While many people in the U.S. use cellphones, most either carry around basic models or don’t avail themselves of more advanced features on devices that can be used for tasks other than voice calls—like surfing the Web, texting and e-mail. Until recently, such advanced devices, referred to as ‘smartphones’ or ‘personal digital assistants’ (PDAs), were typically viewed as specialty products intended for businesspeople.

                   

Yet, smartphones have captured the imagination of technophiles in both consumer and business markets due to the ‘coolness’ factor. The infatuation over smartphones reached a fever pitch this summer with the launch of Apple’s iPhone (News - Alert), a multimedia device for making phone calls, surfing the Web, taking photos, and checking e-mail. iPhone also includes a built-in music player.

 

iPhone is a smartphone for consumers. To starry-eyed consumers, it represents the ideal form for a smartphone: a device with lots of cool, useful features in a sleek, sexy form factor. iPhone, it seems, is both useful in daily life and is also a gadget that people can show off to their friends.

 

 

But, just how useful are smartphones, really? Do people need ‘converged’ devices that pack so many features into a single package? And what is a ‘smartphone,’ anyway?

Even that last question, it turns out, is somewhat complicated to answer. By some definitions, iPhone — cool though it is — can’t be called a smartphone.

 

"I don't consider the iPhone to be a smartphone," said Bill Hughes, Principal at analyst firm In-Stat. "Generally speaking, a smartphone is a device that runs an open operating system, with built-in ecosystem to develop applications for that platform. But that's not the case with the Apple iPhone. It's not a published interface."

 

Hughes added: "The fact that you can do e-mail on the iPhone doesn't, in itself, make it a smartphone. It does make it a multimedia phone."

 

Maybe iPhone is a multimedia phone. Or maybe it's something else… something new that doesn’t have a label yet.

 

"The devices we've traditionally called 'smartphones' have been business-centric," said Charles White, senior vice president of the telecoms department at analyst firm TNS. "iPhone is a consumer-centric device. Enough is different about iPhone to fit into its own category."

 

 

Whether or not iPhone is a category-creator, there’s no denying that it’s quite different from any cellphone that came before. iPhone is a consumer-grade converged device, and its price is not subsidized. This time the manufacturer, rather than the service provider, is at the helm.

 

The lack of price subsidization, and the role Apple is playing in iPhone’s distribution, could potentially change the entire landscape of the cellphone industry in the U.S. To understand the significance of this change, consider how regular home phones work. A consumer signs up for a phone service by choosing among several providers (depending on the region, there may not be many choices). Then, the consumer goes to an electronics store, buys a phone, brings it home, plugs it in, and starts making calls.

 

The home phone scenario is quite different from how cellphones work. Instead of pairing the phone of his or her choice with the provider of choice, a cellphone user must first pick a provider and then select from a limited number of phones available from that provider. It isn’t possible to go to a store, pick out a cellphone, and plug it into any service.

 

Some people, like Core Capital Partners managing director Jonathan Silver, think the way the cellphone market is set up in the U.S. is fundamentally flawed, and in fact is hurting the country's global technology standing.

 

"I don't think anybody disagrees with the general observation that large parts of Asia and Europe are two or three years ahead of us in terms of their cellphone technology and the use of handheld devices in daily life," Silver said. "A large part of that has to do with the fact that they have successfully decoupled the relationship between handhelds and networks."

 

Silver thinks the U.S. would be better off if the market for cellphone services and devices was set up the same way it is for regular phones: pick a combination of any phone and any service. Until iPhone, however, there was little sign that the status quo would change, since cellular network operators are big companies and wield a lot of control.

 

"The economics of the phone industry in the U.S. to date have been about subsidizing handsets," said M:Metrics analyst Mark Donovan (News - Alert). "If you wanted to sell a handset it had to conform to a whole bunch of requirements from the operator. The iPhone is a singular event because in this case the phone manufacturer really is driving the ship end-to-end. The fact that AT&T stepped aside to let Apple do its thing was a really new event in the U.S. mobile industry."

 

Short of new regulation being introduced, which seems pretty unlikely, the U.S. cellphone market will only change in response to events like iPhone's launch. The question that remains to be seen is how successful Apple will be in maintaining this paradigm shift, and whether it will catch on with other manufacturers and operators.

 

Apple has some pretty lofty ideas about the impact iPhone will have, and Bill Hughes at In-Stat thinks the company is being unrealistic.

 

"Apple has set a bogey for itself with the goal of selling ten million iPhone units in the first 18 months," Hughes said. " If Apple sells two or three million iPhone units it will have achieved a fantastic success."

 

Perhaps fearing that it set its sights too high, Apple last week lowered the price of its 8GB iPhone from $599 to $399. Sales over the holiday season will be a good barometer of whether Apple’s goals are reachable.

