Technology is our friend: Why a mini-iPhone is inevitable
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February 14, 2011

Why a mini-iPhone is inevitable

A few days ago the rumor came up that Apple will offer a low-priced "mini-iPhone" (look here or here). I don't see that as a rumor but an inevitable step in Apple's further growth and cannot understand the irritations some people expressed in comments and posts.

Here's why:

Nokia and WP7 did emphasize the fact that they are building "the next mobile ecosystem" and that they see a "three horse race". The other two horses (or "ecosystems"), running downhill (as opposed to Nokia) and with a 50 miles head start, are of course Apple and Android. "Ecosystem" was one of the terms we stressed most at Deutsche Telekom in 2005/2006 when we were trying to establish a new strategy, so I think it might be interesting to share some basic thoughts on what the components of an ecosystem are and how they work together since they are the reason why an "iPhone mini" or "nano" is inevitable.

When you are posting an Instagram image from your iPhone or checking in to some location via Foursquare on your HTC Desire or for example post a status update on Facebook through Xbox Live, you are using a network access from some telecommunication provider, a piece of hardware that is running on an operating system, a service (piece of software) designed to run on this OS and some kind of personal network as the recipients of your action. There are no clear rules on what has to be controlled by who to establish such a system, but it is clear that there are two components that can be viewed as the core:
A) the operating system, setting the rules and environment for any kind of interplay, and B) a mass of participants that brings anything within an ecosystem to life.

The mass of participants cannot be overestimated as the most vital component within any system:

You could have the best credit card in the world, without participants as credit card holders you wound not be able to build a network of places that accept your card; without a network of places that will accept your card, you will not be able to build a mass of credit card holders.

You could also have the best game console in the world, without a mass of consumers as potential buyers of games you would not get game studios to design games for your console, and without games for your console, you would not get a mass of consumers to buy it.

In our case, you could have the best phone and UI in the world, but without customers on the one hand you would not attract developers and service providers on the other hand, and without services, you would not be able to sell a mass of these phones.

So the operating system is merely the basis: there are services/apps (built on and specifically for an operating system, being enabled and enhanced by an operating system) and a mass of (networked) consumers as the true core of each digital ecosystem.

Apple, being the control freaks that they are, took influence on every layer of such an ecosystem and not only on the core: The network access that adds nothing to these types of systems (and could be completely exchangeable) was restricted to only one operator (in most markets) for years. Key services (entertainment, mail, browsing) are provided by Apple, other apps and services are controlled and being influenced by Apple. And while some ecosystems work on a variety of devices from many different manufacturers, Apple not only controlled or influenced but completely built every hardware that connects with their ecosystem. Understandable given the heritage as a hardware company and given the fact that a hardware decision is a consumers "ecosystem-decision".
The power of such a system and how much it draws additional consumers (and additional hardware purchases from existing customers) once it is established and gained momentum can be seen here in one of Mary Meeker's fabulous charts:

The more consumers in an ecosystem, the better ecosystem additions sell

Android goes the other way round: Of course they own some key services (but totally different ones than Apple does, mainly anything mobile search related), but in terms of hardware they are totally open. They even let anyone modify their OS to their specific needs unless some cornerstones are untouched - because they understood that the more competition there is on any level (network access, hardware, software/services) of an ecosystem, the more innovation, speed and market coverage (in terms of price range, taste, preferences) will be achieved - and by this, the more consumers will be attracted to join the ecosystem, forming the biggest attraction themselves for even more manufacturers, developers, service providers to join in.
Parabolic curve in Android shipments - forcing Apple to react

Given this (from Apple's perspective: horrifying) development in Android's user base and WP7 as a great platform that brings in networked consumers through, messenger, Outlook, Xbox and more services but lacks penetration (and hopes to achieve this with Nokia), Apple's primary task is to offer a bigger variety of devices to keep on growing the user base of their own ecosystem. An "iPhone Nano" is therefore inevitable, just like the iPod userbase could not have grown without a low price alternative to the - remember? - terribly expensive iPods 1 and 2. I personally still do not believe that a single company will be able to cover all networked devices in every price range and every taste; so on the long run, Apple may have to introduce partners for TVs, cars, consoles, smart homes and whatever may be part of an ecosystem in future, or they will have to focus on a premium segment with a questionable growth perspective compared to other ecosystems. For now, they will of course exploit every opportunity to cover as large a market as possible.

A mini-iPhone will be an interesting experiment in terms of what it has to offer (in hard- and software without cannibalizing the higher priced phones too much) and from a brand perspective - the iPod Nano and even the (from a hardware, cost/value point of view: terrible) iPod Shuffle did not hurt the brand at all, but may have cannibalized some higher-margin iPod sales. For the sake of growing the user base, that was a price Apple was willing to pay, and they will have to do the same with phones (short term) and slates/tablets (mid term), too. Of course they will only do this at the very last possible moment - given Androids development, this moment has come for phones. So now is the time for growth in every smartphone market segment, including the 250$ and below area. I am keen to see which "special feature" they have cooked up for this one, offering a differentiator besides the OS for phones in this segment. I cannot imagine it will be the "iPod Shuffle" equivalent but rather a Nano wristwatch phone or something else that at least looks like being unique. We will learn soon enough. [UPDATE: The special differentiator for the miniphone could very well be that it has no memory, according to RWW]