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Time has named Apple's iPhone its invention of the year. The iPhone is a big deal, but not for any of the reasons Time cites. The nonrelease of the Googlephone just highlights what Apple gets about consumers, and what Google doesn't. Apple knows how to design not just gadgets, but the businesses that go around them. And as a result, I wouldn't be surprised if Apple is worth more than Google within two years.

The iPhone is clearly a success, having sold 1.2 million units in the three months since launch. That 250,000 of those phones were bought to be unlocked shows the huge demand for the phone overseas and among U.S. users who don't want to switch to AT&T. Apple has publicly stated that it wants to sell 10 million units in calendar year 2008. In 2009? 50 million, according to leaked numbers. That's less than 5 percent of the total global cell phone market — a legitimate goal, I suspect, and yet a huge business: $15 billion just from hardware sales alone.

Unlike most phonemakers, which only get paid when they sell phones, at steep discounts, to wireless carriers, Apple has set up three separate revenue streams for its iPhone platform.


First, Apple makes a profit when the phone is sold — about $200. Second, it takes a hefty chunk of subscription revenue from the carrier — $18 a month, or $432 over two years. Third, Apple takes a cut from music and television shows sold through the iTunes Store — and, possibly, it will take a cut of sales of third-party software applications as well.

The hardware profits are likely here to stay. Apple has been hugely successful in driving down costs and keeping margins up. For the most part, Apple doesn't really lower prices. Its top of the line laptop has been in the $2,000-$2,500 range for years. Those $500 pieces of crap at Wal-Mart? Those are last year's computers being sold as new. Apple doesn't do that, so they keep their margins fat and juicy.


The same thing happened with the iPod. When it debuted in October 2001, the iPod was $399. For years the top of the line iPod remained around that price. Only more recently, with the advent of cheap flash drives — Apple spent $1.2 billion to snatch a huge percentage of the worldwide supply of it — has it been able to drive down the average cost of iPods. As a result, Apple has sold millions upon millions of the music players, taking a huge market share and laughing all the way to the bank.

That's where Time missed the story. What's really innovative about the iPhone? Well, the multitouch screen, perhaps. But other than that, its commodity parts expertly engineered together. If Apple sells 50 million iPhones in 2009, those phones will generate more than $30 billion in gross profit over the next two years. And when I say gross profit, I mean really gross.

Many observers scoffed when Steve Jobs called Apple a "tripod" company — Mac, iPod, and iPhone. At first, the iPhone looked like the weakest leg. Not for much longer.

And the Googlephone? Forget it. It's just a bunch of developer tools right now, and Google's happy to give them away. Apple, meanwhile, has been luring developers by playing hard to get — first saying it wouldn't open the iPhone, and then coquettishly changing its mind. That's the kind of skirt-waving that drives programmers crazy — not Google's drop-your-dress open-standards move.

Fifty million units in 2009 doesn't seem like such a huge mountain to climb when you consider that Apple will have completed its international rollout by then — and launched revisions and new models of the iPhone. With fat profit margins thanks to massive economies of scale, cell-phone company kickbacks revenue-sharing and continued growth in the Mac and iPod legs, Apple's iPhone is more than just an invention. It has all the makings of a killer business. As for Google — weren't they going to make a phone once?