Dogfight: How Apple and Google Went to War and Started a Revolution (4 page)

That sounded tough and principled. But by the end of 2003, as the iPod became Apple’s most important product since the Macintosh, it was also starting to look misguided. Cell phone makers were putting music-listening applications in their phones. And companies such as Amazon, Walmart, and Yahoo! were beginning to sell downloadable music. Executives such as iPod boss Tony Fadell worried that if consumers suddenly gave up their iPods for music phones, Apple’s business—only five years removed from its flirt with bankruptcy—would be crushed. “We didn’t really have a hit on our hands [with the iPod] until late 2003, early 2004, so we were saying maybe we don’t have the market domination—the retail channels—to expand the iPod’s business properly,” Fadell said.

It’s hard to imagine a time when the iPod wasn’t an iconic product, selling more than 50 million units a year; but back then Apple had sold only 1.3 million devices in two years and was still having trouble getting retailers such as Best Buy to carry it. “So we were thinking, ‘How do we get above the noise? How do we make sure that we are at least competitive so that anyone who is carrying a cell phone can get iTunes music?’ Because if we lost iTunes, we would have lost the whole formula,” Fadell said.

Publicly, Jobs continued his harangue 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.

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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, 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 on 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 Jobs 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.

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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. 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.

Another Cingular executive who worked on the deal but who would not be named put it this way to me when I was working on a story for
Wired
in 2008: “Jobs was cool. He was hip. There were studies done in colleges that asked, ‘What is the one thing you can’t live without?’ For twenty years it was beer. Now it was the iPod. Things like that made us say this guy has got something. That probably gave us that much more energy to make sure this deal happened.”

While Cingular was lobbying Jobs from the outside, a handful of Apple executives, such as Mike Bell and Steve Sakoman, were pushing Jobs to sign off on building a phone from the inside. “We were spending all this time putting iPod features in Motorola phones. That just seemed ass-backwards to me,” said Bell, who now is cohead of Intel’s mobile-device effort. He told Jobs that the cell phone itself was on the verge of becoming the most important consumer electronics device of all time, that no one was good at making them, and that, therefore, “if we [Apple] just took the iPod-user experience and some of the other stuff we were working on, we could own the market.”

Bell was a perfect executive to be making this pitch. He’d been at Apple fifteen years and had helped build some of the products, such as the iMac, that enabled Apple to avoid bankruptcy in 1997. Most important, because he ran not only a chunk of the Mac software division but the software group responsible for Apple’s AirPort Wi-Fi devices, he knew more about the wireless industry than most other senior executives inside Apple. He doesn’t claim credit for being the father of the iPhone. He ultimately didn’t run or even work on the project. Fadell ran it, before Scott Forstall took it over. But even today most say Bell was an important catalyst.

“So I argued with Steve for a couple of months and finally sent him an email on November seventh, 2004,” Bell said. “I said, ‘Steve, I know you don’t want to do a phone, but here’s why we should do it: [Design director Jony Ive] has some really cool designs for future iPods that no one has seen. We ought to take one of those, put some Apple software around it, and make a phone out of it ourselves instead of putting our stuff on other people’s phones.’ He calls me back about an hour later and we talk for two hours, and he finally says, ‘Okay, I think we should go do it.’ So Steve and I and Jony [Ive] and Sakoman had lunch three or four days later and kicked off the iPhone project.”

It wasn’t just Bell’s persistence and Ive’s designs that helped convince Jobs. Sakoman came to lunch having already done some early engineering work about what it might take to build a phone. He’d been at Palm until 2003, where, among other things, he helped build the software that went inside Treo smartphones. And as vice president of software technology at Apple, he had become the executive most familiar with the software inside the iPod. If Apple was going to make a smartphone, the iPod was a logical place to start. That’s what consumers were expecting Apple to do. So by the time Sakoman arrived for lunch, he and his team had already figured out a way to put a Wi-Fi chip inside an iPod and get it to connect to the Internet.

They’d even begun working on new software for the music player—a version of Linux—so that it could handle the increased demands of being a phone and an Internet browser. Linux, the open-source software made famous by Linus Torvalds in the 1990s, had not supplanted Microsoft Windows as many geeks predicted it would. But by then it had become the software of choice for less powerful and sophisticated electronics. Sakoman briefed Jobs on his team’s progress and later that afternoon told his team, “You better start figuring this out because this [phone project] is going ahead.”

Bell says one reason why he remembers the meeting is that he’d never seen anyone eat the way Jobs did that day. “You know how you remember certain things because of their bizarreness? So we’re meeting outside at the Apple cafeteria, and when Steve walks out, on his tray is a glass bowl full of avocado halves. Not one or two, but, like, fifteen covered in salad dressing. So I remember sitting there with Jony and Sakoman and watching Steve mow through a mound of avocados. I guess, having read Walter Isaacson’s biography [of Jobs], it was one of those food phases he was in to cure his cancer, but at the time I had no idea what was up.”

*   *   *

The final deal between Apple and AT&T, which acquired Cingular in 2006, took more than a year to hammer out. But it would prove easy compared to what Apple went through just to build the device. Many executives and engineers, riding high from their success with the iPod, assumed it would be just like building a small Macintosh. Instead, Apple designed and built not one iPhone but three entirely different devices in those two years. One executive on the project thinks Apple made six fully working prototypes just of the device it ultimately sold—each with its own set of hardware, software, and design tweaks. Many on the team were so burned-out, they left the company shortly after the first phone hit store shelves. “It was like the first moon mission,” said Fadell, who was one of the key executives on the project, and who left Apple to start his own company, Nest, in 2010. “I’m used to a certain level of unknowns in a project, but there were so many new things here that it was just staggering.”

Jobs wanted the iPhone to run a modified version of OS X, the software that comes with every Mac. But no one had ever put a gigantic program like OS X on a phone chip before. The software would have to be a tenth the size, and even then there wasn’t a phone chip being made in 2005 that could run it fast enough and with a long enough battery life. The chips that run Apple laptops were never considered because they generated too much heat and would suck a phone battery dry in minutes. Millions of lines of code would have to be stripped out or rewritten, and until 2006 engineers would have to simulate chip speed and battery drain because actual chips weren’t available until then. “Initially we just worked on Gumstix boards [cheap circuit boards hobbyists buy],” said Nitin Ganatra, one of the early software engineers. “We started with the Mac address book—a list of names—and to see if we could make it scroll [on a screen] at between thirty to sixty frames a second. We just wanted to figure out if there was any way to make this [OS X on a phone chip] work—whether we were even in the right ballpark. We wanted to know if we could push bits fast enough to get that iPhone look and feel. If we couldn’t get it to work on a Gumstix board, we knew we might have a problem.”