How the iPhone disrupted the Oil industry

By James Arbib & Tony Seba

[This is an excerpt from a chapter of our 2020 book Rethinking Humanity]

When Steve Jobs unveiled the very first iPhone at the San Francisco Macworld Convention in January 2007, the expectant crowd was full of techies, comms professionals, and the obligatory assortment of Apple devotees.

Oil executives were nowhere to be seen. For who could possibly have imagined the introduction of a new pocket-sized communications device represented an existential threat to the global oil industry?

But this is precisely what the smartphone has become. Understanding how and why is key to understanding disruption – how new technologies quickly take hold and impact not just the industry that developed them, but other sectors, the wider economy, and society itself.

Why, for example, did the iPhone appear in 2007? Why not 2005 or 2009? The answer is very simple – it was built on a series of underlying technologies, each of which needed to develop to the point where a $600 smartphone became possible. The cost and capabilities (size, weight, reliability, and functionality[1]) of each of these individual technologies needed to reach a level that, when combined, resulted in a product both good enough to satisfy consumers’ desires and cheap enough they were prepared to buy it.

Technology Convergence

In the early 2000s, each of these technologies benefited from improvements made in different markets as increasing sales volumes, competition, and investment of capital and ingenuity drove down cost and improved performance. Cost alone was not enough, since some of the key technologies did not function adequately or could not be used widely enough – analog (1G) and digital (2G) networks, for example, could not run smartphones as data traffic was conducted over calls and transfer speeds were too slow. The introduction of GPRS technology (2.5G) solved these issues by allowing data to be sent all the time, increasing transfer rates dramatically.

Meanwhile, after decades of development, touch screens worked well enough to use as 2007 approached. With sensors, processing power, and energy dense lithium-ion batteries also now in place, this was the last, albeit critical, piece of the jigsaw. Without any of these technologies reaching the threshold in cost and capability, the iPhone would not have been so disruptive. It was born through technological convergence – the coming together of key technologies at a particular point in time to enable the creation of an entirely new product or service at a competitive cost. It was, therefore, no coincidence that Apple introduced its first smartphone in 2007, the same year Google launched its Android operating system. In 2005, a $600 smartphone would not have been possible and by 2009, the ship had sailed.

Exponential S-Curve Adoption

Once the smartphone was launched in 2007, sales soared.
By 2017, just ten years later, they topped a trillion dollars as the smartphone gained more than 80% market penetration. Adoption was non-linear and followed an S-curve – in all technology disruptions the pace appears slow at first because a new product has less than 1%-2% market penetration, then hits a tipping point and accelerates through an exponential phase until the product nears about 80% of the market, at which point growth slows as the market reaches saturation.

The iPhone’s extraordinary success took most of the industry by surprise. Jim Balsillie, then co-CEO of Blackberry-maker RIM, predicted its impact on his business would be minimal, dismissing it as just “one more entrant into an already very busy space.” [2]

Steve Ballmer, CEO of Microsoft at the time, was even more forthright: “There’s no chance that the iPhone is going to get any significant market share. No chance.” [3]

Humanity_Smartphone_Fig 1

Many investors were also deeply skeptical. The trillion-dollar investment fund Capital Group, evoking the popular Harry Potter books of the time, said the iPhone’s price meant it “lacks the ability to produce magical business growth... The old iPod magic doesn’t translate here." [4] The media were also unconvinced, with PC Magazine, TechCrunch, and Bloomberg all publishing articles giving the iPhone little or no hope of success. MarketWatch even ran a comment piece advising Apple to “pull the plug on the iPhone” or “risk its reputation in competitive business”. [5,6]

Cellphone disruptors like Nokia and Motorola were in a privileged position to drive the next wave of disruption, but they just did not see it happening so quickly. In a 2013 press conference, then Nokia CEO Stephen Elop said: “We didn’t do anything wrong, but somehow we lost.” [7]

Led by Outsiders

Neither Apple nor Google was a cellphone maker. In fact, neither company had any telecoms market expertise. The established giants of the industry such as Nokia, Blackberry, and Motorola were all blindsided by the emerging smartphone. This is usually the case – disruptors come from outside the core market. Think of the incumbent ice cutters, whalers, carriage, or camera makers, none of which led the disruption of their sectors. Hamstrung by protecting their existing product suite and locked into existing business models, thought processes, cultures, and incentive structures that favor incremental progress over disruptive innovation, incumbents find it difficult to develop and adapt quickly enough to entirely new product architectures, business models, or success metrics.

Cascading Impact

Technology convergence opens up new possibilities and the smartphone created a period of extraordinary opportunity. At the start of 2007, Apple was valued at around $70bn. By 2020, the company was worth more than $1 trillion, making it one of the most valuable corporations in the world. [8] But the smartphone created huge possibilities far beyond the narrow confines of the cellphone market. The internet had gone mobile. This small, handheld device enabled not just the creation of new products and services, but also new business models that together disrupted sector after sector of the wider economy. Industries from music, banking, news, and restaurants to navigation, retail, education, and travel were transformed.

At the same time, the arrival of the smartphone triggered destruction of value on a shocking scale. The market share of Nokia, the leading phone maker at the time, slipped from 51% of the market in Q4 2007 to less than 3% just five years later as net sales slumped 75%. [9,10]

The once ubiquitous brand has now all but disappeared. And just as the creation of value spread from sector to sector, so too did the destruction. Cameras were included in smartphones and as their quality improved, standalone cameras (both digital and what was left of the film market) became largely redundant. Despite an explosion in the number of photos taken, the formerly-dominant camera makers (both film and digital) and their value chains were effectively destroyed. The same can be said of MP3 players, GPS navigation devices, and handheld gaming consoles.

