Blog Post

Will iPhone Save Handset Business?

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Apple, it is rumored has signed a deal that will allow the Cupertino-based computer company to source 12 million iPod-based phones from a Taiwanese electronics manufacturer. In itself, the news is hardly a surprise for the iPhone has been subject of rampant speculation.

What is surprising the speculation that Apple will sell these phones unlocked, allowing consumers to pop in their SIM cards and use it as a phone. In the US, that would mean getting a SIM card from either the Cingular or T-Mobile. If this is indeed true, and it is not clear if it is so, then Apple will be lending a helping hand to the mobile phone makers.

You can buy unlocked phones in Europe, Asia and on the Internet. But in the US, the carriers in exchange of a long-term contract subsidize most of the handsets, typically between one to two years.

Since they are the big buyers of handsets, the US mobile phone providers have an unnatural control over the market, and thus giving them the ability to dictate what features or models come to market. Many of the major handset makers roll over and play The Pooch, as a result.

Nokia for example doesn’t sell the E61 smart phone in the US, and instead sells a striped down E62 (no WiFi) via Cingular. LG Chocolate (GSM) version is nowhere to be found, but you can get it from Verizon. It is a source of frustration for many handset makers, since they would like to sell their latest phones at premium prices.

The introduction of the unlocked iPhone will do two things – it would basically get US buyers savvy to the idea of buying full priced unlocked phones. Secondly, it is going to cause a behavior change – of buying phones instead of freebies.

It won’t be a mass-market phenomenon in the early stages, but eventually (as shown by iPod Nano and iPod Shuffle), Apple will bring the iPhone prices down to a mass-market price point.

If iPhone causes this behavior change, then, it is good news for rest of the handset industry. Nokia is currently selling three million N Series phones a month, a number that could easily go up if the company could sell its entire range of products at full price. So if you are Nokia or Samsung, it is time to secretly root for the success of iPhone.

59 Responses to “Will iPhone Save Handset Business?”

  1. Apple will be able to go above the $99 psychological barrier for cell phones because it’s really selling an enhanced iPod.

    It will be comparable to an iPod nano with phone capabilities so if you allow the phone to cost even just $50, then Apple should be able sell a 2GB version for $199, and an 8GB version for $299 (or maybe it will have more flash or cost less by first half 07 since flash prices will have dropped again by then).

    To cement this difference, I believe it’s highly likely that Apple will call it an iPod xxxx instead of iPhone.

  2. Somehow Apple will get its share of revenue from:
    1. handset sales (hardware)
    2. MobileMe tiered storage subscription plans to access your data anywhere anytime. Apple trademarked MobileMe but no one seems to know exactly what it is. This data can include basic stuff (contacts and bookmarks), or your documents (webpages), or advanced stuff like your owned media (music, podcasts, videos, movies) library.
    3. MobileMe subscription that includes video iChat using the camera with other phones or computers via 3G networks (cellular gets some additional revenue here).
    4. MobileMe subscriptions could be available to PC iTunes users, but somehow Apple might make a .Mac link preferable (iWeb pages, iChat) thus making a Mac more preferable.

    Apple is aiming to bring the Internet delivery model to both the TV/cable carrier and now the cellular carrier industries. They will allow the carriers (cable, telco, satellite, cellular, etc) to collect the basic fee for transport but compete with them on any carrier-based walled garden services approach. Of course, all the Apple-critics will point out that Apple has its own walled garden in its restricting media playback to Apple devices (except for Windows computers).

  3. First of all, I doubt that a number of handset sales can “easily go up if the company could sell its entire range of products at full price.” Mass market got used to subsidized phones in the US. Everything that goes above the phsycological price barrier of $99 is a hard-sell. And I’m talking about the mass market here, not geeks. The mass market still needs phone just for voice communications, it is not ready to pay premium for hype add-ons.

    Secondly, Nokia and Sony Ericsson are selling unlocked phones in the US from their websites. Nokia also, as you mentioned, has two stores in the US. So, if you want you can buy unlocked phone in the US, but look at the prices – they are too high to afford for the majority.

    Another point is that by selling unlocked iPhones, Apple will limit their availability to the GSM user base only – in the US it is roughly 50% of wireless phone users. It doesn’t sound as a goog business plan to offer your product to only half of the market. I doubt that users would leave Verizon and Sprint Nextel on a mass scale just for the privelige to have iPhone.

    Apple can create an MVNO – sure it can get a couple of millions of its loyal users under its banner, but MVNO business is risky and expensive and you need to have some expertise. Not sure Apple will go this way. Once again, don’t forget of global exposure of iPod brand, and MVNO will limit iPhones to the US only. Of course, Apple can start with the US first and then gradually expand internationally with its MVNO brand, but it’s a lengthy process with a lot of obstacles. Though, I can see one advantage Apple has and other handset vendors don’t have – a network of Apple’s stores across the globe. Nokia and Motorola just started to build it.

