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Apple Introduces Highly Anticipated iPhone

January 10, 2007 at 6:35 PM EDT

STEVE JOBS, CEO, Apple, Inc.: The second is a revolutionary mobile phone.

JEFFREY BROWN: Once again, Apple is in the news, this time with its long-awaited jump into the mobile phone business yesterday at the annual MacWorld in San Francisco. Steve Jobs, a founding father of Apple, introduced his latest technological baby.

STEVE JOBS: An iPod, a phone. Are you getting it?

JEFFREY BROWN: The iPhone, which starts at a pricey $499, is controlled by touch. It plays music, surfs the Internet, and runs the Macintosh computer operating system.

STEVE JOBS: What we want to do is make a leapfrog product that is way smarter than any mobile device has ever been and super easy to use.

JEFFREY BROWN: Apple also announced that Apple TV would be available next month. It would allow users to view Internet video content on their televisions.

Signaling its increasing focus on consumer electronics, the company also renamed itself yesterday, from Apple Computer to Apple, Inc.

But while Apple wants to focus on its future, the company’s past has also been in the news in recent weeks, after revelations about so-called backdating of stock options, intended to boost executive compensation. An internal investigation at the company found “no evidence of misconduct by current management,” but a spokesman said the company is responding to inquiries from regulators.

Revolutionizing the phone industry?

Troy Wolverton
San Jose Mercury News
This is a product that has a chance to revolutionize the mobile phone industry. Apple has a reputation for having revolutionized other industries.

And now, more on all this from Troy Wolverton of the San Jose Mercury News. He's covered the company for years and attended the MacWorld meeting yesterday.

Troy, let's start with the iPhone. Why did it make such a splash in the tech world?

TROY WOLVERTON, San Jose Mercury News: Well, it made a splash for a couple of reasons. Partly it's because it represents Apple's first cell phone. It's a big, dramatic way for Apple to get into the consumer electronics business.

It's also made a big splash because people have been looking for this product. It's been rumored for a while, but it hasn't come out until now.

The other kind of big reason is because this is a product that has a chance to revolutionize the mobile phone industry. Apple has a reputation for having revolutionized other industries. The Windows interface that you use on your computer today is the interface that Apple popularized back in the 1980s.

The iPod is a device that revolutionized the MP3 player market. Everybody has an iPod, if they've got an MP3 player. And so you have an opportunity here for Apple to do something similar in the mobile phone market.

JEFFREY BROWN: Who are the competitors? And what does this do to the marketplace for consumers?

TROY WOLVERTON: Well, there's a number of big competitors in the market for cell phones, obviously. And that's why this could be a more difficult task for Apple than getting into the MP3 player market, for instance.

When Apple entered the iPod market, when it launched the iPod, basically it was competing against the likes of companies like Creative Technologies and Diamond Rio, kind of minor companies.

But today it's going into what's called the smart phone market, a market for phones that have both voice capabilities, as well as data capabilities. You can surf the Internet on it, for instance.

And it's going against some pretty strong competition, I mean, companies like Nokia, for instance, companies like Motorola, companies like Palm, and Research in Motion, which are smaller, but have been doing this for years. So it's going to get some pretty tough competition in this field.

The future of Apple

Troy Wolverton
San Jose Mercury News
The name change is emblematic of what Apple's ambitions are. It's no longer just a computer company. It's now a consumer electronics company.

JEFFREY BROWN: You talk about this as another attempt by Apple to be a sort of game-changer once again. Every time we get an announcement like this, you wonder, what is the bigger goal here for Apple and these other companies, in terms of the mobile digital future? What are they really after?

TROY WOLVERTON: Well, for Apple in particular, what Apple is trying to do is essentially to diversify. Apple started as a computer company. They had great success, obviously, with the iPod, and in the MP3 market, and then the broader digital music market.

They've started to get into digital video distribution, both with the iPod and with iTunes, and also now with Apple TV, this set-top box that they introduced yesterday. But now they're broadening their market further.