 

 

Hughes also thinks the touch screen technology on iPhone is not all it's cracked up to be, and possibly could end up in a cautionary tale like that of the Apple Newton, a PDA introduced in 1993 and discontinued in 1998.

 

"The handwriting recognition program Newton came with caught everyone's imagination," Hughes said. "But, the fact of the matter was it didn't work that well. I'm skeptical about iPhone's touch screen technology."

 

Stewart Carlaw, research director at ABI Research, is similarly cautious.

 

"The problem with touch screens is always sensitivity," he said. "Apple has done a good job in terms of the Web browser experience. But for sending e-mail, there have been some reported problems with the screen being less sensitive and responsive than a dedicated QWERTY keyboard in a hard form factor."

 

Carlaw said the real sweet spot for user interfaces is voice recognition. But he predicts it will be at least three years before the introduction of voice recognition technology suited for everyday use. Mobile phone processors simply are not yet powerful enough to support such robust applications, in part because the form factor of today's smartphones limits their functionality.

 

 

Device design, Carlaw said, is a trade-off between price, functionality and battery life. Concern over battery life is probably a key reason why iPhone doesn't yet use a faster wireless network; this might seem like a background issue, but in fact it’s pivotal. For now, manufacturers can’t do much more than offer creative ways to manage battery life. RIM's BlackBerry (News - Alert) devices, for example, power down between keystrokes and automatically go into sleep mode when they're inserted into a holster.

 

Carlaw said what's really needed is a new type of battery, based on fuel cell technology. But the technology needs to evolve so there isn't danger of fuel cell batteries overheating or blowing up. Plus, of course, the price needs to come down.

 

Jonathan Silver at Core Capital Partners thinks the future of portable power lies in thin-film batteries like those made by Infinite Power Solutions in Colorado (one of the companies Core Capital has invested in).

 

"A thin-film battery is a battery that has the size, shape, weight and flexibility of a postage stamp," he said. "A huge part of the size and shape and weight and structure of the iPhone is dictated by the battery. Even then the battery is not that good. Now imagine a battery taking any shape — it could be the skin of the machine, for example. If thin-film battery technology succeeds, the form factor of virtually every smartphone out there could be changed."

 

By combining thin-film batteries with flexible screens, and maybe even holographic keyboards, Silver thinks manufacturers in the future will be freed to create devices with form factors unimaginable today.

 

"There's a huge amount of technology development going on right now around flexible screens," Silver said. "It possible to imagine a rollable version of a converged device using thin-film batteries. Even the iPhone is constrained by the requirements of current hardware technologies."

 

 

What will people do with such futuristic devices?

 

"You're going to get a whole new generation of people who use the Web differently in ways you and I can't even guess at," Silver said. "I think it's possible to imagine that information delivery will be much more visual than text-based in the future. I'm seeing huge numbers of business plans now around the development of different kinds of widgets."

 

By widgets, Silver refers to visual "tools" that display information, such as weather reports or sports scores, in a relatively small amount of space. This makes widgets well suited for use on handheld devices. Together with other methods for displaying information on small screens, widgets are helping to create the ‘mobile Web.’

 

"Yes, people can get ‘Internet’ on their cell phone, but this is not a replacement for other types of Internet usage," said Charles White at TNS. "The mobile Internet is a thing in and of itself."

 

Silver said iPhone will have a major impact on how people use mobile devices for three main reasons. First, it makes content easier to manage. Second, it enables people to use the Web in different ways. Third, it is changing the nature of mobile video.

 

Mobile video has become a pretty hot topic, and Silver thinks in the future people will have access to ‘on-demand’ video using their handheld devices. He predicts that companies like Roundbox, which makes technology for delivering real-time TV to mobile phones, will redefine ‘mobile video.’ Rather than downloading video to their devices, users will instead simply tune in, just like with regular TV.

 

 

‘Broadcasting’ TV to mobile devices, though, will take considerable breadth and depth of broadband network coverage. In some places, the bandwidth needed to deliver ‘on-demand’ mobile video is already available; in other places, not. Donovan said that Sprint, Verizon (News - Alert) and other U.S. carriers this summer have been heavily touting the bandwidth of their networks, offering better speeds than the relatively pokey EDGE network AT&T offers for use with iPhone.

 

Even the coverage of Sprint and Verizon's networks leave something to be desired when compared to other areas of the world, though.

 

"One of the things the U.S. market lacks is geographic coverage for wideband CDMA-based solutions and HSDPA," Carlaw said. "In some European and Asian markets there is more blanket coverage. But, it's expensive to build."

