The iPhone Before the Apple iPhone

3/26/12Follow @allegiscapital

Ask most people to tell you the story of the iPhone, and you’ll likely hear about how an innovative computer company took the traditional telephone, combined it with the Internet, and came up with an attractive and low-cost device that pioneered a new category of touch screen hardware, appealing not just to the tech savvy, but to tech novices as well.

The story, of course, is true. But there’s one detail of the tale that most people are likely to get wrong. The company that made that first iPhone was not Apple Inc., as most people assume, but rather, InfoGear Technology Corporation. And its remarkably pioneering iPhone device went on sale in 1998, nine years before the now better-known iPhone was introduced to the world.

The original iPhone was not the handheld wonder most people know today; the technology of the mid-1990s did not allow so much computing power to be packed into so small a space. It was a desktop machine that looked much like an ordinary telephone, albeit with a small gray and white screen and keyboard.

But the first iPhone shared much in common with today’s model. It evidenced the same vision about how the Web would become central in our lives. Its creators had the same high regard for good, consumer-friendly design, and the same belief that computer products should be as easy to use as TVs and toasters. The 1998 iPhone never became the marketplace sensation of the current model, but it acquired a devoted following and is credited with influencing subsequent generations of product engineers and designers.

The story of the first iPhone also demonstrates one of the most important lessons of the business world: That timing is everything, and being too early with a product can be as problematic as being too late. The makers of the first iPhone saw the future exactly as it would come to pass. That future just took a little longer to arrive than they had anticipated.

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There are many surprising aspects in the story of the first iPhone, not the least of which is the company where it originated: National Semiconductor. National was one of the first generation of Silicon Valley chip makers, but reflecting the no-nonsense personality of its founder, Charles Sporck, it was associated with all of the important but dull products—timers, converters, capacitors—that play necessary but background roles in any piece of electronics. National had none of the glamour of Intel, home of the Pentium, and not much of a reputation for cutting-edge ideas.

The first-generation InfoGear iPhone, ca. 1997

But exteriors might have been deceiving, because inside National, there was more innovation that the company was given credit for. A notable example was National’s project NIF/T, which gave $100,000 grants to internal teams of engineers so that they could pursue in-house research projects on their own. In 1995 three engineers, Chaim Bendelac and Yuval Shahar in Israel and Reuven Marko in Santa Clara, CA, were given a grant to work on an idea they had for a device that would be part telephone, part Internet. They code-named the effort “Project Mercury,” after the first American manned space effort.

The name was appropriate. In the mid-1990s, the newly-minted World Wide Web inspired the same sense of excitement and exploration that outer space had for engineers in the 1960s. Personal computers, of course, had long been staples in the office and some homes; the “Wintel” duopoly was already so well-established that it seemed like the two companies were destined to dominate computing forever. The Internet, though, was beginning to change that. People began talking about a new kind of device, one that, while not exactly a PC, would provide access to the Internet, especially for e-mail. At the time, less than 10 percent of U.S. homes were online. Personal computers were still relatively expensive, usually in the $1,000 to $4,000 range, and their high cost was widely viewed as placing an upper limit on Web penetration.

Project Mercury engineers came up with an idea for a game-changer, a low-cost device that would combine Internet access with a telephone. At National, designers had considerable experience with the thrifty use of “commodity” off-the-shelf chips; that, in fact, was the DNA of the company. The three men made good use of the skills common at National. The heart of the new device, for example, wasn’t the latest CPU from the fanciest PC, but instead, a low-end microcontroller originally designed for fax machines. The trio also wrote some rudimentary but groundbreaking software to allow basic Web browsing and e-mailing.

The end result didn’t look like any sort of product you’d find in a store; instead, it was a collection of bits of electronics laid out on an engineers’ bench. But at least it proved the concept that a new sort of “Internet appliance” could be constructed without the high-end hardware of the like of Sun Microsystems and Silicon Graphics, the companies that were then most commonly associated with the Internet of that time.

