Watching the discussion and analysis of the iPhone 3G, what’s getting the most attention -- particularly from the stock market world -- is not so much the new features, but rather the price drop and change in business model. Many people seem to think that Apple lowered the price merely to move more units, and that dropping revenue sharing has come about because Apple is willing to let carriers subsidize the device. I think that Apple is actually trading revenue sharing from the carriers in favor of what may be a much bigger pie: revenue sharing from its developers in the form of the App Store.

Apple used to get a cut of monthly revenues from AT&T and the initial carriers it signed with in Europe. That was a controversial model that caused no end of consternation with current and would-be partner carriers, largely because it was different from the relationship that every other handset manufacturer had with the carriers. Change is, after all, bad in the established corporate world

Apple has run into much resistance to this model as it was looking to expand the number of countries in which the device was being offered. Indeed, it was the revenue sharing deal that was at the heart of negotiations ending with the world’s largest carrier, China Mobile. For those keeping score at home, China mobile has more customers than the U.S. has citizens.

Now, however, we know that Apple dropped this business model in exchange for a more traditional carrier-subsidy model. At the same time, the retail price of the iPhone 3G was dropped to $199, and it seems a logical leap to focus on the fact that this price point puts the iPhone in the price range of the less-washed masses. With free iPhones already being offered by O2, even the unwashed masses can consider being Apple chic.

On the other side of that equation, however, is the concern that Apple is going to cut into its own enormously profitable iPod business. With the iPhone being such a great iPod (the best iPod ever, according to Steve Jobs), that free-$199 price likely means fewer iPods being moved, an analysis I agree with.

So how is Apple going to make up lost revenues from monthly data plans, cheaper iPhones, and fewer iPods sold? From the App Store, if I’m right.

One aspect of the iPhone SDK and the ability to develop for the device is the fact that Apple is controlling distribution of iPhone applications. If a developer wants to distribute an iPhone application, it goes through the App Store. Developers set the price -- and many iPhone apps will be free -- and Apple handles all aspects of the distribution (including bandwidth charges), while keeping 30% of those apps that aren’t free.

From the beginning, I’ve said that Apple should embrace the iPhone as a legit platform, and let the application market for it explode. Even with the iPhone SDK , it’s still not entirely an independent platform -- for instance, I can’t install another OS on it as of yet -- but Apple has struck a nice balance between open development and Apple control in the form of the App Store.

I think that balance is going to help the iPhone explode in popularity, and if it does, Apple is going to realize tremendous revenue in the form of sales of iPhone apps and the 30% Apple keeps.

This is where the more-is-better aspect of cheaper iPhones kicks in. On an iPhone-to-iPhone comparison basis, 30% of App Store revenues won’t make up for the lower price point and the loss of monthly revenue sharing. However, if the result is exponential growth in the number of iPhones in use - growth that would not have occurred under the previous business model -- Apple’s total revenue could rise significantly.

I think that’s precisely what will happen. Even in its current incarnation, the iPhone is nothing short of an amazing mobile computer. With the power of thousands of developers dedicated to unlocking the real potential of this device, it’s going to become even more amazing.

I think that will translate into the iPhone being the dominant smartphone, or at least continue to be one of the dominant smartphones, with tens of millions of them in use in a few short years.

As a gaming platform alone, the iPhone could become a tour de force. The games shown at yesterday’s WWDC keynote were just awesome looking, and I think that game developers are going to be able to sell a ton of games for the device, and Apple will be getting money on each one sold.

Aside from games, there are dozens of other categories of applications that are likely to emerge for the device, and that’s the power of the iPhone as a platform. More importantly, that’s why Apple changed its tune on the business model for the device.

Follow me on Twitter @TMOBryan.
Bryan Chaffin began using Apple computers in 1983 in a high school BASIC programming class. He started using Macs in 1990 when the Kinko’s guy taught him how to use Aldus PageMaker, finally buying a Power Computing Power 100 in 1995. Today, Bryan is the Editor of The Mac Observer, and has contributed to the print versions of MacAddict and MacFormat (UK).
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