    Another way for Apple is just to continue selling iPhones through partnesrships with carriers. Motorola’s handsets with iTunes sold for approx. one million already. But if Apple manufactures iPhones by itself, will this business profitable? Don’t forget for royalties Apple has to pay for using wireless standards and technologies. Motorola sells around 40 million handsets every quarter, so they have the economy of scale, but what about Apple? Is the reported 12 million handsets enough to cover the development, distribution, royalty pays and sales expences? Don’t know.

    Overall, I don’t know all the economics, but I think Apple would rather partner with carriers to get subsidized deals rather than going MVNO way. But, hey! Maybe, Mr. Jobs has already thought about some unusual business model, we don’t know about? We’ll see.

  4. i think you’re missing the real benefit of a market without subsidy from the carriers.

    the real benefit is that the carriers will not be able to limit the phone’s functionality to protect their interests (and block innovation from reaching the users).

    it will probably not matter much in the case of an iPhone, since apple is not known for making their devices open for developers..

  5. I purchased an unlocked phone – moto razr, amazingly, Cingular would not help get the browser to work properly. They wanted a 2 year contract to switch from and AT&T SIM to a Cingular SIM. T-Mobile wanted an 11 month contract for just a SIM. Why are American carriers so hell bent on contracts? Why not compete on price, features, and technology?

  6. Who’s actually overlooked the idea of opening up its own mobile phone service, google did it with wi-fi (the got businesses to provide free wi-fi in return they were able to use the network), this could be a possibility, but a highly doubtable one.

  7. I still can’t believe you don’t offer unlocked phones. Here in Australia we do have subsidised phones on offer but they are few and far betweeen. There’s a lot more freedom here that what it sounds like you have.

    If I had known this earlier I may have made a business move on this – it just makes sense. Apple are right on the money.

  8. Om,
    I would love for the U.S. cellphone market to be more like the European market. However, here in the Northeast people swear by their Verizon phone service. Not even an iphone could get them to switch to a different carrier. Could apple include all the different signals in one phone?

  9. Its great news if they do sell unlocked phones. I disagree with a couple of the posts that they will not because they might want a cut off the carrier’s services. Apple tends to be a hardware company and they will already leverage their music services with this product and I don’t see them scraping for more dollars from the carriers.

    Also with their brand power I don’t see them discounting the phones by doing the same sort of deals like the other handset manufacturers.

  10. I disgaree with a few points and believe that some misunderstanding has taken place.

    First, how could handset manufacturers beable to get full retail if they sell directly versu through mobile carriers? I believe the market will demand lower prices as it will be comparing against the subsidized prices.

    Second, as Apple comes late to the party as a handset vendor, and they want to gain rapid traction, they will partnber with a single major Carrier in each market. This will enable them to bring value to the Carrier which will enable them to charge higher prices to the Carrie rup front. Later Apple will move to a anyone can offer it scenario.

    Also, as we may be savvy about moving SIMs between sets, most users are not educated in this, and they will remain so. I believe the push wil be take your existing SIM out of your old phone from “XXX” Carrier and plug into an iPhone. But only from a specific Carrier, initially. Maybe AQpple sells firmware upgrades later that enable moving your original iPhone between all Carriers once it becomes a truly unlocked terminal.

    So, the iPhone will be a hit, it will be exclusive initially, it will drive the Carrier to higher subscriber numbers, ARPU, and market value while giving Apple another nail in their building of an “all digital, all Apple” lifestyle marketing approach. And mostly toward the young, the hip, and the technorati.

  11. Ol' Yeller

    Apple won’t sell an unlocked phone. How would they reap the rewards from making their iTunes/Apple platform available on handsets? Translation: if the phone is unlocked how does Apple get a revenue share of the data and voice ARPU? Sure, they’ll make money by being the gatekeeper for the content and applications available for purchase, but there is a big (probably $80 month for this demographic) ARPU nut that Jobs won’t be able to resist dipping his hand into. He knows he can bring tons of subscribers to the carrier that steps up and offers a nice revenue share.

    Ironically, and often ignored by Apple lovers, Jobs has learned all of Microsoft’s tricks and then some. Apple’s marketing still appeals to the anti-establishment crowd, but the truth is that Apple is as proprietary as it gets. And wisely so.

  12. Brad,

    not all but there a substatial portion of buyers who want to get a phone which is not dominated by the carrier stuff, or is locked to a single network. people also want to be able to buy a phone from wherever they want.

    I think the argument i am making is that if people buy a phone from the Apple store, there is a good chance they can go to the Nokia store and buy a phone.