Project Mercury might have never been more than an engineering curiosity had I not stumbled across it at National, where I was consulting on innovation, in addition to preparing to launch a small early-stage venture capital firm.

In the middle of 1995, at the end of an otherwise routine meeting at National’s headquarters, my executive host at the company, Demetris Paraskevopoulos, without any fanfare invited me into a lab to take a peek at something a few engineers had been playing around with.

It looked like something my 11-year-old would build by running through the junk yard collecting pieces. When I was told it was a telephone integrated with a Web browser and a screen, I had an “Aha” moment. The ragtag collection of circuit boards lying in front of me had the makings of exactly the sort of post-PC Web-based computer that Silicon Valley’s keenest minds were beginning to predict. And for the project to have any kind of future, it would be clearly need to be rescued from National Semiconductor, which as a behind-the-scenes electronics supplier had no experience marketing products directly to consumers.

Thus was born what would become InfoGear Technology Corporation, the company that had as its goal conquering the world with what was promptly named the iPhone. InfoGear would occupy most of my time for the next several years.

My first task, with the help of Paraskevopoulos, was reaching an agreement with National, as InfoGear needed access not only to the technology associated with the iPhone, but also the engineers who had worked on it. Negotiations dragged on for months, with lawyers for National unwilling to offer any reasonable terms for the technology licenses that would be crucial for the iPhone’s success.

Discussions would have been broken off entirely had it not been for the direct last-minute intervention of National’s then-president Gilbert Amelio, who wanted the deal done and who basically ordered his team to make it happen. (Ironically, Amelio also played a supporting role in the story of the second iPhone, when in 1996, while chief executive at Apple Computer, he bought Steve Jobs’ NeXT Computer, setting off the chain of events that would lead to Jobs’ return to the company he had co-founded.)

By November 1995, structural and ownership issues had been worked out. I brought on board a strategic corporate partner for the project, a Morgan Hill company named CIDCO. The CID in the company’s name stood for “Caller ID;” CIDCO had grown to be a substantial public company by selling small units that attached to home telephones, and displayed the number associated with the incoming call. The devices were extremely popular: CIDCO sales exceeded $200 million a year and its NASDAQ stock traded above $30.

But CIDCO had a problem, because caller ID functionality was slowly being designed directly into phone units, eliminating the need for CIDCO’s separate device. As sales of its original product declined, the company was in search of new business opportunities. It saw the iPhone as a perfect fit, reflecting CIDCO’s legacy in telephony and its extensive ties with phone companies. The phone would be known as the “CIDCO iPhone” and the company would be renamed InfoGear.

While many things about the iPhone would change before the first model hit the market, the core ideas remained constant. First and foremost, this was going to be a consumer product, not something for uber-geeks. My mother had to be able to use it right out of the box. The sales target was the home, as the office market was ruled out because its telephony landscape was dominated by complex PBX systems. The user interface would be a touch screen – would be a cross between a telephone and an ATM.

The iPhone would not be a PC replacement, but instead, a new kind of “appliance” device that did only a few things—telephone, e-mail and simple Web browsing—but did them very well. The mission of the product was described in an early InfoGear press release: the iPhone would not replace the PC, but instead “co-exist with PCs much as the microwave co-exists with a conventional oven.”

To cut down on both the hardware and software resources (and their related costs) that would be required inside each iPhone, InfoGear adopted what was then called a “client-server” architecture. That approach allowed most of the software necessary for the iPhone to be stored on a big central computer, and be downloaded quickly on an as-needed basis when the device was turned on. The approach also had other advantages, including how it freed users from loading, updating and patching software. Today, of course, the company would say it was working “in the cloud.”

The rapidly evolving Internet was the main influence on the iPhone design project. But another major source of inspiration came from France, in the form of Minitel. Minitel terminals were small black and white consoles, provided by state-owned France Telecom, which during the late 1980s and early 1990s had become mainstays in every French home and office. They were used for train tickets, directory assistance, stock purchases, e-mail and a host of other applications. It was a simple, brain-dead device, but it was incredibly useful.

