Fred Vogelstein - Battle of the Titans - How the Fight to the Death Between Apple and Google is Transforming our Lives

Publicly, Jobs continued his 13harangue against the carriers. At the D conference in 2004, Stewart Alsop, Jr., the venture capitalist and former journalist, actually begged Jobs to make a smartphone that would improve on the popular Treo. “Is there any way you can get over your feelings about the carriers?” Alsop asked, offering to connect Jobs with Verizon CEO Ivan Seidenberg, who was also in the audience. Not a chance, Jobs said. “We’ve visited with the handset manufacturers and even talked to the Treo guys. They tell us horror stories.” But privately, Jobs was thinking hard about the content of Alsop’s pitch.

Jobs’s first answer to the growing competition wasn’t the iPhone, but something much more modest—a music phone called the Rokr, to be built in partnership with Motorola and Cingular, the big wireless carrier that would, via two mergers, become AT&T. The deal, agreed to in early 2004, seemed like the best of all worlds for Apple. It would license its iTunes software to Motorola to be put on Motorola’s supersuccessful Razr cell phone, and Motorola would handle the rest. Apple would get a license fee for letting Motorola use the software, and Jobs wouldn’t have to deal with the wireless carriers. iTunes would help Motorola sell more phones, get Cingular more wireless customers, and enable Apple to compete with the music phones it feared. “We thought that if consumers chose to get a music phone instead of an iPod, at least they would be using iTunes,” Fadell said.

Instead, the Rokr was an embarrassment. When Jobs unveiled it nearly eighteen months later in September 2005, it was not capable of over-the-air music downloads, the device’s main selling point. It was big and chunky—nothing like the sleek Razr that Motorola had made famous. And its music capacity was artificially limited to a hundred songs.

The tension between the partners 14, especially Apple and Motorola, was obvious quickly after Jobs was done demoing the device onstage at Moscone Center in San Francisco. Jobs had released the first iPod nano at the same time, and when a reporter asked Motorola CEO Ed Zander a few weeks later if he felt upstaged by the other products Jobs had unveiled, his answer was succinct: “Screw the nano.” Wired magazine soon put a story of the fiasco on its cover under the headline YOU CALL THIS THE PHONE OF THE FUTURE?

Jobs successfully pinned the Rokr screwup 15on Motorola, but the fiasco was mostly Apple’s fault. Yes, Motorola had produced an ugly phone, and it continued to produce phones that didn’t sell well for the next four years until Zander resigned. But the Rokr project’s real problem was that Jobs’s reason for the deal evaporated almost as soon as it was signed, Fadell said. The deal was designed as a defensive maneuver, a hedge against companies’ trying to build music phones without having to deal with the carriers themselves. But with each passing month in 2004 it became clearer that the last thing Apple needed to do with iTunes and the iPod was to play defense. It didn’t need the Rokr to help it more broadly distribute iTunes. It just needed to hang on as iPod sales took off like a rocket ship. In the summer 2003 Apple was selling only about three hundred thousand iPods a quarter. At the beginning of 2004 it was selling only eight hundred thousand a quarter. But by summer 2004 sales exploded. It sold 2 million during the quarter that ended September 30, 2004, and another 4.5 million in the final quarter of the year. By the time ugly Rokr prototypes showed up in the fall of 2004, many Apple executives saw clearly that they were on the wrong path, and by year-end Jobs had all but abandoned the project. He was still driving the iTunes team to deliver the software that would go in the Rokr, but he was listening more carefully to executives who thought the Rokr project had been folly from the start.

It wasn’t just the iPod’s success in 2004 that diluted Apple’s enthusiasm for the Rokr. By the end of the year, building its own phone no longer seemed like such a bad idea. By then it looked like most homes and cell phones would soon have Wi-Fi, which would provide high, reliable bandwidth over the homeowner’s DSL or cable connection. And outside-the-home cell phone bandwidth looked like it would soon be fast enough to stream video and run a fully functioning Internet browser. Phone processor chips were finally fast enough to run cool-looking phone software. Most important, doing business with the carriers was starting to seem less onerous. By the fall of 2004, Sprint was beginning to sell its wireless bandwidth wholesale. That meant that by buying and reselling Sprint bandwidth, Apple could become its own wireless carrier—an MVNO, short for “mobile virtual network operator.” Now Apple could build a phone and barely have to deal with the carriers at all. Disney, on whose board 16Jobs sat, was already in discussions with Sprint about just such a deal to provide its own wireless service. Jobs was asking a lot of questions about whether Apple should pursue one as well.

Cingular executives involved in the Rokr project such as Jim Ryan watched Jobs’s interest in an MVNO with Sprint grow, and it terrified them. They worried that if Apple became a wireless carrier, it would cut prices to win customers and crush profits in the industry as other carriers cut prices to compete. So while they had access to Jobs and his team, they gently lobbied him to cut a deal with them instead. If Jobs would agree to an exclusive deal with Cingular, they said, they would be willing to throw out the rule book on carrier–manufacturer relations and give Jobs the control he needed to build a revolutionary device.

Ryan, who has never talked publicly about those days until now, said the experience taxed every ounce of his negotiating skills. He’d been assembling complex carrier deals for nearly a decade and was known in the industry as one of the early thinkers about the future of wireless. He’d grown Cingular’s wireless data business from almost nothing to $4 billion in revenue in three years. But Apple and Jobs had little experience negotiating with carriers, making it much harder for Ryan to predict how they would respond to his various offers. “Jobs hated the idea of a deal with us at first. Hated it,” Ryan said. “He was thinking that he didn’t want a carrier like us anywhere near his brand. What he hadn’t thought through was the reality of just how damn hard it is to deliver mobile service.” Throughout 2004, during the dozens of hours he and his team spent in meetings with Apple executives in Cupertino, Ryan kept reminding Jobs and other Apple executives that if Apple became a carrier itself, it would get stuck with all the hassles of running an inherently unpredictable asset—a cell phone network. A deal with Cingular would insulate Apple from all that. “Funny as it sounds, that was one of our big selling points to them,” Ryan said. “Every time the phone drops a call, you blame the carrier. Every time something good happens, you thank Apple.”

Cingular wasn’t just playing defense 17. Executives such as Ryan thought partnering with the inventor of the iPod would transform the way customers thought about their own company. Apple’s explosive success with the iPod in 2004 and 2005—it sold 8.2 million iPods in 2004 and another 32 million in 2005—had taken Jobs’s status as a business and cultural icon to unparalleled heights. The likely torrent of new customers who would come to Cingular if it were the carrier for a phone as revolutionary as the iPod had been made them salivate.