Apple: how the iPhone entered a market led by Nokia, and sold a million in 74 days

The situation

On 9 January 2007, at the Macworld conference in San Francisco, Steve Jobs showed a phone that Apple would not sell for another five months. Apple called it a mobile phone, a widescreen iPod with touch controls and an internet communications device in one. It had a 3.5-inch multi-touch screen that users controlled with their fingers, a 2-megapixel camera and a browser that displayed full web pages. In the United States it would cost 499 dollars for the 4GB model and 599 dollars for the 8GB, and it would be sold through one carrier, Cingular, which Apple described as having more than 58 million subscribers. Jobs said it was “literally five years ahead of any other mobile phone”.

Apple was not a phone maker. It sold Macs and iPods. In the quarter ended 29 September 2007, its first full quarter of iPhone sales, it sold 1,119,000 iPhones alongside 2,164,000 Macs and 10.2 million iPods, and made 6.22 billion dollars of revenue and 904 million dollars of profit. The firms it was about to compete with were far larger in phones. Nokia alone sold 437.1 million devices in 2007, about 38% of an industry that shipped roughly 1.14 billion. Apple was entering a market of more than a billion devices a year with one model.

This case looks at what Apple decided to build and how it sold it. It covers the first two years, from the announcement to the iPhone 3G and the App Store in 2008. The central question is why a product with a high price, no 3G network support and a single carrier reached a million buyers in 74 days, and what Apple did in its first months to widen that audience.

Background

A company built on Macs and iPods

By 2007 the iPod was Apple’s largest unit business. In the quarter ended September 2007 it sold 10.2 million iPods, up 17% on the year before, and in the December quarter that followed it sold 22.1 million. Mac sales were also growing: 2.164 million units in the September 2007 quarter, a rise of 34%.

That gave Apple a customer base that already used it for music and software, through iTunes. The iPhone announcement made use of that base. Its music and video features worked with iTunes, and the January release noted that the iTunes Store offered more than 350 TV shows, more than 250 films and more than 5,000 music videos at the time of the announcement. Contacts and calendars synchronised with a PC or Mac.

What the phone industry looked like

Nokia’s results for 2007 show the scale of the incumbents. It reported net sales of 51.1 billion euros, an operating profit of 8.0 billion and an estimated 38% share of device volume for the year, rising to 40% in the fourth quarter. Its average selling price was 86 euros. It shipped 60.5 million smartphones of the kind it called converged devices, from an industry total of about 122 million. The market was large and profitable for the leaders.

The software side was dominated by a few platforms. A study reported in 2007 gave Symbian 72.5% of the smartphone operating system market at the end of 2006, Linux 16.9% and Microsoft 4.6%. Microsoft’s chief executive, Steve Ballmer, had a clear view of where the market was going. In an interview with USA Today, quoted in the trade press, he said: “There’s no chance that the iPhone is going to get any significant market share.” He added that he would prefer Microsoft’s software on 60%, 70% or 80% of the 1.3 billion phones sold than to chase the 2% or 3% he thought Apple might get.

The industry

Handsets reached most customers through carriers, and the iPhone’s own pricing shows the link. The 2008 iPhone 3G prices of 199 and 299 dollars applied to customers taking a new two-year carrier plan, and the original iPhone was announced with a single US carrier. A handset maker that wanted to reach a market had to work out terms with the carriers in it.

The economics favoured volume. Nokia earned a 21.7% operating margin in its Mobile Phones unit on a falling price per device, because it sold hundreds of millions of units. A new entrant with a high-priced device had no obvious route to that scale. Smartphones, in the sense of Nokia’s converged devices, were a minority of the market: about 122 million of the roughly 1.14 billion devices sold in 2007.

The incumbents’ own plans for 2008 show how they read the market. Nokia’s results for 2007 forecast industry volume growth of about 10% for 2008 and said the company aimed to increase its own share. It also expected average selling prices to fall. Nothing in that outlook points to a competitor with a different model. The leaders were planning for more of the same: more units, lower prices and a larger slice for themselves.

The technical environment also limited what a new phone could do. The first iPhone used quad-band GSM and EDGE data, plus Wi-Fi and Bluetooth, but not the faster 3G networks. Apple fixed that with the iPhone 3G in 2008.

Carrier structure mattered for the launch too. In the United States, Apple chose a single partner, announced as Cingular and reported as AT&T by the time of the launch. The terms of the arrangement are not described in the sources used here. One consequence is visible: a problem at the carrier would become a problem for Apple, as the launch weekend and the iPhone 3G launch showed.

The decision

Apple’s problem was how to turn a touch interface and an iPod business into a phone that a mass market would pay for. The sources do not record the internal options considered. The alternatives below are the obvious ones, framed as such, and the record shows which one Apple took.

