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The demo was not going well.
Again.

It was a late morning in the fall of 2006. Almost a year earlier, Steve Jobs had tasked about 200 of Apple's top engineers with creating the iPhone. Yet here, in Apple's boardroom, it was clear that the prototype was still a disaster. It wasn't just buggy, it flat-out didn't work. The phone dropped calls constantly, the battery stopped charging before it was full, data and applications routinely became corrupted and unusable. The list of problems seemed endless. At the end of the demo, Jobs fixed the dozen or so people in the room with a level stare and said, "We don't have a product yet."

The effect was even more terrifying than one of Jobs' trademark tantrums. When the Apple chief screamed at his staff, it was scary but familiar. This time, his relative calm was unnerving. "It was one of the few times at Apple when I got a chill," says someone who was in the meeting.

The ramifications were serious. The iPhone was to be the centerpiece of Apple's annual Macworld convention, set to take place in just a few months. Since his return to Apple in 1997, Jobs had used the event as a showcase to launch his biggest products, and Apple-watchers were expecting another dramatic announcement. Jobs had already admitted that Leopard — the new version of Apple's operating system — would be delayed. If the iPhone wasn't ready in time, Macworld would be a dud, Jobs' critics would pounce, and Apple's stock price could suffer.

And what would AT&T think? After a year and a half of secret meetings, Jobs had finally negotiated terms with the wireless division of the telecom giant (Cingular at the time) to be the iPhone's carrier. In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple's iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He'd also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer's AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry. Now, the least he could do was meet his deadlines.

For those working on the iPhone, the next three months would be the most stressful of their careers. Screaming matches broke out routinely in the hallways. Engineers, frazzled from all-night coding sessions, quit, only to rejoin days later after catching up on their sleep. A product manager slammed the door to her office so hard that the handle bent and locked her in; it took colleagues more than an hour and some well-placed whacks with an aluminum bat to free her.

But by the end of the push, just weeks before Macworld, Jobs had a prototype to show to the suits at AT&T. In mid-December 2006, he met wireless boss Stan Sigman at a suite in the Four Seasons hotel in Las Vegas. He showed off the iPhone's brilliant screen, its powerful Web browser, its engaging user interface. Sigman, a taciturn Texan steeped in the conservative engineering traditions that permeate America's big phone companies, was uncharacteristically effusive, calling the iPhone "the best device I have ever seen." (Details of this and other key moments in the making of the iPhone were provided by people with knowledge of the events. Apple and AT&T would not discuss these meetings or the specific terms of the relationship.)

Six months later, on June 29, 2007, the iPhone went on sale. At press time, analysts were speculating that customers would snap up about 3 million units by the end of 2007, making it the fastest-selling smartphone of all time. It is also arguably Apple's most profitable device. The company nets an estimated $80 for every $399 iPhone it sells, and that's not counting the $240 it makes from every two-year AT&T contract an iPhone customer signs. Meanwhile, about 40 percent of iPhone buyers are new to AT&T's rolls, and the iPhone has tripled the carrier's volume of data traffic in cities like New York and San Francisco.

But as important as the iPhone has been to the fortunes of Apple and AT&T, its real impact is on the structure of the $11 billion-a-year US mobile phone industry. For decades, wireless carriers have treated manufacturers like serfs, using access to their networks as leverage to dictate what phones will get made, how much they will cost, and what features will be available on them. Handsets were viewed largely as cheap, disposable lures, massively subsidized to snare subscribers and lock them into using the carriers' proprietary services. But the iPhone upsets that balance of power. Carriers are learning that the right phone — even a pricey one — can win customers and bring in revenue. Now, in the pursuit of an Apple-like contract, every manufacturer is racing to create a phone that consumers will love, instead of one that the carriers approve of. "The iPhone is already changing the way carriers and manufacturers behave," says Michael Olson, a securities analyst at Piper Jaffray.

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