    Of course, I could be wrong…

  13. Shefaly – I don’t think this what-if-it-gets-stolen mindset has affected the sales of Ipods (or wallets).

    This will increase the sales of unlocked phones and bring the prices down. “locked” phones are about to go away.

  14. I will pay full price for a non-crippled phone. You also do realize that you are just amortizing the cost of the phone in your service plan. What will happen when they finally start lowering plan prices when you don’t have to subsidize a phone.

    I personally like the Japanese cell phone model where they essentially give you points depending on what plan you have and you can apply those points towards your next phone. So if you have a $30/month plan, then you might get enough points to get a free basic phone every 2 years, and if you have a $150/month plan, you might get a top-of-the-line phone for free every 9 months or so.

  15. Do you really think that consumers WANT to pay full price for phones?! When I signed up for my contract, a new Samsung MMA900 from Sprint would have set me back a solid $400, but with the two year I got it for $150. Granted, I could have switched providers during that time or sold the phone on ebay and bought another, but the fact remains that premium phones carry premium prices and only the most savvy of users want to shell that out.

  16. I think it makes sense, Apple will want to cater to the hip crowd, getting them to move their existing SIM to an iPhone.

    But that does not mean that the carriers won’t be able to sell the iPhone locked at a later date, after all, it’s all software, right? :)

    Here in Europe we saw the same thing 10 years ago: most mobiles would be sold through carriers, mainly to get them cheaper, but over the years a double market has developed: subsidized phones for carriers to fight each ohter and/or get younger/new users, and free, more feature-rich phones for those wanting to change. Sometimes the same model would be available both ways (also to show off the ‘savings’ if you buy the carrier locked version), but other times models are different…

  17. I’m in the US and I’ve been buying unlocked handsets exclusively for years. Sellers of unlocked phones are readily available here.,, and others come to mind, as well as smaller phone retailers.

    Currently I use the Sony Ericsson W810i (Walkman phone) and love it. I’ve been buying Macs since 1986, but the iPhone will have to be fantastic for me to drop my W810i.

    That the iPhone will/might ship unlocked is a big deal, not for the handset market in the States, but for Apple. I’ve been blogging about this topic for years: A locked iPhone does not fit into Apple’s usability philosophy, particularly because there’s no one carrier that covers the entire US up to Apple’s standards.

    Buy shipping an unlocked phone Apple can more or less guaranty that coverage will not be an issue, and as we all know coverage is pretty much the make or break factor when choosing a carrier.

  18. The Telco’s will not be too enthusiastic about the unlocked phones going mainstream.
    All major Telco’s have some sort of serial number tracking system in place.
    If unlocked phones are sold it would create more problems for them; i.e. Customers want to install T-zones on their unlocked phones.

  19. Unlocked mobile phones are so normal here! You get them from 50 dollars on. They are a great way to save money since we have those new mobile virtual network operators (MVNO) like Easy Mobile, Simyo, Blau and others. I just bought a SIM card from one of them and now I only pay one third of my former minute price. No setup fee, no monthly minimal use, no basic monthly fee. I just put their SIM card into my unlocked GSM phone and made my first call. When there is another MVNO that is even cheaper I will get a SIM card from them.

  20. Stacy Young

    I have had a number of phones from a number of makers over the years and I have YET to experience a well designed product. (Blackberry excluded) I believe it will be some type of crossover functionality from the ipod world that will drive sales initially. Perhaps rendezvous for discovery and short range free messaging to get the kids excited.

  21. I don’t agree fully on this. It’s true that majority of devices sold in the U.S. goes via carriers. However, Nokia already started to sell its phones unlocked in its Flagship store. Plus, there are many stores online selling unlocked devices and it seems that they do well.

  22. Hardly! If at all the US Handset market opens up with iPhone, it would be a side-effect. Nobody will buy the Apple phone because its unlocked. They will buy it because its a better product than the current generation of mobiles out there. With Apple’s brand appeal and marketing prowess, they can definitely beat the crap out the incumbent players. Big trouble for the handset majors lies ahead IMHO.

  23. By this time next year goog will be giving iphone’s or something with the same functionality, away like AOL used to give away disks. One year may be too soon but two years is a lock. Schmidt and Urs have both said something to the effect that utiilties(specifically power and telco) may be better positioned as businesses if they gave away computers(power companies) and phones(telco/wireless) because the revenue they can achieve by providing services to computers and phones is greater than the customer acquisition costs. Something btwn the lines there perhaps?

  24. I see an added benefit – for criminals. One mugging and not only do you get an unlocked phone, you also get somebody’s entire network’s phone numbers and all their music. What a bounty that would be.. Of course I make this remark purely with the knowledge that mobile phones remain the most common reason for muggings here in the UK, now closely followed by iPods..