Option one: extend the iPod

Apple could have kept making music players and added phone features through a partner’s device. That would have limited its risk and kept the company in a market where it already won. It would also have left the phone itself, and the customer’s main device, in the hands of firms such as Nokia, whose 437.1 million devices in 2007 showed who held the customer.

Option two: license software to existing handset makers

A second option was to sell the interface to other phone makers. Microsoft was present in the market as a software supplier, with a 4.6% share of smartphone operating systems at the end of 2006. Selling software to many makers spreads software across many devices but gives up control of the experience. Apple’s choice of a single device, a single carrier and its own software points the other way: control of the whole product, from the multi-touch screen to the way voicemail worked.

Option three: build the whole phone and sell it through one operator

The path Apple took was to design the hardware, the software and the services, and to sell with one carrier in each market. The January release shows what that meant in practice. Visual Voicemail let users choose which voicemails to play in any order. Yahoo! offered a free push IMAP email service to iPhone users, and Google search and maps were built in. The phone had an accelerometer, a proximity sensor and an ambient light sensor, so that the screen turned with the device, switched off during calls and adjusted its brightness.

The cost of this choice was a high price and a lot of risk. Apple had to persuade people to pay 499 or 599 dollars for a phone that did not support 3G networks and was tied to one carrier.

What they did

The unveiling, January 2007

The announcement came about five months before the launch. Apple set out US availability in June 2007, Europe in late 2007 and Asia in 2008. Jobs described the interface as “the most revolutionary user interface since the mouse”.

The launch, 29 June 2007

The phone went on sale on 29 June, in the last two days of Apple’s third fiscal quarter. Apple sold 270,000 iPhones in the final 30 hours of the quarter. The carrier reported 146,000 activations in the first two days, more than 40% of them from customers who had switched from a rival network. Many of the phones sold on 29 and 30 June were not activated until later. Apple defers iPhone revenue over 24 months, so those sales added only about 5 million dollars to quarterly revenue.

The price cut, September 2007

On 5 September Apple cut the price of the 8GB model from 599 to 399 dollars, about two months after launch. Jobs addressed early buyers in an open letter, posted by 6 September. He said the cut was meant to bring in new customers for the holiday season, and he wrote that early customers “trusted us, and we must live up to that trust”. Apple gave anyone who had bought at the higher price and received no other compensation a 100-dollar credit to use in its stores.

One million in 74 days

Apple passed one million iPhones in early September 2007, and Jobs later said it had taken 74 days from the launch. The fiscal fourth quarter, ended 29 September 2007, brought iPhone sales of 1,119,000 units, bringing the total for fiscal 2007 to 1,389,000. Revenue for the quarter was 6.22 billion dollars and net profit 904 million.

The iPhone 3G and the App Store, 2008

On 9 June 2008 Apple announced the iPhone 3G at 199 dollars for the 8GB and 299 dollars for the 16GB model, each needing a new two-year carrier plan. Jobs said it was “twice as fast at half the price”. It went on sale on 11 July in 22 countries according to Apple (a later trade report says 21), with more than 70 promised later in the year. The accompanying software update added Microsoft Exchange support for business email and supported third-party applications built with Apple’s software development kit. The App Store was available in 62 countries at launch. In the first weekend Apple said it sold 1 million iPhone 3G units, and the store recorded 10 million downloads. The launch was marred by activation problems, which the carrier blamed on iTunes synchronisation issues.

What happened

Unit sales

The first full quarter was the one that showed the demand. Apple sold 1,119,000 iPhones in the quarter ended September 2007 and 2,315,000 in the December quarter, during which total revenue reached 9.6 billion dollars, 35% above the prior year, and net profit 1.58 billion. Mac sales in that quarter were 2,319,000 and iPods 22,121,000.

What the first sales figures hid

Apple’s accounting made the early iPhone look smaller than it was. It spreads iPhone revenue over 24 months, so the 270,000 phones of the first 30 hours added only about 5 million dollars to the June 2007 quarter. A reader of that quarter’s revenue alone would have seen almost nothing. Units told a different story. By the end of the next quarter it was reporting 1,119,000, and by the end of the following one 2,315,000, which is more than double.

The activation figures matter for the same reason. The carrier counted 146,000 activations in the first two days, against Apple’s 270,000 sales, and AppleInsider quoted Apple saying that many of the phones were not activated until afterwards. For the launch of a product that needs a data plan, a sale and a working customer are two different events.

Against the incumbents

Set against the incumbents the numbers remained small. In July 2008 an industry report noted that Nokia sold almost 10 million phones a week, while Samsung and LG each shipped more than 100 million a year. Apple’s own target at the time was 10 million iPhones by the end of 2008. The case’s reading is that the iPhone’s influence outran its volume, but the sources used here give sales, not proof of influence.