But the impact of the smartphone was felt far beyond the economy. Social lives were transformed as smartphones revolutionized how we communicated, made friends and contacts, and managed and expanded our personal and professional networks. The way we found jobs, worked, shopped, and entertained ourselves changed radically, almost overnight. The arrival of social media had an even greater transformative effect, completely upending traditional channels not just of communication but of information, as individuals could for the first time bypass traditional sources of news and analysis by creating their own content and sharing it with billions of people at the touch of a button. Dating was completely transformed – the percentage of heterosexual couples who met online went from 2% in 1995 to almost 40% in 2017. [11]

In the developing world, the smartphone had an even greater impact. The cellphone networks leapfrogged expensive (now obsolete) landline infrastructure, giving huge swathes of the population access to telephony and communications for the first time. Smartphones allowed people around the world to access banking and loans, business information, education, and entertainment in a way that was not previously possible.

The lives of billions of people were instantly transformed.

All these new uses set in motion powerful forces (feedback loops) that fueled demand for smartphones, while each new user created more value for all existing users in a classic network effect. This helped drive demand, investment, and innovation ever higher while economies of scale pushed costs ever lower.

Unexpected Consequences

The explosion of the smartphone market also helped drive down the cost and increase the capabilities of all the underlying technologies, which then converged in different ways to disrupt other, apparently unrelated, sectors of the economy.

One example is ride-hailing, which only became possible thanks to the smartphone. Uber (founded in 2009), Ola (2010), Lyft (2012), and Didi (2012) have decimated the taxi markets in their respective countries, offering cheaper and more convenient rides. Often hamstrung by century-old regulatory models, licenses, or expensive medallions, established taxi operators have been unable to respond, other than by evolving into ride-hailing services themselves, such as Free Now. By 2016, just seven years after launching from an apartment in San Francisco, Uber had more bookings than the whole taxi industry in America. [12,13]

Humanity_Cellphone_Fig 2

But ride-hailing is just one dimension in the disruption of transportation. The improvement in lithium-ion battery costs, driven initially by the consumer electronics sector and then by the smartphone market, means electric vehicles (EVs) are now disrupting the high end of the gasoline vehicle market and are about to disrupt the mainstream market. The all-electric Tesla Model 3, for example, is now one of the best-selling cars in the US. [14]

At the same time, incredible strides are being made in developing autonomous vehicles (AVs). Again the cross- pollination is clear – Google, the company that created the first working AV and is helping lead the development of this market, is also the leader in global smartphone operating systems. Global ride-hailing companies such as Uber and Didi, both enabled by the smartphone disruption, have also invested billions of dollars to develop autonomous technology.

The convergence of ride-hailing, AVs, and EVs will soon create an entirely new form of transport known as Transportation-as- a-Service (TaaS) – essentially robo-taxis. This will be dramatically cheaper than car ownership, costing up to 10x less per mile and saving the average American family more than $5,600 a year (details are laid out in our Rethinking Transportation 2020-2030 report), and trigger a rapid disruption of the gasoline car, bus, delivery van, and truck markets.

But the disruption of internal combustion engine (ICE) vehicles is not just about the dramatic cost reduction of autonomous electric vehicles (A-EVs) – the smartphone has also disrupted the value of individually-owned vehicles. In the past, the car was necessary for dating but now couples meet online. In the past, we needed the car to go to a restaurant or shop for food, but today a host of companies such as Amazon, Uber Eats, and GrubHub deliver fresh produce and ready-made meals to our front door. In the past, we needed a car to go and see a movie, but today streaming services like Netflix and Prime offer a monthly subscription to tens of thousands of movies and TV shows for less than the cost of a theater ticket. Information technology has unbundled and disrupted the value streams of the car, both practical and emotional, to the point where the individually-owned car is turning from an asset to a liability.

In a chain of complex causality, the smartphone has enabled the key technologies, products, and business model innovations that will kill off not just the ICE and individual car ownership, but the industry that fuels them – oil. The siloed, linear, mechanistic mindset points to the smartphone creating an ‘App Economy’ and disrupting telecoms, which is a true but narrow and dangerously incomplete assessment. In reality,
the smartphone, the cloud, the internet, and AI are now converging to bring a swift end to two multi-trillion dollar, hundred-year-old industries together with a political, financial, and industrial order dominated by the geopolitics of oil.

Humanity_NYC_Ride_Fig 3

References:

Capabilities can be thought of across many dimensions.
For example, improvement in computer processing is usually measured in number of transistors per unit of space (inch). But these transistors also improve in speed, so improvement in processing power is a combination of both. Size, speed, and also durability are all relevant measures. Lithium-ion batteries improve in cost/kWh stored, but also in energy density, charge times, and lifetime. While the cost curve measures only $/unit of storage – the other measures of capability are also relevant. A cheap battery that is huge,
for example, would be of no use for a smartphone.
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Mainstream analysts and consultants should have learned from the recent major telecoms disruption. When hired by AT&T (then the largest telecoms company in the world) in 1985 to predict the size of the mobile market by the year 2000, McKinsey came back with an estimate of 900,000. The number was 120 million. It was out by a factor of 120. The consultant was not alone. Vinod Khosla, the Silicon Valley investor, looked at forecasts by major technology research consultancies between 2002 and 2010 and found they routinely underestimated growth in the mobile phone market by a factor of eight.
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