Research Notes

The launch of the new iPhone 5 – no big

– As usual operators will use their shareholders’ money to subsidize the iPhone 5 and make Apple shareholders happy. 

It is impressive to see the attention Apple gets for the launch of a new phone that looks so similar to the one released in January 2007. There is no shortage of frivolous stories in the media; a small Danish IT website claimed that the new iPhone would have such a positive impact on the in the U.S. economy that Obama would be assured re-election.

Strand Consult has no doubt that the new iPhone 5 will be the iPhone that will create the greatest negative impact yet on a number of mobile operators’ revenue over the coming months. We would like to ask the mobile operators around the world reading this newsletter just how many millions of dollars of their shareholders money are to be squandered to subsidize the iPhone 5 to the delight of Apple and its shareholders.

There is no need to speculate about which operators will profit from the new iPhone 5, whether they are network operators that have a close relationship to Apple, MVNOs, or operators such as T-Mobile USA that aim to sell SIM-only products to “old iPhones”.  At least there is one winner amongst operators with the new iPhone5:  operators like T-Mobile in US that focus on SIM-only products for old iPhones.

The critical view of Apple that Strand Consult takes is not emotionally or personally motivated against the handset manufacturer.  Rather it is informed by the evidence:  Strand Consult has documented repeatedly that the iPhone enriches Apple shareholders, not the shareholders of mobile operators.  

It is no surprise that there is a new iPhone 5.  Apple has grown its sales over the years by two things, (1) broader distribution through multiple operators in many countries and (2) upgrading new models to old iPhone customers.

But there may be challenges on the horizon for Apple.  Consider that in the last three quarters, the sales of iPhones have dropped in the number of units sold.  Not only has Samsung had great success with their Galaxy II and III models (exceeding iPhone sales in fact), but other manufacturers have launched serious alternatives to the iPhone.  This puts Apple in the situation in which it will need to come up with something new, lest it fall to the fate of Motorola and the dreaded “Razr fatigue”. 

Motorola unwittingly launched the new technology in an old phone for two years beginning in Q3 2004.  Consumers, not seeing anything new in the phone’s design and not appreciating the technology inside, grew tired of the Razr. It was the end of Motorola.  Apple will need to “double-down” on design and innovation (to use Tim Cook’s expression) to avoid “iPhone fatigue”.

To assess the new iPhone, examine its sales on five parameters:
1. How does the new iPhone 5 differ compared to previous iPhone models? For example, is it cheaper than previous models, thereby enabling a larger segment to be able to afford it? The answer to that question is NO.  It costs the same as the previous models. It is not cheaper and it does not expand the market of “people who can now afford an iPhone”.

2. Does the new iPhone have a new form factor that makes it attractive to new customer segments that did not purchase it before? The answer to that question is also NO.  The new model is basically a minor facelift of old models, which can be compared to the launch of the new VW Golf, a car that barely changes year after year.  People who didn’t like the old iPhone will probably not change their minds having seen the new iPhone.

3. Which customers will purchase the new iPhone 5? Are they new customers or existing iPhone customers who want to upgrade? The answer to that question is that probably everyone who purchases a new iPhone will be existing iPhone customer.

4. As for mobile operators, how will a massive upgrade of the iPhone customer base influence the economy of operators that have many customers who want a new iPhone 5 at a subsidised price? The answer is that the new iPhone will negatively stimulate the operators’ churn and result in operators’ costs for subsidies and dealer commissions to skyrocket.  This happens because customers cancel contracts when a new phone comes along.  To get new iPhone 5 customers, operators have to pay Apple and its distributor dearly for the privilege to carry the iPhone, a cost that is difficult to recover from new subscriber revenue.
5. What will happen to all the old iPhones when people purchase a new iPhone 5? Will they destroy them? Sell them? Or give them to friends and family? They will of course try to sell them or give them to their family members. So, where will all the new users of old iPhone models purchase their SIM cards and thereby their traffic? The answer is they will purchase their voice and data where it is cheapest, and in many countries that will be from a no-frill MVNO or from operators such as T-Mobile USA that sell SIM-only products to iPhone users.At the end of the day there is no doubt that the launch of the iPhone 5 has been very successful for Apple and its shareholders.  But shareholders of mobile operators will not be so pleased.  The new iPhone 5 will not expand the market for new users and will likely end up being an expensive proposition for many operators.

As we follow the launch of the iPhone from an operator’s viewpoint, we are very much reminded about the research notes we originally wrote about the iPhone viewed through the eyes of an operator: and another research note we published about how MVNOs were doing good business selling SIM cards to iPhones that mobile operators had heavily subsidised:

We believe that the larger and older a mobile operator’s iPhone customer base is, the more costs they will have from the new iPhone. We are certain that many of Apple’s original and largest partners will experience an explosion in churn and that the money they will need to spend on subsidies and dealer commissions will have a negative influence on their revenue during the coming months.

In many areas it looks like the scenario we described in our report ”The moment of truth, a portrait of the iPhone”  in the summer of 2009 is repeating itself and that we will once again perhaps experience mobile operators issuing profit warnings due to large subsidies for the new iPhone.

Strand Consult has created a workshop concept based on our extensive research and experience in this area. The workshop helps mobile operators structure their smartphone strategy to better prepare for some of the smartphone challenges that mobile operators around the world will be facing in the near future.

If you would like to learn more about our workshop concept How to get success on the smartphone market please do not hesitate to Contact Us . We will then send you an outline that further describes how we view these upcoming challenges together with our iPhone market report from 2009 – our iPhone market report is still very relevant reading.

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