The iPhone’s launch in the U.S. June 29 over AT&T’s GSM/ EDGE network met the intense hype that surrounded the device since it was announced in January, with over 500,000 have been sold over the weekend, surpassing analysts’ expectations.
While a launch in Europe is expected by year-end, Apple has yet to finalize an operator to partner with.
A deal could, however, be imminent. Latest indications are that the list has narrowed down to Vodafone and T-Mobile, with Vodafone said to be the frontrunner.
But Apple is widely have been in talks with each of Europe’s regional players: not just T-Mobile and Vodafone, but also France Telecom Orange and Telefonica O2. It has also been said that Apple may sign-up with the FreeMove alliance, which includes T-Mobile, Orange, Italy’s TIM and TeliaSonera.
At one time or another each of these operators has been rumored to be ‘close to’ sealing a deal with Apple. But so far, none has.
It has been suggested that Apple is finding it difficult to find a European partner because of operators’ reluctance to accept its radical iPhone business model.
Befitting a company with a military definition of secrecy, little is known about the details of Apple’s exclusive five year deal with AT&T.
What is known is that the scope of the deal goes far beyond AT&T simply selling the Apple device for use over its network.
Under the deal, AT&T is understood to have agreed to install Apple equipment in the heart of its network, giving Apple wide-ranging access to and information about each iPhone user. One much-touted application, Visual Voicemail, won’t work without the Apple-installed hardware.
Apple is also understood to have a revenue share deal with AT&T that sees it earn a percentage of the US$59.99-US$99.99 monthly contract the iPhone is offered with. No figures are available, but it’s probable that, based on the industry average, the revenue-sharing deal is in the range of an 80/20 split in favour of AT&T.
Under these terms, it’s safe to say that Apple and AT&T are fully sharing ownership of each iPhone subscriber.
For all intent and purposes Apple has become an MVNO while side-stepping much of the business risk associated with becoming a full-blown virtual provider of wireless services. It has also ensured that it retains 100% focus on its core business - designing software and products.
For its part, AT&T points out that iPhone users will receive an AT&T bill, and that any problems with the iPhone will be dealt with by AT&T. This, it says, means that Apple is not an MVNO.
While AT&T shrugs off the suggestion that Apple acts an MVNO over its network, the nature of the deal suggests the MVNO moniker is apt.
Having ceded so much to Apple, what will AT&T gain from the iPhone?
AT&T is the largest mobile operator in the U.S. The Apple brand is iconic. AT&T can only benefit from this relationship, unless, that is, the iPhone seriously fails to deliver on promise.
Regardless of the varying passions that Apple inventions elicit - they’re loved or loathed to a degree that no other consumer electronics products are - being associated with the Apple brand will rocket AT&T to new heights of street credibility and cutting-edge technological savvy. The fact that iPhone users will need to register the device via iTunes will intensify AT&T’s association with all-things Apple.
Most importantly, AT&T’s tie-up with Apple will clearly improve its revenues.
Look at the figures. Every iPhone subscriber will generate at least US$59.99 in revenue a month over two years, from which AT&T and Apple will each take their respective share.
Assuming 500,000 iPhone’s were sold in the first weekend, that’s at least US$720 million in new revenue right off the bat.
There are obvious brand and revenue incentives for AT&T to give in to Apple’s iPhone demands.
Is iPhone forbidden fruit for European cellcos?
Apple aims to sell 10 million iPhones worldwide by end-2008, equivalent to 1% of the total handset market.
On a global scale, assuming that the iPhone is offered for at least US$59.99/ month two year subscription in each market, that’s around US$14 billion in revenue for Apple and for its operator partners.
So why might European operators, well-used to partnering with MVNOs, shy away from partnering with Apple if it is simply trying to replicate the terms of the deal it has agreed with AT&T?
For sure, Apple’s demands in return for exclusive use of the iPhone have proven too much for Verizon Wireless, for one, to bear. After Apple announced the AT&T deal, Verizon made it be known that it had also held talks with Apple, and that they broke down over, among other things, share of revenues.
European operators have in the past been averse to signing revenue sharing deals with content partners. However, while they initially struggled to find the right business model with content providers, in the last few years this has been overcome. This is evidenced by the numerous content partnerships operators have signed, including with such Web 2.0 giants as Google, Yahoo and YouTube.
Such experience will, at least conceptually, mean that operators in Europe should be at ease with Apple’s proposed MVNO-like business model.
The sticking point is much more likely to be in the details of what Apple is proposing, namely, precisely how much money it makes from each iPhone subscriber’s monthly subscription.
