iPhone is a telephone device and that iPad is a tablet device. The same cannot be said, in my humble opinion, for the N8 mark. This means either that Nokia will have to use N8 together with Nokia, so as least to take advantage of the strong value in Nokia, or settle for a product name that is doomed to be less effective than the names of its rivals. Either way, Nokia would seem to come out second best in the trade mark wars, and where it can ill afford to do so.

Nokia and iPhone; Strong, Famous and Hip?

I usually keep my tweeting separate from my blogs, but this time I will make an exception. In 137 carefully chosen characters, I noted a report that appeared in Business Week, "A Bid to Reconnect with America" (April 13th), which discussed the efforts by Nokia to increase its market share for mobile phones in the U.S. from (as described) "its meager 8% share". Globally, Nokia enjoys a 37% market share. Fellow blogger and tweeter Jeremy Phillips quickly tweeted in reply that, in his view, " I'd settle for just half of that. For a foreign brand it's doing fine." Now I must admit-I was surprised by Nokia's relatively modest degree of U.S. market penetration. I had become so used to reading a 30% plus figure for Nokia's market share world-wide that I had no idea that this number masked a decidedly smaller share for the U.S. market.

The article recited a number of reasons for the single-digit market share in the U.S., including an alleged ambivalence to the U.S. market, due to "the heavy control wireless carriers exert and because wireless technology has not been as advanced as in Europe." As well, Nokia reportedly garnered more substantial returns in emerging markets, most notably China. More generally, the article concluded that, contrary to mobile users in most of the rest of the world, Americans don't think of Nokia as the cool, go-to company for advanced cell phones." I assume that the prize for image in the U.S. goes to Apple and the iPhone, with RIM and the Blackberry carving out cache of its own in the professional market. Nokia products lag far behind.

But what is hip in the U.S. is not hip in the Asian subcontinent. In a small item 10 pages away from the report on Nokia in the U.S., under the title ""iPhone's Asian Disconnect", the same Business Week issue discussed the dismal success of iPhone versus Nokia in India. There, Nokia is dominant in the smart-phone market, while the iPhone is reported to have sold less than 20,000 units. The item goes on to recite a number of reasons for the lack of iPhone's success, including price, download speeds and resistence to arrangements for multi-year service agreements. Whatever the reasons, it seems clear that in India, Nokia is at least for now the preeminent brand in the field. The item went on to speculate that unless Apple figures out a way to get local carriers to subsidize the phone, "Asia is just not going to work."

The stark difference in the strength of the Nokia and iPhone in brands in the U.S. and India, respectively, got me to ask a series of questions regarding brand strength and the fame of marks. Is Nokia a famous brand: if so, where? Does an 8% market share in the U.S. affect the strength of the Nokia mark and its status as a famous mark? To what extent are strength and fame national, regional, or international in scope?

The iPhone has been around for only a short period of time, but it has benefitted from unparalleled media coverage and a certain degree of commercial success. But, as the Business Week item suggests, commercial success may be geographically limited, both in the present and in the future. If so, does the media preoccupation with the iPhone brand trump commercial realities, whereby the strength and fame of the iPhone mark and brand transcend the commercial success of the device, at least in Asia?

Not so hip in Asia?

Maybe the iPhone is the product of a particular set of cultural values coming out a particular mileu: what resonates in Palo Alto may not resonate in Mumbai. If so, perhaps perceived brand strength and fame are as much a function of media coverage as actual commercial penetration. What happens to the strength of the the iPhone brand if it never takes off in Asia, even if it remains a dominant player in North America? I'll think about these questions the next time I make a call from own modest cell phone (being a Nokia and far from being a smart phone).

So You Want to be a Developer of a Smartphone Application?

Few current topics offer as many interesting angles as the cell phone business. Historically (to the extent one can talk about the "history" of this nascent industry), the business focused on the system operator, handset manufacturer and purveyor of the computer operating system. More recently, the rise of the Smartphone, the increasing importance of application programs, and the challenge of the Android operating system have all pushed IP to a more central role in the industry.

Following on my previous post of February 28th on the possible patent aspect of the iPhone and its competitors, my attention was drawn to an article that appeared in The Marker, the business daily published together with the Israel newspaper Haaretz. The article, entitled (in English translation) "How to Make Money from iPhone Applications", contains a large number of interesting nuggets about the emerging industry of iPhone application programs, where copyright reigns supreme. Let me mention several of the points made in the article.

While Smartphone applications are developed by companies with dedicated staff, successful applications have been developed by an individual or two, often working in his/their spare time for several months. One such example is iFog, which was developed by two individuals over a two-month period. Reportedly ranked no. 20 on the list of most downloaded applications on AppStore and iPhone, the iFog has been downloaded over 150,000 times, at a price of $1 per download.