The cost of early adopters

The price cut cost Apple money and goodwill in the short term. Jobs’s open letter and the 100-dollar credit show that the company recognised the damage to its most loyal customers. The lower price also helped the move toward a wider public. By 2008 the iPhone 3G sold for about half the original price in the United States. Its first weekend, with 1 million units, compares with the 74 days it took the first model to reach the same total.

Other views

Microsoft and the incumbents

The most quoted dissent came from Ballmer, who predicted the iPhone would win no significant share. His reasoning, as reported, was about volume: Microsoft wanted its software on most of the 1.3 billion phones sold. A fair reading is that he judged the product by the economics of the existing industry and gave less weight to a change in them.

The incumbents’ own forecasts

Nokia’s January 2008 release is a useful counterweight. It reported that its share had risen to 40% in the fourth quarter of 2007, the same calendar quarter in which Apple sold 2,315,000 iPhones, and it expected to take more share in 2008. On the numbers of the time the incumbent’s confidence was understandable: 133.5 million devices in a quarter, against 2.3 million. The release was written before the iPhone 3G and the App Store. The sources used here show what Nokia knew and forecast in January 2008. They do not show how its position changed afterwards.

Early buyers and the launch

Early customers were the group that lost most from the September price cut, and the credit was Apple’s partial answer. The launch also exposed limits: no 3G, activation problems at the carrier, and third-party apps arriving only with the iPhone 2.0 software in July 2008. AppleInsider noted the gap between the 270,000 phones Apple said it sold and the 146,000 activations the carrier reported, and put it down to customers activating later.

Limits of the evidence

Several things are not settled by the sources used here. Apple’s internal options are not documented. The revenue-sharing terms with the carrier are not described. The sources do not break down the first-year sales by model or by country. Sales figures are Apple’s own, as reported in its releases.

Reading it through a framework

Porter’s five forces

In 2007 the strongest force in the handset industry may have been the carrier as a powerful buyer, since handsets reached most customers through carriers. Apple’s decision to sell through a single carrier is the visible response, though the terms are not in the sources used here. The threat of substitutes was also changing: a phone that was also an iPod and an internet device replaced three products, which is why the January announcement described it that way. The rivalry force was heavy, with Nokia at 38% of units, but the rivals were competing on the old basis of volume and price. Supplier power was a risk for Apple too, because it depended on a carrier for connectivity.

Jobs to be done

The jobs to be done approach asks what customers hire a product to do. For the typical phone buyer, the job was to make calls and send texts. For the person who also carried an iPod, a camera and a device for email, the job was to carry fewer things and still listen to music, look at the web and read mail. The January release shows Apple hiring its phone for all of these: music and video from iTunes, HTML email, full web pages, maps and a camera. The iPhone 3G and the App Store extended the idea: with apps from third parties, the number of jobs the phone could be hired for grew without Apple designing each one.

Since then

The iPhone’s first two years set out a pattern that Apple kept: a premium product, tight control over hardware and software, and a store that takes in outside developers. In the September 2007 quarter the company made 6.22 billion dollars of revenue. For fiscal 2025 it reported full-year revenue of 416 billion dollars, with a record iPhone revenue for the September quarter, an all-time high for Services revenue and an installed base of active devices that it said had reached an all-time high across all product categories and geographic segments. The release did not give separate figures for annual iPhone revenue or the size of the installed base.

What to take from it

• A new product can enter a crowded market by changing the basis of competition instead of matching incumbents on the existing one, as the iPhone did by competing on interface and software where Nokia competed on volume and price.
• Controlling the whole product, from hardware to software to the carrier relationship, can give a small entrant bargaining strength that a large rival gets from scale.
• Pricing a premium product high at launch and cutting later can reach early adopters first, but it carries a cost in trust, as the 100-dollar credit and Jobs’s open letter showed.
• Dismissing a product because it fails on the incumbents’ economics can mean missing a change in the economics themselves, which is the lesson in Ballmer’s 2007 prediction.
• Openness can follow control: Apple added third-party apps and the App Store in 2008, a year after launch and once the core product had found its audience.

Questions to think about

1. What were the advantages and risks of Apple’s exclusive deal with a single carrier, and under what conditions would a non-exclusive deal have been better?
2. Was the September 2007 price cut a mistake in launch pricing, or a deliberate and sound way to reach two groups of customers in turn?
3. Which of the phone makers of 2007 could have built a rival product, and what stopped them?
4. How would you judge a prediction such as Ballmer’s: by whether it was right, or by whether the reasoning was sound at the time?

Concepts at work

This case draws on competitive strategy (Porter’s five forces), jobs to be done and platform strategy. Explore them in Insights.

Written from the public sources listed below. Figures are as those sources report them.