How iPhone 3.0 May Revolutionize The Smartphone IndustryHow iPhone 3.0 May Revolutionize The Smartphone Industry

It's easy to see why many people were underwhelmed by Apple's iPhone 3.0 sneak peek last Tuesday. Most of the attention focused on dull features like cut-and-paste and multimedia messaging -- capabiliites that have long been in demand by iPhone users, but which competitors have had for a long time now.

Eric Zeman sniffed that the announcement added features from 2007 to the iPhone. Ed Hansberry asked whether Apple pushed the mobile device forward with iPhone 3.0 and provided an answer: No.

I think I can see how Eric and Ed came to their conclusions. Early reports and blogging about the new iPhone focused on Apple finally getting features, like cut-and-paste and multimedia messaging, where the device lagged far behind its competitors. Catch-up games are just plain boring.

iPhone 3.0, however, does have three features which will be game-changing, if Apple and its developers exploit those features to their full potential. Apple revolutionized the cell phone industry when it introduced the iPhone in 2007. The company did it again last year when it introduced the iPhone 3G and App Store. And now it looks like it will happen a third time when iPhone 3 software ships in the second half of 2009.

The three features that can revolutionize the smartphone industry are peer-to-peer networking, APIs for hardware add-ons, and sales within applications.

Let's take them one at a time.

Peer-To-Peer Networking

The iPhone 3.0 software will enable peer-to-peer connections between iPhones and iPod Touches over Bluetooth, if they're near each other physically. The demo Apple provided on Tuesday was dead simple -- anybody who's tried to pair a headset with a cell phone knows it can be mildly confusing, but the peer-to-peer networking on the iPhone 3.0 software doesn't require pairing. Simply press a button in any app enabled for peer-to-peer connectivity, and the device will search for nearby iPhones and Touches that are running the same app. The other person taps a button to accept an incoming connection, and you're linked. Apple described the capability as useful for multi-player gaming, and demonstrated it with a backgammon game.

What's unknown at this point: How many people can you get on a single network? A handful? Dozens? Hundreds? What's the distance limitation? Can the peer-to-peer networking be used to relay signals -- for example, could my iPhone pass information on to another user located 10 feet away from me, then another 10 feet away from him, and so on until my information has traveled down the hall, out the door, and across town?

The peer-to-peer technology presents intriguing possibilities for business and other non-gaming apps. For example, salespeople could give on-the-fly presentations on multiple iPhones without having to huddle over the device with their clients. iPhone users could flip business cards and brochures to each other at conferences. I suspect the most interesting applications are things that I can't imagine right now.

Hardware APIs

With 3.0, Apple is broadening support of its APIs for hardware accessories. Until now, you've been able to buy third-party headsets, speakers and microphones to give the iPhone and iPod Touch more power. With the iPhone 3.0, you'll be able to buy a greater variety of devices that do more things.

Some of the demos at last Tuesday's preview event were for very serious applications: LifeScan, a Johnson & Johnson company, demonstrated a glucose monitor for diabetics that could take blood samples, check for blood sugar, and transmit the results to an app on the iPhone. Combined with data on diet and exercise inputted by the user, the application calculated a recommended insulin dose, and allowed the user to analyze charts of historical blood sugar data to calculate lifestyle changes to keep the disease in check. Likewise, Apple described a blood pressure cuff that kept track of the user's blood pressure. Both applications would allow the user to transmit data to doctors or, if the user is a child, his parents. These kinds of devices will be extremely appealing to Baby Boomers. Industry analyst Rob Enderle, in an interview a few weeks go for another Apple article, told me that Boomers are the core demographic of Apple's user base. Boomers are getting older, they need more medical care, and Apple is in a position to profit from that need.

More than that, custom hardware devices could make the iPhone the brains for a vast variety of machines. Use your imagination: The iPhone performs diagnostics on your car, the iPhone controls heating, lighting, and entertainment in your home, the iPhone is a remote control for your coffeemaker, Roomba, dishwasher, and so on and so on. Some of those things are already possible with the iPhone, the new APIs will just make them easier.

