In Cingular-Apple Deal, Only Phone Was Missing

By MATT RICHTEL, The New York Times

Published: January 10, 2007

SAN FRANCISCO, Jan. 9 — When Cingular executives went to the company’s board last year to get approval for a deal with Apple, they did so without so much as a prototype of an Apple phone to show the directors. The board signed off anyway.

“We got this deal approved without them ever seeing the device,” said Glenn Lurie, president for national distribution at Cingular Wireless, who was responsible for the project on the Cingular side.

The approval was a leap of faith on Cingular’s part that Apple Computer could produce a phone as groundbreaking as its iPod music players.

Apple came up with the iPhone. The phone was unveiled Tuesday and will not be released until June, but it is already shaking up the market for high-end cellphones. Shares of the companies that make Treo and BlackBerry devices, the iPhone’s most obvious competitors, began to slide while Steven P. Jobs was still on stage in San Francisco, demonstrating the phone’s features.

Cingular and Apple may be fast-moving technology companies, but they took their sweet time putting the iPhone deal together. Officials of the two companies began discussions nearly two years ago, in February 2005. They quickly agreed that they should work together on a phone project, but there were far-reaching conversations and brainstorms about what the product should be.

They considered an Apple-branded mobile phone service that would piggyback on the Cingular network, but rejected the idea. Then, a year ago, they settled on the final concept, an Apple-made phone for subscribers of Cingular, which is owned by AT&T.

Details of the negotiations and partnership were provided in interviews with Mr. Lurie and Eddy Cue, a vice president of Apple who is in charge of its iTunes service and oversaw the relationship on Apple’s end. They said they had spoken nearly every workday over the last two years and had, above all, one mandate: to maintain secrecy.

In keeping with Apple’s tradition of keeping silent about product development, they were fiercely protective of the iPhone, and colleagues and co-workers knew to say nothing about it outside their circle.

Mr. Lurie, in particular, said Cingular wanted to prove to Apple it could be trusted to keep the project secret so that it could be disclosed on the companies’ terms. “We were going to try to be like Apple and keep things quiet,” Mr. Lurie said. “A big part of the partnership is trust.”

The deal marries two companies with considerable heft, though with somewhat different goals. Cingular, the nation’s largest wireless carrier, hopes the iPhone will help it attract new subscribers and keep disgruntled ones from fleeing to competitors, like Verizon Wireless.

Apple, a major innovator in consumer electronics, hopes to break into the market for a product “everyone wants to use and uses every day,” Mr. Cue said.

But the potentially powerful combination of Cingular and Apple may not be as attractive to consumers as they hope, said Roger Entner, a wireless industry analyst with Ovum Research. Mr. Entner said the device would doubtless be state of the art, but that is not the whole battle. He noted that some laptop computers are cheaper than the $499 iPhone.

“Is it futuristic? Yes,” Mr. Entner said. “Is it affordable? No.”

Mr. Entner said phones costing $500 or more represent less than 1 percent of those sold in the United States. As a result, he said, Apple could initially be competing for the attention of a few million consumers who rely on advanced devices like the Treo from Palm Inc. and the BlackBerry from Research In Motion. “This sets a high bar for the high-end device, but on the low end it has no impact,” Mr. Entner said.

Mr. Jobs’s announcement had perhaps its most immediate effect in the stock market, where Palm’s shares fell 5.7 percent and R.I.M.’s dived 7.9 percent. Shares of Motorola, which makes a broader array of phones, fell 1.8 percent. Apple’s stock surged more than 8 percent.

Executives of R.I.M., based in Waterloo, Ontario, did not answer phone messages seeking comment on the iPhone. Nick Agostino, a technology analyst with Research Capital in Toronto, said the decline in the stock most likely reflected investors’ concerns about the fate of R.I.M.’s BlackBerry Pearl consumer model.

But that concern appears to center more on lost potential for R.I.M. in the broad consumer market than on any threat to the company’s core market of business users. The e-mail system the iPhone will use lacks the security features and other properties of the BlackBerry e-mail service, making it unlikely that business users will switch to Apple’s offering, Mr. Agostino said.

As part of its pitch to consumers, however, the Pearl is the first BlackBerry to include multimedia entertainment abilities and a digital camera. Mr. Agostino said that R.I.M. might have trouble attracting customers who are interested in those additional features. “A guy who has e-mail at the top of his list is likely to want a Pearl,” he said. “A guy who has e-mail fifth or sixth on his list is going to look at the iPhone.”

The relatively high price of the iPhone may also swing some buyers to the BlackBerry offering. T-Mobile, for example, is now offering the Pearl for $200 with some of its plans.

Marlene Somsak, a spokeswoman for Palm, said the iPhone did not appear to be aimed at the business market, “where e-mail and quick and easy text entry for messaging and Web navigation are a requirement.”

The iPhone has a touch screen that can display a kind of virtual keyboard. Ms. Somsak said Palm believed that full keyboards like those on its devices were essential.

Tim Bajarin, president of Creative Strategies, a Silicon Valley consulting firm, said the iPhone would make current so-called smartphones obsolete. “It’s certainly going to cause them to go back to the drawing board,” Mr. Bajarin said, referring to phone manufacturers.