Over the past few weeks, rumors have swirled about the possibility of Apple’s
iPhone being available on more cell phone carriers’ services. Of course, this has already been announced overseas in a number of countries, including Italy, Australia and India, but so far, there has been no indication that it’ll happen in the US. But if you look at the writing on the wall, it becomes abundantly clear that it will.
iPhone should be set free!
(Credit: Apple)
Although I believe it will happen this year, there’s no doubt that there are a number of hurdles in Apple’s path if it truly wants to open the iPhone up to different carriers. First off, the company will lose its revenue sharing deal with AT&T and ostensibly back out of a five-year exclusivity agreement with the carrier. And while these two issues are important to consider, I have no reason to believe Apple can’t come out on top by backing out of both agreements.
When the deal was signed with AT&T, one important element that’s missing now was true back then — Apple was an unproven entrant into the cell phone market and the company was trying to establish a foothold. Because of that, it entered into an exclusive agreement with AT&T and used that deal to build up considerable demand. But now, the iPhone is a known quantity and Apple carries all the leverage. Beyond that, it’s being faced with a major contender in
Google Android-based phones that will be available on almost every carrier, and thus, must act before it’s too late.
Suffice it to say that Apple will back out of this deal and make the iPhone available on all carriers. Here’s why:
The idea that Apple would shake free from AT&T first came from a report by Fortune that suggested AT&T would start selling a $200 iPhone. And while I still believe that’s ludicrous — I don’t think the iPhone will be any cheaper than $300 — it unleashed a firestorm of rumors that asked if AT&T was dropping the price to confront its impending loss of exclusivity. After all, it seems to make some sense when you take it at face value.
But perhaps more than anything, there are four main factors that help explain why I believe Apple wants out of the exclusivity deal and will get it done: Competition, the enterprise, its strategy overseas is suggesting such a move, and finances.
Competition
When Apple first started in the highly-competitive cell phone business, it didn’t know what to expect. Would it be just another wannabe or a major player in the industry? Because of that, it did something unique — formed an exclusivity deal with AT&T — and established itself in the market. But now, the game has changed.
Unlike its competitors, you can’t find an iPhone on other carriers (unless it’s jailbroken) and Apple and AT&T have strictly prohibited iPhone use on T-Mobile or any other GSM carrier. But if you look at Apple’s main competition — RIM, Palm, LG and others — you can use most of those phones on almost any carrier you prefer. Because of that, Apple’s competitors are capable of expanding their base much quicker and have the opportunity to stifle the iPhone’s growth in the smartphone market.
If Apple truly wants to avoid competitive upheaval, it needs to eliminate one of its most vulnerable points — availability. Although it was able to coax many to AT&T’s side last year, it wasn’t able to coax enough people to justify it maintaing an exclusivity deal with the carrier. After all, if a customer truly dislikes AT&T’s offerings and prefers T-Mobile, is the iPhone enough to bring them over? If not, all of those issues would be resolved with a moratorium on all exclusivity deals.
The enterprise
Nowhere is the focus on competition so paramount than in the enterprise space. And nowhere is the issue of exclusivity as important as it is in the enterprise space. So far, Apple’s ability to break into the enterprise and push RIM out has been laughable. And although it has announced a slew of improvements to the iPhone to make it more appealing to the enterprise and help it better compete with RIM, exclusivity is still a major issue with many companies. And you’re kidding yourself if you believe Apple doesn’t care.
In most major companies, the executives sign a deal with carriers that allow them to get a special business relationship, but also require the use of certain devices depending on an employee’s position in the company. More often than not, major companies will allow the use of a few cell phone carriers, but smaller enterprises usually only have a deal with one. What if AT&T isn’t one of the supported carriers? Regardless of the iPhone’s new features, if people can’t have it on the carrier they’re required to use by their employer, what good is it?
RIM was one of the first companies to realize that exclusivity isn’t the best tack and has done its part to put its BlackBerry on a slew of major carriers. Because of that, it was able to enjoy success in the enterprise through a dual-pronged approach — give businesses what they want and make sure it’s available to them. Apple may soon achieve one of these goals, but it’s failing at achieving the other. And RIM couldn’t be any happier.
Its strategy overseas
In just the past few weeks, Apple has entered into agreements overseas that will allow it move away from exclusivity and allow consumers to enjoy the iPhone on almost any carrier. So far, the iPhone will be made available on a host of different carriers in India, Italy, Australia, and seven other countries that Vodafone is currently operating in.
Some have said that Apple’s decision to abandon exclusivity overseas reflects its desire to break into new markets, but let’s not forget that those deals have yielded lackluster results and the company is still stunting its growth in the US by being exclusive.
Simply put, there’s no reason to suggest that just because Apple isn’t announcing the end to its exclusivity deal in the US, it won’t happen here. And if it’s following that strategy overseas and obviously realizing that it’s not the best way to be competitive in this industry, who can possibly say that it won’t follow such a path before the five-year agreement is up?
Economics
Invariably, the discussion on whether or not Apple should make the iPhone open to all carriers will come back to economics. What will the net effect on the company’s bottom line be if it abandons its revenue sharing deal and tries selling the iPhone for use on any carrier instead?
If Piper Jaffray’s report is true, Apple is making about $18 per iPhone, per month. Of course, this number is just an estimate and there’s no guarantee that it stays constant over the life of a two-year contract. If it does, some have suggested that Apple may be making a profit of over $500 per iPhone after sales and revenue sharing are taken into account over the two-year period. Assuming Apple eventually hits its 10 million iPhones sold mark, the company could stand to gain approximately $5 billion from their sale. Of course, that number doesn’t take into account a number of factors (including research and development costs), so it’s probably safe to assume that it’s not making nearly that much.
Regardless, Apple can stand to make much more if it gets out of its exclusivity agreement. Why? Its untapped market figures will leap and suddenly it can sell its device (which some cost at no more than half its price) to millions more. In other words, it should be able to easily make up for its profit loss on the exclusivity deal and make much more through the sale of the iPhone to businesses and consumers who want to put it on other carriers.
That said, a full review of figures are practically impossible considering Apple never explained how much it actually makes off the sale of one iPhone over two years. But if it’s willing to abandon exclusivity deals overseas, wouldn’t it make sense to say that it stands to make much more without revenue sharing?
Whether or not Apple will allow the iPhone to be available on other services relies on its ability to get out of the exclusive agreement it formed with AT&T. And although it may not be an easy move, I think Apple either has already done it or is well on its way to getting out already. Of course, it probably came at quite a cost. In fact, it wouldn’t surprise me if the company needs to maintain a similar relationship with AT&T where the iPhone will be available for sale at the carrier’s stores.
Apple has all the leverage right now and there’s no reason to suggest that it can’t use it to its advantage.
Making the iPhone available to all carriers in the US this year makes sense on a variety of levels. Now we just need to wait for it to happen. And I think it will.