• by Diane Mermigas , June 11, 2008

When CEO Steve Jobs raises the technology bar, everybody wins--but Apple walks away with the prize.

Apple's 3G iPhone is the latest killer app for digital consumers who can't get enough mobile interactivity, as well as a virtual Pandora's Box for services and software. Prices slashed in half (to as low as $199) and more powerful features will drive 2.0 iPhone's mainstream adoption. That will make the 3G iPhone a springboard for advanced devices in the home, reaching far beyond the reach of rivals Rim BlackBerry and Nokia.

Email and security upgrades will make it the first widely used device to provide both the consumer and work enterprise markets with a truly ubiquitous mobile Internet. That will yield stunning advances in advertising and e-commerce by combining social networking, search, location, communications and video entertainment functions in a simple handheld tool.

As Piper Jaffray analyst Gene Munster observed, Apple's latest product iteration is not a phone; it's an "integrated experience--a lifestyle." Apple's super-smart phone and others like it could become the digital gatekeeper, trumping Google's applications and Microsoft's software.

Companies in all industries must innovate for this "new online lifestyle" to remain competitive, Google CEO Eric Schmidt told the Economics Club of Washington --the same day Jobs unveiled the 3G iPhone. Mobile phones already are the dominant device worldwide-- outnumbering personal computers 3-to-1 and expected to top 4 billion by decade's end, and to eventually exceed the ad revenues generated on the Web.

Young consumers in particular are so attached to their connected phones that they are willing to watch video on tiny screens and type text messages on painfully small keyboards. Even with limited storage, a modest camera and no video recording function, the 3G iPhone's high-speed connections and larger touch screen will spark the next phase of interactive capitalism.

Apple is upping the ante with subsidies and other support from its exclusive service provider AT&T, less than 20% of whose customers have integrated devices. While AT&T considers it a game-changing device, there is marketplace skepticism that the service provider will be able to keep pace with the 3G traffic of iPhone patrons, who will pay an additional $30 to $45 every month.

The first-generation iPhone snared nearly 30% of the domestic smart phone market by the end of 2007, and expects to sell 10 million units in 2008. The lower price points could triple iPhone demand. "It has given the U.S. consumer a glimpse of what is possible in terms of data service over a mobile device," Bernstein Research analyst Jeffrey Lindsay said. It is one of the few companies that has a secure hold on the four basic Internet business models: e-commerce ($301 billion in 2007 revenues), access ($106 billion in 2007 revenues), advertising ($46 billion) and subscriptions and content ($14 billion). Its simplicity and compatibility to other Apple devices and platforms will be difficult for rivals like Verizon and Google to match.

The 2.0 iPhone will finally break the 3G logjam in the U.S. and become the next major Internet platform, with the assistance of third-party developers innovating on Apple's powerful operating system and keeping an estimated 70% of the revenues they help generate. Some of the new applications (many backed by leading venture capital firm Kleiner Perkins Caufield & Byers) include the free VoIP calling service iCall, the software Plum Record, the LingoLook foreign language, Associated Press Mobile News, Digital Legends fantasy role-playing and other video games, the Readdle document reader and the social location-based GPS service Whrrl.

Forrester Research says the end game is for Apple to become the hub of the digital home with eight key products and services to connect PCs and digital content to the HDTV stereos-audiovisual infrastructure in consumers' homes by 2013. These will be supported by the launch of new products and a reengineering of the Apple store; both were announced Monday. Apple is in the throes of reinventing itself again, with an estimated 40% of the U.S. population consumers of Apple products (Macs, iPods, iTunes) and Pixar Animation movies.

What Apple can do with unparalleled speed, simplicity and efficiency is integrate audiovisual and information technology products running amuck in homes. The Macintosh will become the home content manager. An Apple home server product will support an AppleSound universal music controller, a network-enabled "clock radio" and digital photo frames, and an Apple TV-PC media extender, according to Forrester analysts J.P. Gownder and James McQuivey. The new MobileMe Web service (at $99 annually for 20 gigabytes of storage) will provide a new software bridge and cloud computing to facilitate storage of data and content in sync with users' iPhones, Macs and PCs.

Inherent in the 3G iPhone is the consumer-centric, crossover capabilities that will allow Apple to manage digital experiences across multiple platforms, devices, content and services. Apple will become a true convergence brand, protected by a newly issued trademark for the three dimensional shape of its iPod media player designed to keep competitors at arms' length.

Going mainstream as well as fully international (rolling out in 64 more countries by year's-end) is going to make Apple an even more powerful force for anyone involved in media and the Internet--which could be nightmarish, given Apple's rigid walled garden of content. Apple revved up the iPhone engine this week with a Securities and Exchange Commission filing that explained a change in its business model. It will no longer collect revenues from carriers authorized to distribute and provider network services as long as they subsidize the lower cost of the iPhone. Apple is forfeiting upfront revenue-sharing on the bet that globally scaling the iPhone will be worth more in the long run. It seems the only thing more cunning than Apple's ability to embrace and cater to the tech-empowered consumer is to incentivize its business partners--such as AT&T and other global carriers) to come along for the wild ride.