Among the iPhone's Biggest Transformations: Apple Itself

By Tripp Mickle Features Dow Jones Newswires

Since Apple Inc. launched the iPhone in June 2007, the smartphone revolution it unleashed has changed the way people work and socialize and reshaped industries from music to hotels.

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It also has transformed the company in ways that co-founder Steve Jobs could hardly have foreseen.

Ten years later, the iPhone is one of the best-selling products in history, with about 1.2 billion sold, generating about $740 billion in revenue. It skyrocketed Apple into the business stratosphere, unlocking new markets, spawning an enormous services business and helping turn Apple into the world's most valuable publicly traded company.

But it also created enormous challenges for Apple, raising the bar for innovation and turning a company that thrived on its self-image as scrappy underdog into an industry leader, with a workforce more than six times what it was.

"It's hard because the company has grown in every dimension and holding it together is very, very tough," said Horace Dediu, a former Nokia executive and technology analyst with Asymco. Apple has to balance sustaining the iPhone business with preserving employees' passion to create new products, he said, and "that's really hard."

The iPhone boom has overshadowed Apple's other products, making the company dependent on one product line for two-thirds of its sales. That means any big stumble with the iPhone could be calamitous.

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The iPhone's success is best reflected in China, where a combination of good timing, smart manufacturing and strong branding have made Apple one of the most successful American companies in the world's most populous country.

The iPhone hit Chinese shelves in 2009 as wages in that country were swelling. Apple -- which relies on thousands of Chinese workers to assemble its products -- benefited as Chinese consumers embraced the iPhone as a status symbol.

In 2006, all of Asia-Pacific outside of Japan accounted for 7% of Apple's revenue. Last year, greater China alone made up 23% of revenue, and at $48.49 billion, was greater than Coca-Cola Co.'s total revenue world-wide.

The iPhone's success in China has been so dramatic that analysts now worry Apple is too reliant on sales from the region.

The iPhone also spawned Apple's second-largest business by revenue: apps and other services offerings.

Mr. Jobs didn't plan that. In fact, he opposed it, said Scott Forstall, the company's former head of software. As a result, Apple didn't open the device to application developers until 2008, when it added the App Store and began taking 30% of each app purchase.

Since then, app sales have generated roughly $100 billion in gross revenue as Apple has registered more than 16 million app developers world-wide. The company also pushed into payments with Apple Pay and a music-subscription service, creating a $24 billion services business that is Apple's second-largest after the iPhone and is growing rapidly.

Now, the iPhone is "the razor and the blades are the software services," said longtime Apple adviser and Steve Jobs confidant Regis McKenna. "It creates this great annuity business."

As sales surged, Apple staffed up. The company hired about 100,000 people in the 10-year span, bringing its global workforce to 116,000 from 18,000 in 2006. New workers were brought on to manage relationships with cellphone carriers, double the number of retail stores and maintain an increasingly complex supply chain.

The employees are spread across more than 100 buildings, creating a disparate workforce Apple has pushed to bring together with a new, $5 billion spaceship-style headquarters in Cupertino, Calif.

Managing that explosive growth fell on the shoulders of Tim Cook, who succeeded Mr. Jobs, who died in 2011. The Duke University business school graduate and supply chain-expert has tried to preserve Apple's unique culture by taking a more inclusive approach than his predecessor, seeking out more opinions from staff, while consistently saying Apple's overriding goal is to make great products, echoing a mantra of Mr. Jobs.

"This is a huge undertaking now and requires a lot of talented people, and Tim's built a team capable of managing a $200 billion company," said Mr. McKenna. "We don't know if Steve could have done that or not."

Still, preserving Apple's culture has been difficult. Before the iPhone, Apple sought to prove itself after nearly going bankrupt in the mid-1990s, said Alan Cannistraro, who worked at Apple from 2000 to 2012 before founding video startup Rheo.

"We felt like: Let's show the world. We were the underdogs," he said. But new hires didn't inherit that attitude and it became "less of a mission-driven" place and "more function driven."

Mr. Cook has committed to maintaining Mr. Jobs's passion for doing the extraordinary as Apple pushed into new devices such as the Apple Watch and software tools for augmented reality.

Meanwhile, pressure intensified to make each iPhone model better than the last. As iPhone revenue fell for the first time in Apple's fiscal 2016, and its market share dropped in China, Mr. Cook told analysts the key to regaining share was "innovating like crazy."

"If we do a really great job of that, which we will, then I'm confident that we'll do well," he said.

Apple fans are waiting for the newest iPhone, the 10th anniversary model expected this fall, to see whether Mr. Cook makes good on that promise.

Questions about innovation have dogged Mr. Cook, whose operational prowess contrasts with Mr. Jobs's talent as a visionary product developer.

The iPhone was so revolutionary it raised expectations that the company would introduce radical new products regularly, said Patrick Moorhead, a technology analyst with Moor Insights & Strategy. "That's what I call the leadership burden," Mr. Moorhead said.

That has made innovation more difficult in some ways, former employees said. Apple developed products that were linked to the iPhone, such as the Apple Watch and AirPod headphones, but was late to pursue hot internet-connected home devices like Nest's thermostat and an intelligent speaker like Amazon's Echo.

"There was a real opportunity missed there," said Mr. Cannistraro. Still, he said, Apple recognizes and supports innovative ideas internally and executes better than competitors. "The right ideas tend to be the ones that get through."

Write to Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

June 20, 2017 05:44 ET (09:44 GMT)