Elgan: Why the iPhone doesn't matter

Handsets are irrelevant. It's all about software now. And networks.

The new iPhone 3G S is here! The new iPhone 3G S is here!

Big deal. New cell phone hardware doesn't matter that much anymore. What's important now is software. And networks.

Two years ago, the choice between an iPhone or an alternative to the iPhone was mostly about hardware. Cell phones had always been about hardware first, software and networks second.

The iPhone decision back then was: Can I live without a keyboard? The upside was a huge, high-quality screen. Do I want to control apps with touch? Or would I rather navigate menus? What about that horrible battery life? On the other hand, look how thin it is. It was all about hardware.

Now the decision is different. Do I want the iPhone's thousands of apps or the Palm Pre's multitasking ability? Do I want Android's Google search centricity or Windows Mobile's Microsoft Office compatibility? It's all about software and networks.

Don't believe me? Try the following thought experiments:

1. Apple rolled out this week an awesome iPhone 3.0 upgrade. The software improves iPhone 3G performance and functionality. Of course, the new iPhone 3G S runs the new 3.0 OS as well. But if you had to choose between the old iPhone 3G with the new iPhone 3.0 software, or the new iPhone 3G S with the old iPhone 2.0 software, which would you choose? I think most would choose the old hardware with the new software.

2. If you had to choose between the original iPhone, but have full access to iPhone Apps, or choose the new iPhone 3G S but have zero access to Apps, which would you choose? I think you'd go with the Apps.

3. Which would you choose: The Palm Pre with the iPhone 3.0 software, iPhone Apps and iTunes - or the iPhone 3G S running WebOS and accessing the Palm App Catalog. I think most iPhone fans would choose the Palm hardware with the iPhone software and network. And most Palm fans would choose the iPhone with the WebOS. (What Palm users like best, according to my own unscientific poll, is the WebOS and its gestures, "card" system and multitasking - in other words, the software.)

In fact, Apple is dominating the cell-phone handset market precisely because it realizes the new primacy of software and networking. Apple set up a development system that resulted in a huge number of standard-functioning low-cost applications. This month, they also rolled out new hooks into MobileMe, which give the iPhone new functionality - and users new reasons to demand an iPhone.

A similar phenomenon is happening with other devices. For example, the Amazon Kindle is by far the best selling e-book reader. But the Kindle hardware device is nothing to write home about, especially the first one, which was a piece of junk. What's great about the Kindle, and the thing that makes it "better" than the Sony Reader and even better than all the color "Kindle Killers" that have been demonstrated in the past year, is the Amazon Kindle Store. Hardware doesn't matter. Network is everything.

And look at the console gaming contest between Microsoft and Sony. The Sony Playstation hardware is vastly superior to Xbox 360. But Microsoft wins primarily because of the appeal of the Xbox Live network.

What's happening with these consumer electronics devices is that they're going through the same transitions as PCs did in the early days.

Back in the 1980s, people bought hardware, and the software was secondary. Over time, however, each PC hardware line increasingly resembled all the others, and what really mattered was software. Eventually, even Apple ended up moving over to Intel-based PC hardware. But nobody cared.

What really matters now is the Mac OS X or Windows or Linux, and all the software you can run on these platforms.

And just look at what's different about the iPhone 3G S. Like a new PC, the new phone is pretty much the same as the old phone, just faster. (The "S" stands for "speed.")

Why this matters

So what does it mean that cell phone software and networks are more important than the hardware?

In a nutshell, it predicts which non-cell phone devices are likely to succeed and fail in the months and years to come.

For example, we're almost certainly going to see new netbooks and tablets running cell phone operating systems real soon now. We'll be able to buy systems running the iPhone OS, WebOS, Windows Mobile and possibly others. These devices will hook into the respective app stores and take advantage of other services offered by the companies.

Because of the new primacy of software, I can safely predict even now, sight unseen, that Apple's offerings will probably dominate as thoroughly as the iPhone, and for the same reason: The App Store, iTunes and MobileMe.

The new importance of networks also raises an interesting set of questions. For example, who will create the first or best Xbox Live-like multiplayer gaming network for a cell phone platform? What if Microsoft rolled out a version for Sidekick users, and pushed Xbox gaming development in that direction? Or, alternatively, what if Apple built an Xbox Live-like gaming network?

What if one of the major handset makers, through partnership or acquisition, gained exclusive control of Amazon's Kindle and Audible.com distribution? Or Netflix? Or Facebook?

The game-changers of the future will not be new hardware features, but new software and network capabilities.

So if you'll be buying a new iPhone 3G S, enjoy it! But realize that the best thing about it is that it gives you the iPhone 3.0 software, the App Store, iTunes and MobileMe just like the old iPhone did. Just faster.

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Mike Elgan

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