Peter Zaballos

PETER ZABALLOS: Are the Kindle and the iPhone the exceptions in the mobile market, or are they the first of two landmarks in a entirely new landscape?

What these two consumer products have in common -- and what makes them different -- is they are mobile devices with blockbuster user experiences that connect to the Internet.  And oh yeah, they use the cell phone network to make that connection.

But while that’s remarkable, what makes them capable of transforming the landscape is that Amazon and Apple have finally succeeded in “unbundling” the user experience and device from the mobile service. 

In the case of the Kindle, you don’t even know that Sprint provides the connection -- it just comes with the product. 

With the iPhone, you know it’s there only because AT&T is who you pay your monthly bill to.  But the user experience?  That’s 100 percent Amazon or Apple.

Need proof?  Just walk up to someone who has a Kindle -- including the new DX version that launched today -- and ask them how they like it.  But give yourself 20 minutes to listen, because you’ll need it.  And the word “Sprint” will never be mentioned. 

BACK IN THE USSR

It didn’t used to be that way. For years the mobile carriers wanted us to believe they weren’t just providers of a commodity.  They even convinced themselves they weren’t and built businesses around that belief.  And for a while we sort of believed them too, back when the Razr was what we thought of as “good.” 

Each carrier developed its own little mini-AOL: content, sites, and applications they selected and presented to us.  And because we had crappy, cumbersome handsets, we didn’t know better.

But then the iPhone came out, and it was like the end of the cold war.  Users of iPhones were like Soviets walking through western supermarkets for the first time.  Eyes wide with wonder and astonishment. 

The colors!  The variety!  The ability to make your own choices!  No surprise that Apple sold more 21 million in less than two years.

And look at AT&T’s most recent earnings announcement. Growth from their wireless business helped the company beat Wall Street’s predictions.  Wow, what great news. 

But take a closer look at subscriber growth: 1.2 million overall, with 640,000 from the iPhone. 

Back out those iPhones and that means AT&T only added 560,000 new subscribers, which is scarily close to the 415,000 new subscribers T-Mobile added.  T-Mobile?  The distant number four?  Ouch. (Correction: T-Mobile's rank has changed.)

A RACE TO THE BOTTOM

Verizon is desperate to get in the iPhone game too, and Saul Hansell of the NY Times does a great job explaining why. 

AT&T is generating around $700 million in operating profit each year from those iPhone contracts. 

Of course Verizon wants some of that.  But this is a race to the bottom; there is no durable differentiation selling someone else’s innovation.  

Yeah, Verizon’s network might be better, but isn’t that just a way of saying they deliver a commodity better? If anything says carriers are in a commodity business, it’s the very presence of this wrangle over the iPhone.

And how far from reality are the carriers?  Two words: App Store.

One billion applications were downloaded from the iPhone App Store by fewer than 21 million handsets.  In nine months.  That is half the time it takes many companies to get a contract signed and their application placed on a major carrier’s download deck.  I am not kidding.

BREAKING THE CARRIER'S GRIP

Look, I get that the iPhone and the Kindle represent a small slice of the 282 million mobile handsets sold in the first quarter. 

But the landscape-altering forces they are generating will not be contained to just that slice.  Blackberry/RIM and Android are following suit: the days of your carrier deciding for you are over.   While Blackberry is outselling Apple, it’s Apple who has broken the carrier’s grip on the user experience.

This is a stellar example of how a transfixing consumer experience can create over-the-top success for one company while simultaneously obsoleting a business model for another.  You don’t get to see this played out this clearly and cleanly very often.

Mobile carriers will not go away. And don’t get me wrong: I’m not passing judgment on them, in fact I know many carrier execs - they are smart, hard working folks.  I’m just trying to point out that their business models have fundamentally changed. 

The Kindle and the iPhone are showing us in real time that carriers are just providers of a connection and have essentially little to do with the user experience that is creating enthusiasm, fueling demand for or producing a durable emotional relationship with these devices.

We are seeing the new “normal” and it’s a really exciting landscape to experience, in a disruptive kind of way.

Peter Zaballos is vice president at Frazier Technology Ventures. He blogs at Open Ambition.