Apple raises its iPhone ante

For the past two years makers of powerful, Internet-connected smartphones have been racing to respond to the innovations unleashed by Apple's iPhone. While they've taken steps to narrow the gap, Apple may have just pulled further ahead.

Apple (AAPL) is doing that through a series of capabilities unveiled on Mar. 17 that make it easier for software developers to create nifty iPhone applications. In a packed auditorium at Apple's Cupertino (Calif.) campus, the company presented both a major update of its iPhone software and details of a software developer kit.

The likely result is that Apple will further solidify its position as the platform of choice for software developers"”and as a result, many consumers. In just eight months programmers have created 25,000 applications that are available on Apple's online App Store. Of those programmers, 62% had never written anything for an Apple product. So far, consumers have downloaded more than 800 million of these apps, which include everything from games like Tetris to software that helps diabetes patients manage insulin levels. The wide range of apps is a major reason the iPhone quickly jumped to No. 3 in the cutthroat smartphone market.

Playing catch-up to Apple apps

The App Store is also a key reason why rivals will have such a hard time closing Apple's lead. In recent weeks companies including smartphone leader Nokia (NOK), BlackBerry maker Research In Motion (RIMM), and Microsoft (MSFT) have announced plans to open their own app stores. While the three companies have sold far more devices than Apple, which has sold 17 million iPhones and 14 million iPod Touches, their products are used mostly for making calls and sending e-mail. People flock to Apple for other kinds of programs, including browsing the Web. 'This will make Apple's big lead that much bigger,' says Trip Hawkins, CEO of Digital Chocolate, a maker of popular iPhone games.

Many of the new capabilities address shortcomings with the current iPhone software. For the first time, iPhone owners will be able to cut and paste text or pictures between applications"”say, to include in an e-mail a photo of a home for sale or restaurant meeting place. Users will be able to write e-mails in landscape mode, so the phone's software-only keyboard is larger. IPhone software chief Scott Forstall said the company also made upgrades to its server farms so it can now reliably offer 'push notification' every time a user gets an e-mail or an application update.

What's more, the iPhone will increasingly be useful for social rather than solo activities, thanks to the addition of so-called peer-to-peer networking. IPhone owners will be able to automatically recognize and interact with others wirelessly, to play a game, share a contact, or even play a duet using software from Smule that lets the iPhone double as a flute or trombone. The company also announced plans that should expand the already vibrant market for iPhone accessories. Now, accessory makers will have an increased ability to make customized products. There will be one for taking blood pressure, together with an app that lets the user quickly get a reading, look at past results, or contact a doctor.

More payment options

Maybe the most significant advances are in the tools that will enable developers to make money from their handiwork. Developers will be able to offer subscription pricing for the first time.


They can also offer other 'in app' purchases, so customers could buy another level of a video game or an electronic book without having to leave the application. Many developers have wanted these payment options, to help differentiate their offerings from free or cheaper knockoffs. That's not enough to build a large, profitable software company, but these alternatives can let developers bring in recurring revenues. 'This will drive up revenues for developers, and lead to the creation of more expensive apps,' says Gartner Group (IT) analyst Van Baker.

Despite speculation that Apple would tip its hand about future devices, the company gave no such hints. And Apple did not announce support for video, which would likely be a prerequisite for the laptop-like netbook many expect the company to bring to market. But Baker notes that the secretive company may well have included software that lets iPhones record or play video clips but chose not to disclose it.

Of course, Apple's many rivals are not about to throw in the towel. Palm (PALM) is expected to start selling its Pre phone by midyear. Many observers feel the device may come closest to the iPhone for ease of use and may be even better for people who want a device for both their personal and business lives; for example, it includes a real keyboard, which many prefer for typing e-mails. Phone maker HTC has announced it will make additional models that run Google's (GOOG) Android software.

Microsoft to make its move

Microsoft, Apple's old nemesis from the PC wars, is also planning a major consumer push for phones that run its Windows Mobile software, which in the past were aimed mostly at corporate users. The company plans to focus on making phones that work seamlessly with Windows PCs, which still have 90% of the PC market. And the company may integrate voice-recognition capabilities, obtained through Microsoft's 2007 acquisition of TellMe. One possibility: users simply ask for turn-by-turn directions or for the next movie time of a certain flick, rather than have to type or tap a touchscreen. 'There's a lot of opportunity there, and the team is looking at all the relevant ways to integrate that into the platform,' says Greg Sullivan, senior product manager in Microsoft's Mobile Communications Business.

But while others look, Apple is increasing the momentum for a product some believe is the most significant in the company's history.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.