The new hardware APIs might even allow attaching an external keyboard and mouse to the iPhone, pushing it into the true realm of laptop replacement.

Sales Within Applications

When Apple introduced the App Store last year, it introduced a new business model for selling software and information. Developers enter into a revenue-sharing agreement where Apple handles credit-card transactions, hosting, distribution, and puts the company's mighty marketing machine behind third-party developers. In exchange, Apple takes a 30% cut of sales off the top, and pays the remainder to developers on a monthly basis. Apple emphasized that point several times during Tuesday's iPhone 3.0 announcement: Payments to developers will come in a regular, dependable payment stream.

With the introduction of sales-within-software in iPhone 3.0, developers will be able to sell an application once, then sell upgrades through the application itself. Apple used three examples of how that might work: Magazines could sell subscriptions to content downloaded over time, game developers could sell additional levels and add-ons for their games, and publishers of travel guides could sell information for individual cities.

Another possible application: E-book readers like the Amazon Kindle app for the iPhone could sell books from directly within the application. Right now, users have to buy their books separately, from the Web.

I expect developers will find even more, innovative ways of generating revenue using subscription pricing. The ability to sell within applications will help developers solve an ongoing problem with iPhone development: It's hard to make a living wage, because consumers demand their iPhone applications must be cheap or free. Of the top 100 paid apps currently on the iTunes Store, 44 are priced at 99 cents, only 11 are priced more than $5, and none is priced higher than $7.99. Developer Andy Fennell said in November that 99 cents is the sweet spot for iPhone app pricing.

While the iPhone technology is capable of supporting rich, powerful apps, the economic model is not. If developers can find users willing to pay more for their apps by selling the apps a la carte, the universe of iPhone apps will get even richer than it is already.

My colleagues Tom Claburn and Marin Perez discuss the impact of iPhone 3.0 for developers in greater depth.

Unknown at this point: Will developers be able to give away free trial versions of their software, and let users upgrade from within the program if they want to pay? That's the current business model for software downloaded over the Internet, but it's currently impossible on the iPhone. The best a developer can do is offer separate free and paid versions.

Even with the new business model, the App Store still isn't a perfect world for developers. Apple must approve every application that appears in the App Store, and developers have been complaining about inconsistent and seemingly arbitrary standards for approval, and about long delays in getting apps approved. For example, developers of Newber, a potentially revolutionary telephony app for the iPhone, decided to simply give up on their app, after waiting five months to get it approved. Apple needs to straighten out its approval process and make it predictable, so that developers can start work on projects with some assurance that they'll be able to sell the work when they're done.

The iPhone Revolution

The iPhone has revolutionized Apple. More than two years ago, Apple Computer dropped the word "computer" from its name, just after introducing the first-generation iPhone. Two years later, that name change is showing itself to be more than symbolic. Mac sales were down year-over-year in February, to according to market researchers the NPD Group. Analysts at Piper Jaffray predicted Apple would sell 2.2 million Macs in the quarter ending this month, along with 10 million iPods. In the two years since the iPhone went on sale, the company sold 30 million iPhones and iPod Touches, including 13.7 million iPhones the past year.

Put the numbers together and that means that the iPhone and iPod Touch are becoming Apple's core product line, replacing the 25-year-old Mac as the company's main computing platform, according to Technology Business Research analyst Ezra Gottheil, when I interviewed him on the day of the iPhone announcement.

iPhone 3.0 will be available this summer, Apple says. It will be free to existing iPhone users, and cost $9.95 for the iPhone Touch. A year from now, when it will have been marinating in the marketplace for a good while, we'll be looking at a mobile computer with a wealth of applications that connect peer-to-peer and a plethora of third-party hardware. The ecosystem of applications, which is already rich today, will be even richer with the new business models provided by 2009.

That sounds like a revolution to me.

That iPhone may be your next full-function computer. information has published an independent analysis of this topic. Download the report here (registration required).