Turning Cell Phones On Their Ear

His usual smooth voice turned raspy, Steve Jobs nonetheless radiated the satisfied glow of a man who had just pulled off a bravura performance before a packed house at San Francisco's Moscone Center. In his hand was his latest gem: a combination phone/music player/Web browsing device called the iPhone. Tapping on its sleek, candy-bar-size screen, Jobs conjured up Wall Street's verdict: "Let's see, Apple's stock is up...8%!" he said matter-of-factly. "Now let's look at RIM (cell-phone rival and BlackBerry maker Research in Motion. Hmm, it's down 7%."

Look out--here comes another genre-busting gadget from Jobs and the newly named Apple Inc (NASDAQ:AAPL - News). Despite the iPhone's high starting price of $499, Jobs is promising to turn the cell-phone business on its ear. That's no idle threat, coming from the guy who paved over the personal computer's awkward interface of arcane commands with easy-to-use graphic icons in the 1980s. Apple also set the tone for the digital music market when it brought out the iPod in 2001, sweeping away a clutter of clunky, hard-to-use players.

Drop The "Computer"
Now, jobs aims to leapfrog rivals with a device that offers a similar panoply of capabilities to other high-end "smart phones" like the BlackBerry and Palm's (PALM) Treo--minus the frustrating complexity that has turned away mainstream consumers. "The problem is that they're not so smart, and they're not so easy to use," Jobs told the adoring Macworld crowd.

Here's why the iPhone should scare the daylights out of phone makers: Despite Apple's announcement that it was dropping "Computer" from its name, there's more computer in the iPhone than just about any other smart phone out there. It runs a slimmed-down version of the Mac
OS X software found in every Mac PC. And it's a lot easier for Apple to add phone features to a mobile computer than it is for a handset maker to move the other way. If the iPod helped people take all their music with them anywhere, the iPhone promises to cut the moorings from a whole new swath of digital activities, from e-mail to video entertainment. "This clearly underlines the fact that we are entering a new phase of computing," says Seamus McAteer, co-founder of the market research firm M:Metrics Inc. "Mobile phones are becoming full citizens in the computer world."

The iPhone could set a new standard for the universal digital device when it goes on sale in June. An ingenious interface lets the phone play many roles. Gone is the keyboard, the usual mess of tiny keys and cryptic buttons, replaced by a touch-sensitive 3.5-inch screen.

But if the iPhone is to be truly revolutionary, it must also crack open the power structure of the cellular industry. That will be a much tougher nut. Today, most consumers choose a carrier, then pick from various phones that are compatible with its network. Apple created the online music infrastructure in an environment where the established market had been disrupted by file sharing (remember
Napster?). But the wireless phone industry is completely different, with strong incumbents. And unless Apple drops the price, iPhone may not appeal to enough buyers to seriously disrupt the industry. There's also the little issue of whether Apple can wrest the iPhone name away from Cisco Systems Inc. (NASDAQ:CSCO - News).

Still, Apple's rethinking of the phone may spur the whole industry to deliver on its many visions of an easy-to-use, universal digital device. This has been an ongoing struggle for Motorola Inc. (NYSE:MOT - News), even while it was scoring a major hit with its slick-looking RAZR. CEO Edward J. Zander is now pushing simplicity. His new RIZR Z6 model, due out midyear, will let users download a song, send photos, or leap to the Web in a click or two, down from about six with current phones. "Wouldn't it be great to have an easy-to-use, same-as-your-PC mobile device in your pocket?" Zander asked an audience at the Consumer Electronics Show in Las Vegas on Jan. 8.

Sure--but it sounds like the iPhone. If it really catches fire and Cingular Wireless, Apple's exclusive U.S. partner, benefits from the relationship, other carriers may have to rethink their strategy. Instead of pushing their mobile services such as movies and music, they might let handset makers and content partners control more applications that lead to greater data usage. The iPhone's capabilities also could help spur Cingular's sales of other services, from photo sharing to basic three-way calling.

It's still six months before Jobs's latest brainstorm hits stores. But already it is delivering the phone industry a wake-up call.