If the U.S. example is anything to go by, in Europe Apple will only allow its operator partner to charge a monthly fee that incorporates flat-rate data use, of which Apple will take a share.
Operators in Europe are now coming round to thinking like Apple in the area of flat-rate data pricing. Vodafone, France Telecom and T-Mobile have each recently launched price plans that either are or closely resemble flat rate charging.
In Europe an iPhone tariff will likely be launched with an entry-level monthly tariff of around EUR45 (US$61.16) for 300-400 free minutes and unlimited data; £35 (US$90.50) in the UK.
The device will also almost certainly only be offered on a two-year contract, ensuring at least EUR1,080 (£840 in the UK) per user in revenues over the lifetime of the contract.
Analysts at Credit Suisse estimate that Apple could sell as many as six million iPhone’s in three years in Europe. Assuming two million new subscribers a year, this would equate to at least _2.2 billion in revenues within two years of launch for Apple to divvy up with its operator partner.
iPhone users will generate enough revenue to make Apple’s revenue-share business model financially compelling.
Based on AT&T’s initial prices, Apple/ AT&T are pricing unlimited mobile data usage at US$20, including 200 SMS (compared to the US$39.99 monthly rate for a comparable voice-only tariff from AT&T), equating to 33% of the US$59.99 monthly fee.
By comparison, average data revenues in the U.S. are currently around 15% of total monthly revenues.
Similarly, European operators can expect to easily beat the region-wide mobile data use average with the iPhone, of 18% of revenues at end-4Q06.
If the evolution of the iPod is anything to go by, Apple will introduce slimmed-down and cheaper versions of the iPhone within two years, which will significantly broaden its market appeal.
As such, a five year deal with Apple should see at least two iPhone model launches, which will see Apple comfortably beat its target of gaining 1% share of the global handset market.
Apple will wean operators off their subsidy habit
A new area for European operators: no handset subsidy. Operators should be more than willing to accept Apple’s demand not to subsidize the iPhone.
Apple will relieve operators of a burden they have long-hoped to be rid of. Operators will not go wanting for consumers willing to pay the full amount for the iPod, which is retailing for US$499 and US$599 in the U.S., depending on hard drive size.
The EDGE, 3G issue
European operators have a major problem not faced by AT&T: none, except France Telecom, has comprehensive EDGE coverage, meaning that services such as internet browsing would typically be used only via GPRS connections.
With an EDGE device operators would be right to be worried about high user expectations for internet browsing via the iPhone, especially when there is no EDGE network and the device falls back onto GPRS connections.
It is ironic that a device that offers one of the best opportunities operators have yet had to encourage 3G mobile data use would work poorly on clunky 2.5G networks.
If the iPhone becomes a WCDMA device, operators in Europe will be much keener to sign a deal with Apple, and more inclined to cede ground over terms.
Because of this, Apple will likely only launch the iPhone in Europe with 3G capability.
Indeed, Apple CEO Steve Jobs has said that he chose to launch iPhone with EDGE only because AT&T has ubiquitous EDGE coverage. Jobs’ comments suggest that he will not launch an EDGE-only iPhone if there isn’t a comprehensive EDGE network to support it, and it’s hard to imagine he’s restricting himself to France Telecom just to ensure iPhone margins.
Margins. One reason for not including 3G in the iPhone launch for use on AT&T’s 3G network could be because of margins. iPhone margins are said to be as high as 50%, and a 3G chipset, because of the additional royalties, will erode these considerably.
Still, the bottom line is that Apple will just have to give-in on margins to ensure a successful iPhone launch in Europe.
iPhone = paradigm shift
In short, the launch of the iPhone represents a definite paradigm-shift for the mobile industry. Apple will succeed in doing what operators have long-struggled to do: give a compelling reason to use mobile data and the mobile internet.
The iPhone will mark the beginning of mass-market use of mobile email and the mobile internet, especially when 3G iPhones come to market.
Apple’s software/ application prowess, along with its close ties to Google (through which to YouTube) and Disney/ Pixar, will give operator partners a privileged window onto the future of the internet and how premium content will be distributed on it. As such, Apple will succeed where operators have so fair failed: making dumb pipes intelligent and buzzing with network traffic.
And it is an indication of how much operators need outside help to engender mobile data uptake that Apple will be able to all-but dictate the terms of an iPhone agreement to them. It will be Apple who will chose the operator it wants to partner with, not the other way round.
Only European operators’ in-built and unswerving belief that they have the ability to one day create the future will be stopping them from falling over to meet Apple’s iPhone demands.
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