Battle of the Titans: How the Fight to the Death Between Apple and Google is Transforming our Lives. Fred Vogelstein
start out as Apple’s “next big thing.” Jobs had to be talked into building a phone. It had been a topic of conversation among his inner circle almost from the moment Apple launched the iPod in 2001. The conceptual reasoning was obvious: Why would consumers carry two or three devices for email, phone calls, and music when they could carry one?
But every time Jobs and his executives examined the idea in detail, it seemed like a suicide mission. Phone chips and bandwidth were too slow for anyone to want to surf the Internet and download music or video over a cell phone connection. Email was a fine function to add to a phone. But Apple couldn’t leverage all the work it had put into building a music player such as the iPod to do that. Research in Motion’s BlackBerry was fast locking up that market, anyway. Apple even considerd buying Motorola in 2003, but executives quickly concluded it would be too big an acquisition for the company then.
Worst of all10, if Apple wanted to make and sell a phone in the United States, it would be at the beck and call of the U.S. wireless carriers. Back then, phone manufacturers such as Motorola were the serfs of high tech in the United States. They depended on carriers’ marketing dollars to get consumers into stores, and then they depended on carriers to make the phones affordable by subsidizing their purchase price. That made manufacturers powerless to resist carriers’ meddling in how each phone should be built. Manufacturers occasionally pushed back against this dominance and were always met with the same response from the carriers: “You can build the phone your way, but we might not subsidize it, market it, or allow it on our network.” Manufacturers always caved in the face of this threat.
Jobs was personally offended11 by this way of doing business and wanted no part of it. “We’re not the greatest at selling to the Fortune 500, and there are five hundred of them—five hundred CIOs [chief information officers] that are orifices you have to go through to get” that business. “In the cell phone business there are five. We don’t even like dealing with five hundred companies. We’d rather run an ad for millions and let everyone make up their own mind. You can imagine what we thought about dealing with five,” he said during an onstage interview at the All Things D conference in May 2003. Translation: I am not about to spend hundreds of millions of dollars to have a bunch of suits tell me how to build and sell my phone.
That sounded tough and principled. But by the end of 2003, as the iPod became Apple’s most important product since the Macintosh, it was also starting to look misguided. Cell phone makers were putting music-listening applications in their phones. And companies such as Amazon, Walmart, and Yahoo! were beginning to sell downloadable music. Executives such as iPod boss Tony Fadell worried that if consumers suddenly gave up their iPods for music phones, Apple’s business—only five years removed from its flirt with bankruptcy—would be crushed. “We didn’t really have a hit on our hands [with the iPod] until late 2003, early 2004, so we were saying maybe we don’t have the market domination—the retail channels—to expand the iPod’s business properly,” Fadell said.
It’s hard to imagine12 a time when the iPod wasn’t an iconic product, selling more than 50 million units a year; but back then Apple had sold only 1.3 million devices in two years and was still having trouble getting retailers such as Best Buy to carry it. “So we were thinking, ‘How do we get above the noise? How do we make sure that we are at least competitive so that anyone who is carrying a cell phone can get iTunes music?’ Because if we lost iTunes, we would have lost the whole formula,” Fadell said.
Publicly, Jobs continued his13 harangue against the carriers. At the D conference in 2004, Stewart Alsop, Jr., the venture capitalist and former journalist, actually begged Jobs to make a smartphone that would improve on the popular Treo. “Is there any way you can get over your feelings about the carriers?” Alsop asked, offering to connect Jobs with Verizon CEO Ivan Seidenberg, who was also in the audience. Not a chance, Jobs said. “We’ve visited with the handset manufacturers and even talked to the Treo guys. They tell us horror stories.” But privately, Jobs was thinking hard about the content of Alsop’s pitch.
Jobs’s first answer to the growing competition wasn’t the iPhone, but something much more modest—a music phone called the Rokr, to be built in partnership with Motorola and Cingular, the big wireless carrier that would, via two mergers, become AT&T. The deal, agreed to in early 2004, seemed like the best of all worlds for Apple. It would license its iTunes software to Motorola to be put on Motorola’s supersuccessful Razr cell phone, and Motorola would handle the rest. Apple would get a license fee for letting Motorola use the software, and Jobs wouldn’t have to deal with the wireless carriers. iTunes would help Motorola sell more phones, get Cingular more wireless customers, and enable Apple to compete with the music phones it feared. “We thought that if consumers chose to get a music phone instead of an iPod, at least they would be using iTunes,” Fadell said.
Instead, the Rokr was an embarrassment. When Jobs unveiled it nearly eighteen months later in September 2005, it was not capable of over-the-air music downloads, the device’s main selling point. It was big and chunky—nothing like the sleek Razr that Motorola had made famous. And its music capacity was artificially limited to a hundred songs.
The tension between the partners14, especially Apple and Motorola, was obvious quickly after Jobs was done demoing the device onstage at Moscone Center in San Francisco. Jobs had released the first iPod nano at the same time, and when a reporter asked Motorola CEO Ed Zander a few weeks later if he felt upstaged by the other products Jobs had unveiled, his answer was succinct: “Screw the nano.” Wired magazine soon put a story of the fiasco on its cover under the headline YOU CALL THIS THE PHONE OF THE FUTURE?
Jobs successfully pinned the Rokr screwup15 on Motorola, but the fiasco was mostly Apple’s fault. Yes, Motorola had produced an ugly phone, and it continued to produce phones that didn’t sell well for the next four years until Zander resigned. But the Rokr project’s real problem was that Jobs’s reason for the deal evaporated almost as soon as it was signed, Fadell said. The deal was designed as a defensive maneuver, a hedge against companies’ trying to build music phones without having to deal with the carriers themselves. But with each passing month in 2004 it became clearer that the last thing Apple needed to do with iTunes and the iPod was to play defense. It didn’t need the Rokr to help it more broadly distribute iTunes. It just needed to hang on as iPod sales took off like a rocket ship. In the summer 2003 Apple was selling only about three hundred thousand iPods a quarter. At the beginning of 2004 it was selling only eight hundred thousand a quarter. But by summer 2004 sales exploded. It sold 2 million during the quarter that ended September 30, 2004, and another 4.5 million in the final quarter of the year. By the time ugly Rokr prototypes showed up in the fall of 2004, many Apple executives saw clearly that they were on the wrong path, and by year-end Jobs had all but abandoned the project. He was still driving the iTunes team to deliver the software that would go in the Rokr, but he was listening more carefully to executives who thought the Rokr project had been folly from the start.
It wasn’t just the iPod’s success in 2004 that diluted Apple’s enthusiasm for the Rokr. By the end of the year, building its own phone no longer seemed like such a bad idea. By then it looked like most homes and cell phones would soon have Wi-Fi, which would provide high, reliable bandwidth over the homeowner’s DSL or cable connection. And outside-the-home cell phone bandwidth looked like it would soon be fast enough to stream video and run a fully functioning Internet browser. Phone processor chips were finally fast enough to run cool-looking phone software. Most important, doing business with the carriers was starting to seem less onerous. By the fall of 2004, Sprint was beginning to sell its wireless bandwidth wholesale. That meant that by buying and reselling Sprint bandwidth, Apple could become its own wireless carrier—an MVNO, short for “mobile virtual network operator.” Now Apple could build a phone and barely have to deal with the carriers at all. Disney, on whose board16 Jobs sat, was already in discussions with Sprint about just such a deal to provide its own wireless service. Jobs was asking a lot of questions about whether Apple should pursue one as well.
Cingular