And that's kind of -- the name change is emblematic of what Apple's ambitions are. It's no longer just a computer company. It's now a consumer electronics company. And some might argue that it's kind of a latter-day Sony, in terms of its ambition, if not its real sales or real reality.

JEFFREY BROWN: Yes, I was wondering about that. So the change is being read as a kind of statement about the company, who it is and how it sees itself at this point?

TROY WOLVERTON: Definitely. I mean, the company is definitely changing. And Steve Jobs alluded to that yesterday at MacWorld when he talked about the name change.

He talked about all the different lines of business that Apple is in today. I mean, Apple was in computers. They're now doing music. They're getting into video. Now they're getting into cell phones.

You know, those are the -- the latter two of those are not big businesses for them right now, but music is. The iPod business is a huge chunk of Apple's revenue. In fact, if I recall correctly, in Holiday 2005, the sales of the iPod were larger than sales of Apple's computers.

Backdated stock options

Troy Wolverton
San Jose Mercury News
Apple has acknowledged that it had backdated options. It's acknowledged that there is something like hundreds or thousands of actual individual grants that are affected by the backdating.

JEFFREY BROWN: Now, let's turn to this so-called backdated stock options issue that is a potential problem for the company. First, define what we mean by that. Tell people what those are.

TROY WOLVERTON: Well, essentially, what backdated options are is, when you grant an option, typically what you're supposed to do is it's supposed to have the price, the market price for the stock, on the day that it was given out.

So if today Apple stock closes at, say, $90, I'll give you an option to buy the stock at $90 a share. But what happened with backdated options, not just at Apple but at now we learned hundreds of companies, executives didn't do that.

Instead, they handed out options and put a price on it that they knew after the fact to be a short-term low in the stock. So instead of giving you an option today at $90, because that's the market price of the stock was, I gave you an option today, and I said that I really gave it to you two weeks ago when the stock price was, say, at $70.

JEFFREY BROWN: So briefly tell us, how much is known at this point about, for example, to what extent Steve Jobs himself is involved?

TROY WOLVERTON: Well, what we know from Apple is that Apple has acknowledged that it had backdated options. It's acknowledged that there is something like hundreds or thousands of actual individual grants that are affected by the backdating.

What Apple has said, in terms of Steve Jobs' role, is that, a, he was aware of what was going on, at least in some cases; and, b, not only was he aware, but he actually recommended favorable dates for the option grants. In other words, he recommended the date of two weeks ago when the Apple stock was $70 a share, even though today it's at $90.

Now, what Apple has said is that they've cleared all their current management, including Jobs, of wrongdoing, and they've said that they have complete confidence in Jobs.

But there's seemingly a big discrepancy between Jobs' recommending favorable dates and him being cleared of wrongdoing. And Apple hasn't really explained how he can be untarnished by this and yet have had a hand in it.

JEFFREY BROWN: And so is it in the hands of federal regulators now?

TROY WOLVERTON: Ostensibly, yes. What Apple has done is they have, as they say, voluntarily handed over the results of the internal investigation that they recently concluded over to federal regulators, meaning the U.S. attorney's office in San Francisco and the Securities and Exchange Commission.

They've also said that, the federal regulators, that they have responded to inquiries from federal regulators, although they have declined to date to acknowledge whether, yes or no, federal regulators have launched any kind of informal inquiry, as such, into what they're doing or into their options finances.

JEFFREY BROWN: And just very briefly, Troy, after a day like yesterday and the stock jumps, but you still have this hanging over the company, is there a fear there about the potential impact?

TROY WOLVERTON: Well, I think that there is. It depends on who you ask. I think that there is an underlying fear of what this could eventually mean.

Because, for Apple, the big deal about the backdating going forward is if it, for some reason, forces Steve Jobs out of the company. Now, nobody is saying that Steve Jobs needs to leave right now.

You know, nobody has been indicted at apple. Apple is not in trouble with federal regulators yet. But there still is an underlying chance, especially given what's happened in other backdating cases.

I mean, you look at what happened, say, at UnitedHealth, where William McGuire was forced out, the CEO of that company, because of the backdating scandal there.