Designing a consumer product like the iPhone today simply involves picking up a phone and telling a one-stop-shopping “Original Design Manufacturer” in Taiwan or in China what you need. In the 90s, though, the computer industry supply chain wasn’t as well developed, and assembling a product required a global shopping spree. As the National engineers refused to move to California from Israel, much of the engineering for the project was done in the Middle East, ten time zones away from Silicon Valley. At the height of the original iPhone work, there were 20 engineers in Israel and another 40 team members working in Mountain View.

The design team decided to use the same processor from Project Mercury. While the initial three-man team had written a few software components for their laboratory device, much more code needed to be written before the iPhone could be used by everyday consumers. And the product itself needed to look like something that would blend in with a modern home. To help give the iPhone a sleek, sophisticated look, Frog Design, famous for its work on Sun, Next and Apple computers, was called in to help.

Pricing is an important decision for any company, but even more so for one hoping to have a consumer market hit on its hands. InfoGear was hoping to be able to sell the iPhone for $250 to $300. Working backwards, that would mean its component cost, known as the “Bill of Materials,” would need to be around $100.

This is where the team got the first bit of bad news: the actual figure came in at $210. Then, as now, the most expensive component in the system was the display. Having a touch-screen LCD, the sort used in ATMS, was key to the iPhone’s design. But this was still the early days of that technology, and individual units cost upward of $80.

What was needed was a distribution partner willing to subsidize expenses. There were two obvious candidates, telephone companies and cable companies, both of whom were in the business very much like the one InfoGear wanted to be in, providing “Customer Premise Equipment,” along with a monthly data plan. InfoGear’s argument to phone companies would be that the iPhone represented the next iteration of the telephone. For cable companies, the device would be depicted as representing a new revenue opportunity at a time of flatlining sales.

To run the company, meanwhile, I recruited Robert Marshall, who had recently stepped down as COO of Tandem Computers, the maker of very high-end “fault-tolerant” computers used mostly in the financial sector. Since InfoGear was headed to a partnership with a telephone or cable company, a solid operations manager like Marshall would be perfect to run it.

When unveiled in 1998, the first model hit nearly all of the design goals the company had set. There was, of course, a standard telephone line and corded handset, albeit with advanced call waiting and conferencing features. And the seven-inch, 640 X 480 screen and keyboard allowed users to also send e-mail and surf the Web.

Many of the specs of the first device seem primitive these days. The original iPhone had just one phone line, meaning users couldn’t be on the phone and online at the same time. The phone had only one megabyte of total memory. But it had some features that would impress even today’s power users. For example, because the device lacked a mouse-style cursor pointing devices, the iPhone’s programmers had to develop ingenious ways for users to interact with the information being presented to them on Web pages. For example, whenever a Web page displayed a phone number, the iPhone automatically turned the number into a touch-screen button, meaning the user could dial it just by touching the screen.

InfoGear and CIDCO knew that the iPhone would need an ecosystem of content suppliers, and they were all duly lined up. There was Java technology from Sun Microsystems; maps and the like from RR Donnelley & Sons; movie listings from Hollywood Online; and perhaps most impressive of all, content from Time Inc.’s family of magazines, including People, Time, Money, and Sports Illustrated.

In terms of pricing, InfoGear hardware, of course, would have a price tag. But the iPhone would also require a paid monthly data plan. The price tag of the iPhone was set at $499; the bill of materials dashed all hopes of anything less. There was a separate $19.95 Internet access plan required for the device to be operational. The $499 was then at the low end of next-generation digital consumer technology, which was much more expensive in the early days than many people seem to remember.

The second-generation InfoGear iPhone, ca. 1999

The public got to see the iPhone for the first time in January, 1998, at the huge Consumer Electronics Show in Las Vegas. Reviews were positive. Personal Computer World said it was “an exciting look at the future of telephony integration,” and PC World described it as “a well-designed product” that “smoothly combines phone, Internet, and e-mail access in one small console.” Perhaps most prescient was a trade reviewer who wrote, “As it stands the iPhone is interesting, but what it points to is more important.”

