Research Notes

IPhone -an operator’s worst friend

A lot has been said and written about the iPhone and there will undoubtedly be more to come next year. There is no doubt that Apple’s PR department has created a unique PR campaign, but there is also little doubt that Apple has created the Paris Hilton of mobile phones – a seemingly beautiful product on the outside. But what is actually inside and how good is the iPhone for operators that partner with Apple?
Strand Consult is not in the business of creating hype around technology, our business is to explain to mobile operators how the future market will evolve and how to make money for their shareholders. In the same way that Apple primarily handles the interests of their shareholders, we believe a number of operators ought to focus a little less on the iPhone and a little more on their shareholders. During the past year, our CEO John Strand has held many workshops at CxO level for operators across the world that have requested qualified information on the future mobile market and how it will develop. One of the subjects that often emerges during these workshops is the iPhone and its role in the mobile industry in the short, medium and long term.
We have chosen to use this newsletter to publish some of the conclusions we have reached and we hope that you can use our views in the future iPhone debate. Strand Consults position is perfectly clear:
1. The iPhone attracts a limited market segment, Apple’s goal was a global market share of 1% and on some markets they have achieved even higher results. But despite this, the iPhone is not a mass-market product; it is a product that attracts a niche segment.
2. Operators that have partnered with Apple have spent an incredible amount of management resources on the iPhone. If you examine the time spent on this product, launching this product and discuss all the limitations Apple has imposed on the operators, you cannot help but notice how the customers have been overlooked during this period. If an operator moves a large part of their focus to a phone that is attractive to less than 5% of the market, they are forgetting the 95% of their customers that are creating the cash flow that is the foundation of an operator’s profit for their shareholders.
3. How many customers have been overlooked by operators focusing on the iPhone? Could some of those customers that are not interested in an iPhone feel more welcome with operators that do not carry the iPhone and is not it likely that focusing on a niche product will result in neglecting customers that are the actual foundation of an operator’s existence? All questions that the industry should seriously contemplate.
4. Many operators have emphasised the data consumption volume among iPhone customers, but comparing an iPhone customer’s data consumption with the rest of their customer base is sad. We believe that most of the iPhone customers were already data customers before purchasing their iPhone, so the actual educational effect of the iPhone is minimal. Perhaps operators should take a closer look at these customers voice ARPU rather than their data consumption?
5. Having iPhone customers using large data volumes sounds good, but when data is being sold at a flat rate, a high data consumption results in high production costs without the corresponding increased revenue. You could compare the operators’ attitude towards the iPhone’s data consumption with a restaurant owner that has a “all you can eat for 10 Euro” buffet and that is proudest of the customers that eat the most! In this business the idea is to generate revenue for the shareholders, not to increase the production volume and costs, while at the same time minimising revenue.
6. When you examine the iPhone data consumption, you will see that iPhone customers use their browser to view ordinary websites and that they often choose not to view the websites in XHTML – optimised for low bandwidth and mobile phone sized screens. In practice this results in that when an iPhone user browses a typical news site, an ordinary web page will be around 1 MB, while the mobile version of the same page will often be less than 100 Kb. It is significantly cheaper for an operator to produce 100 Kb data than it is to produce 1 MB data and it is much more fun to deliver 100 KB rather than 1 MB when you are selling data at a flat rate.
7. There is also no doubt that Apple has a restrictive policy regarding the iPhone. Not only do they want a kick-back from the data traffic generated by the phone, but they also keep all revenue from the iPhone-generated sales of Apple’s own applications and music. Is it not fair to say that Apple is actually in the process of positioning the mobile operator as a dumb bit pipe that is spending subsidies on reducing the price of Apple’s hardware, while at the same time letting Apple keep all the premium revenue streams generated by the product after the customer has purchased it?
8. There are already a number of operators that have issued profit warnings related to their iPhone ventures and our research shows that there is not one single Apple partner in the world among the mobile operators that has increased their overall turnover, profit and market share due to the iPhone. So apart from the press coverage, what value has the iPhone actually created for the shareholders of the operators that have chosen to become Apple iPhone partners?
9. Across the world there is a huge market for unlocked iPhones. People purchase a phone that has been marketed, sold and subsidised by an operator who thereafter does not receive the data traffic and revenue from that handset. These phones are most often used on other non-Apple partner networks, resulting in the Apple iPhone partner operator ending up with a high SAC, while another non-Apple partner only needs to sell a SIM-only product with a low SAC and attractive voice and data prices.
10. We know of a great many operators and MVNOs that have done good business on NOT being an Apple and iPhone partner. These operators let other operators subsidise handsets and instead sell SIM cards with inexpensive data traffic at competitive prices. Their low SAC gives them a positive cash flow on the customer far earlier than the Apple partner operators that are subsidising, marketing and selling iPhones.
The conclusion is simple. This is not good business for shareholders of operators that are Apple and iPhone partners – on the contrary it is far better business not been an Apple and iPhone partner. Operators that choose not to carry iPhone products have an increased probability of serving their shareholders interests over those that move their management’s focus, subsidies, marketing and distribution power on a product that is as beautiful as Paris Hilton, but increases production costs and where there may not be a relationship between revenue and costs. The fact that the iPhone is currently receiving so much attention from the press is probably due to an uncritical press that have allowed themselves to be seduced by Apple’s unique PR machine – and that have not analysed and examined the underlying business models and the financial success of the iPhone from an operator’s point of view.
In our strategic workshops we examine this business case and many other subjects. We believe it is very important for top management in this industry to occasionally take a critical look at the hype that is often in the press, a hype that is created by the technology pushers whose primary focus is to please their shareholders at the cost of the operator’s shareholders. During the past 14 years, Strand Consult has specialised in delivering high-end strategic knowledge at CxO and board level – and with a customer list that includes over 140 operators worldwide in our customer list we get around quite a bit!
If you would like more information about our workshop concept you are welcome to contact us so we can initiate a dialogue about how we can help you optimise your business and earn more money for your shareholders. Our goal is to give the best advice you can get.

Get more information about:

Strand Consult’s iPhone report

Strategic workshops

Successful Strategies for the Mobile Broadband Market

Megatrends in the Mobile industry

How Mobile operators get success with their MVNO strategy

How technology providers get success on the MVNO market

The Mobile VAS Market 

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