Find the Fog in iFog

Seen from another angle, each of the top ten downloads can earn $3,000 a day for its developer, while the number 1 download is reported to earn $15,000 a day. Of course, there can be only a single no. 1, and over 15,000 applications are reportedly competing for downloads by the iPhone users. Neverthless, perhaps (perhaps not) with a tinge of exaggeration, one of the iFog developers observed that one can earn sums similar to producers or artists in the music business. That said, even the most successful developer will admit that the half-life of application is not overly long, and the odds of coming up with a second (or third) hit would not seem to be overly high.

There appear to be several business models for the developer of the application to monetize his product. Marketing the application through the operator or integrator is reported to split revenues 70-30 in favor of the operator/integrator. On the contrary, distribution via iTunes or the AppStore splits revenues 70-30 in favor the developer. There also appear to be applications that are distributed for free, with monetization realized either by the provision of add-on services or from advertising.

The application must further take into consideration the characteristics of the typical user of the particular system. Thus, the Blackberry user is overwhelmingly a business type, while the iPhone has not (at least yet) been embraced by the business community. Further, the developer is advised to make his product compatible for different platforms, for use with both proprietary and open source operating systems. Moreover, the AppStore will likely encounter additional competitors. The article noted that Samsung, Nokia, RIM, PocketGear and Palm are all contemplating application stores, which provides further channels for sale and distribution for potential developers.

So what do I tell my son when he comes into my study tomorrow, asking advice on how to get into the Smartphone applications business? Young man, it is a tough, competitive business, but it is also an attractive way to channel your creative digital juices in a way that is both financially and aesthetically attractive. And who knows--maybe you will find that pot of gold at the end of the copyright rainbow that has eluded so many an author in the oh-so-yesterday publishing business.

I found my copyright pot of gold

Apple and the IPhone: Can We Expect a Patent War?

Back in the saddle after several weeks away from the office and largely off-line, I have been reviewing various news items collected during my absence. One item immediately caught my attention--"Apple May Use 'Nuclear Arsenal' to Delay Palm's IPhone Rival," by Connie Guglielmo and Susan Decker, which appeared on February 2nd on Bloomberg.com.

Quite by chance, around the time that this item was published, I had posted my most recent MBA exam question, which focused on the various stages of the cellular/smartphone industry. From the IP vantage, the students were asked to address software copyright and trademark-branding issues, while the patent aspect was less highlighted in the question. The Bloomberg report has caused me to reconsider the potential role of patents in this industry, and especially the burgeoning smartphone business.

The article reported that Apple, and in particular Tim Cook, who has taken over the reigns of the company during the absence of Steve Jobs, has intimated that it would consider using its patent portfolio to challenge iPhone competitors, most notably Palm, which is scheduled to come out with its Pre smartphone within several months. Most recently (on January 20, 2009), Apple was awarded a patent for its so-called multitouch technology, which reportedly allows

"people [to] work the iPhone by touching the screen with two fingers and making swiping motions."

The next day, Cook was quoted as saying that "[w]e'll use whatever weapons we have at our disposal" to protect the company's IP.

Does the Apple Patent Arsenal Give iPhone Competitors a Sporting Chance?

A number of US patent practitioners offered their views about what how Apple can be expected to use its iPhone-related patent portfolio. Morgan Chu, a well-known IP litigator for Irell & Manella in LA, suggested that the move may be a form of "nuclear deterrent," whereby the very credibility of the threat forces competitors to redesign certain of their functional and technology features. As Chu noted, [t]he best deterrent of a nuclear arsenal is not to use it."

Robert Yoches, an attorney at IP giant Finnegan and Henderson in D.C, observed that Apple has historically been more successful in taking on competitors in the marketplace than in the courtroom. Yoches did not, however, explicitly state that Apple might break with custom in the current situation.

This is especially if the Pre phone is viewed as a "bet the company"-type of product for Palm, and litigation by Apple could have materially delay the launch of the Pre as well as force Palm to expend substantial sums in defense. Of course, if Apple would prevail in such an action, the injunction (if granted under the more stringent standard for awarding a permanent injunction in a patent infringment action following the U.S. Supreme Court decision in the eBay case in 2006), the affect on Palm could be far worse.

As for the patented technology itself, while Jobs described it as "phenomenol" and "magic", the article suggests that it might be less path-breaking than alleged. It notes that iPhone competitors have challenged the claim, and other companies--Nokia Oyi, Samsung Electronics Co, and Research in Motion--are reported to own patents related to the technology and to incorporate touch screens into its product. While these observations might temper Apple's ardor for pursuing a legal action, it certaintly does not of itself suggest that Apple might completely forego a sabre-rattling strategy against Palm or others.

Apple and Palm Smartphones: Another View

I do not know quite what to make of all this. On the one hand, as a colleague of mine from New York observed over lunch last week, clients seem less willing than in past recessions to embark on potentially expensive patent litigation proceedings. Sure a law suit might cost Palm, but it will cost Apple as well. On the other hand, credible threats and well-executed brinkmanship on the part of Apple could well achieve the desired efect (unless, of course, Palm reaches the conclusion tht has nothing to gain by settlement, nor matter how skilled the brinkmanship).