Views | The iPhone and the future of the global economy - Livemint

It is now five years since the first iPhones went on sale in Apple stores, on 29 June 2007. A million were sold in less than three months. Cumulative sales are now close to 220 million. The smartphone revolution has toppled Nokia from its dominant position in the mobile phone market.

The spectacular success of the iPhone offers many lessons. I want to focus on three important lessons right now.

First, the iPhone story shows that protecting a dominant market share is not as easy as many believe, as Nokia has recently discovered. Much of our analysis of competition is based on price, specifically the threat from cheaper products made by other companies. The iPhone success shows that corporate dominance over a particular market is often demolished by new technology rather than low prices. “In capitalist reality as distinguished from its textbook picture, it is not (traditional) competition that counts but competition from the new commodity, the new technology, the new source of supply, the new type of organization,” Joseph Schumpeter wrote in Capitalism, Socialism and Democracy, his classic work. He said that this type of competition “strikes not at the margins of profits and the outputs of existing firms but at their very foundation and their very lives”.

Second, the success of Apple and other digital companies shows that it is possible to create value even in a weak economy. The five years since the iPhone was launched have also been years of immense economic stress in many countries, especially in the West. These years have seen a new digital economy emerge. Apple has played an important role as a catalyst. There would have been no apps such as Angry Birds without the iPhone. The first App Store opened in 2008, and Apple says that it has paid developers $5 billion till now. A report by Business Insider says that the app economy is not as large as many believe it to be, perhaps only around $3.5 billion in 2011. However, TechNet estimates that app development has created 466,000 jobs across all available platforms.

Third, the success of digital companies amid recessions shows that new technology drives economic renewal. In his classic study of business cycles, Schumpeter said that economies expand and contract in long cycles that are linked to technological change. He identified the main cycles from the Industrial Revolution till the time he was writing. The first wave of innovation was unleashed by the development of the steam engine and better textile technology. The second wave rode on the development of the railways and the growth of the iron and steel industries. The third wave was powered by electricity, the internal combustion engine and plastics. One could update this list with a fourth wave, focused on the development of semiconductors and computing, after the 1960s.

As I had written in an earlier column (The importance of Facebook) it is too early to say whether the next big technological wave will come from the digital economy or if the quest for green energy will spark the next stage of economic growth. But Schumpeterian innovation is always a potent force, a reason for optimism at a fundamentally pessimistic time.