 

AT&T, Donovan said, is working on a faster network based using HSDPA technology. At some point this network will blanket most of the country, requiring everyone to buy new iPhones since the current models don't work with HSDPA. T-Mobile's HotSpot @Home WiFi (News - Alert) service is also something to keep an eye on, since it amounts to a telco offering a service that enables users to make free phone calls.

 

The real magic for widespread broadband coverage, Carlaw predicts, lies in femtocells. These are small, in-home wireless base stations that consumers can use to deploy five-bar mobile phone coverage in their houses. Femtocells provide this coverage by backhauling signal through in-home IP networks. So far, two U.S. carriers are testing out the potential of femtocells: Sprint and AT&T.

 

Carlaw said femtocells address the Catch-22 network operators face when it comes to delivering bandwidth needed for Web 2.0 applications on mobile devices. Consumers want faster networks and will use them if they're available, but as user bases increase so too does the amount of money operators need to spend on supporting new services. Femtocells help solve this problem by reducing the strain on carrier networks.

 

According to ABI’s research, Carlaw said, about 70 percent of mobile Internet data is consumed inside buildings and at least 30 percent of phone calls using mobile devices occur indoors. By offloading the bandwidth for this usage to home networks, mobile network operators can save a lot of money.

 

"Femtocells will be revolutionary from the carrier perspective," he said.

 

Femtocells, Carlaw said, also will provide a significant stimulus for consumers to make full use of their phones; most people don't use even 80 percent of the functions on their mobile devices. The technology could have a huge impact on mobile device usage in business environments, too, because it provides a means to blanket entire buildings in wireless coverage using an IP backbone. That means wideband coverage encrypted end-to-end.

 

 

With such coverage, and with more powerful processors and batteries, lots of possibilities for new applications on mobile devices open up. User-generated content, for example. Already, Donovan said, smartphones are being used to create content rather than just access it. This goes beyond Facebook status updates and blog entries. He recommended paying a visit to Flickr and looking at the "camera type" tag on various photos; many of the images were taken using mobile phone cameras. The same is true of many videos posted on YouTube.

 

Better phones, more bandwidth and more robust services result in people using their phones more and in new ways. Cellphones aren’t just for making voice calls anymore; they’re portable music players and computers, too.

 

Smartphones might even someday gain widespread use as payment devices. Using ‘nearfield technology’ —close-range wireless transmission of information between a mobile device and a receiver, in the style of gas-station key fobs and E-Z Pass tollbooths — makes it possible to perform secure payment transactions using a cellphone. Silver said the type of cashless payment systems offered by Freedom Pay are very popular in Asia, and he thinks this technology will eventually become widespread in the U.S.

 

Another high-bandwidth application that hasn't gotten much attention in the U.S. as a cellphone feature is Global Positioning Satellite service, or GPS. Lots of Americans use stand-alone GPS devices in their vehicles, but people don’t expect to find GPS built into their cellphones — yet. Pete Cunningham, senior analyst at UK-based research firm Canalys, said GPS for mobile phones is an up-and-coming trend in the Europe, Middle East and Asia (EMEA) market. Nokia's acquisition of gate5 is an example of a mobile device manufacturer looking to grab a piece of the GPS pie after seeing the success of stand-alone navigation device makers like TomTom and Navman.

 

 

The launch of iPhones this summer brought new attention back to the dream of having one converged device capable of doing just about everything but sweep the floor and wash the dishes. Apple created a very appealing product that has left some other manufacturers scrambling to keep up. Yet, very little on iPhone is truly new; it's actually how all the pieces were put together that make the new phone such a compelling consumer product.

 

"There have already been touch screens and there have already been music players in cellphones, but Apple has brought these features together in one package with an extremely strong brand," Carlaw said. " It is a benchmark in terms of design, feel, and quality of product."

 

Compare iPhone to smartphones from other manufacturers, and it becomes a bit clearer what sets Apple’s device apart. Buyers looking for a finger-driven touch screen could swing for LG’s Prada phone. Those seeking more flexibility in user interface could consider Helio’s Ocean, featuring two hard-format keypads — one for dialing phone numbers, the other for typing. Slider phones like HTC’s Hermes and Nokia’s N95 continue to be quite popular, Carlaw noted. Music buffs might be tempted by Sprint’s Upstage, a combo music player and phone roughly the size of Apple’s iPod Nano.

 

But, Apple offers something extra with iPhone: user-friendliness and simplicity in a package that doesn’t sacrifice functionality.

 

"iPhone is definitely a step toward the seamless integration that we’ve been promised for a while now," White said. 

 

Silver echoed that sentiment: "iPhone is, in a sense, the first truly converged personal device."

 

Apple’s first foray into the mobile phone market is good news for technology-loving consumers now, and likely will have just as positive an impact in the future.

"iPhone has been fantastic for the industry as a whole because it's forcing many other vendors to step up their game, to innovate," Cunningham said.