It also quickly began picking up technical honors, such as a Best of Show award for Outstanding Desktop Hardware Product at Fall Internet World ’98, and an Innovations ’98 award from the 1998 CES.

Amid all the accolades, there were some complaints too, only natural for such a new product. One was that the proprietary Web browser and relatively low-power CPU of the iPhone weren’t able to keep up with the some of the latest Web offerings, such as Flash animations. The small keyboard also had critics. While Moore’s Law has taken care of the first problem in modern “smart phones,” the issue of an adequately sized keyboard haunts engineers even today.

The company was still looking for a distribution partner to bring down costs. The company approached all of the Baby Bells—this was before the old AT&T system was effectively reconstituted—but found little interest. It was the same at cable companies.

The iPhone was available online, but sales were unremarkable. For all the good reviews, the product was not achieving break-out status. Meanwhile, the competitive space was starting to heat up. New forms of “Internet appliances” with value propositions similar to the iPhone were beginning to hit the market.

Then, six months into the iPhone’s product life, InfoGear got at unpleasant surprise. The Caller-ID market that was CIDCO’s legacy business had collapsed at an even faster rate that the company had anticipated. In July 1998, it announced that it was no longer profitable, and that as a result, it would be getting out of a number of businesses—including the iPhone Internet appliance market that it just entered. The company said it has shipped 2,600 iPhones during the quarter, far fewer than needed to make up for the collapse of its other business. CIDCO’s shares dropped to under $3, and it was given up for dead. The company scraped along until 2001, when it was bought by EarthLink for a mere $5 million.

The loss of CIDCO as a marketing partner was a serious blow. It led to a recapitalization of the company that severely diluted early investors, although a new shareholder team, including Intel and Cisco, entered the picture. Those latter investors continued to believe the iPhone could blaze a trail that would lead to a new combination of Web and telephony.

With CIDCO out of the picture, InfoGear was forced to do all the development work on the second iPhone by itself. The “iPhone 2,” absent any CIDCO references, sported a second phone line, silencing the critics who complained about not being able to use the Web and the phone at the same time. And internally, InfoGear had ambitious plans for an entire family of products built around the iPhone, with color screens, video conferencing, Voice-over-IP and more.

Sales of the device continued through a variety of small retail channels, and via the Web. Eventually, 100,000 were sold. Other Internet appliances makers were getting the same sort of ho-hum reaction. The situation was summed up by a Wall Street Journal headline from the period: “The Future Calls: Smart phones have lots of cool features—but not all that many customers.”

As the iPhone continued to survive, Cisco, one of InfoGear’s second round investors, approached management with an offer to buy the company in March 2000 for $300 million in Cisco stock. Cisco said the iPhone could help it enter new consumer markets and praised the behind-the-scenes network management software that InfoGear engineers had created for the “cloud” operations that controlled the iPhone. The acquisition offer proved irresistible.

In the end, Cisco didn’t push the iPhone (a story that had a haunting sequel after Cisco bought videocam maker Flip nine years later). As the months went by, the iPhone team drifted away to support other Cisco products, or to other companies, and the iPhone slowly faded from the scene.

The word “iPhone” pretty much disappeared from the landscape, and it wasn’t heard much again until 2007, when Apple announced its own iPhone. Amid all the hype and fanfare of that second iPhone rollout, a few enterprising reporters noted that the trademark “iPhone” was still associated with Cisco. Apple and Cisco had to come to an agreement before Apple could use the word in its marketing material. The agreement was struck, and it was a final acknowledgement for the history books that while today’s iPhone is the most famous, it definitely is not the first.

Bob Ackerman Jr. Ackerman is the founder and a managing director of Allegis Capital, an early-stage Silicon Valley venture capital firm that invests heavily in cybersecurity. Follow @allegiscapital

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