The biggest criticism Apple (NSDQ: AAPL) has received concerning the iPhone is the exclusive deals that lock the phone to a particular carrier. The complaint generally centers around “open” being good for customers, but now Dow Jones has a piece arguing that the strategy is short-sighted. The experience of unlocked iPhones in Europe — 20 percent of Orange’s iPhone sales are unlocked, and there was a rush on unlocked iPhones when T-Mobile was forced to offer them — and the fact that 15 percent of people who buy iPhones in the US don’t buy a contract with AT&T (NYSE: T) are used to infer that Apple could make a lot more sales if it didn’t lock the phones to a carrier. “From a distribution standpoint, Apple clearly benefits long-term from selling phones that aren’t locked to a single carrier’s network,” said Trip Chowdhry, an analyst with Global Equities Research. This might be true, but distribution isn’t the total of Apple’s iPhone business. The big thing that Apple gets out of signing exclusive contacts with carriers is ongoing revenue share from the mobile plans, something it can’t get without the exclusive deals: The article cites estimates that if Apple sells 10 million iPhones by the end of 2008 it will get about $2 billion from the deals, around 6 percent of Apple’s expected 2008 sales. For this reason I think Apple is being long-sighted, foregoing a short-term boost in sales for a long-term ongoing revenue stream.
The big mistake I think is being made is thinking that Apple could threaten Nokia (NYSE: NOK) (or even Sony (NYSE: SNE) Ericsson’s) place in the mobile handset industry. For example, a quote from Mike Demmick of the London-based cellphone market research firm Dialed-In: “Apple could blow away competitors like Nokia and Sony-Ericsson (NSDQ: ERIC) for years to come if they were not tied down to these exclusive deals.” This is wrong — even if the comparisons are restricted to smartphones the major manufacturers will sell more than Apple simply because they’ll have more devices on the market. The iPhone business only has the chance to be like Apple’s desktop business rather than its iPod business, unless Apple goes into the market in a far more serious way than it’s doing now. That’s not to say it’s not a good market, Apple will make a lot of money with the iPhone and it’s not going away anytime soon.
But the industry is going open: The article points out that the mobile industry is slowly (finally) opening itself up, citing Google (NSDQ: GOOG) and Verizon’s open network announcement. My response has to be: So what? Being closed hasn’t hurt iTunes, and I think Apple is safe in its bet that the majority of its fan base are used to its closed networks. Besides, any actual results from Verizon’s (NYSE: VZ) announcement or the upcoming spectrum auction will be a long time coming, certainly not before the end of 2008, so Apple has time to switch to an open strategy (and make it seem new and innovative, I’m sure). I think it will be using the time until then to do the same thing Nokia is doing — work out the business model around mobile services and how it can make money from its customers long after they’ve purchased the actual device. ITunes is a part of this, but there are far more things mobile phones can do and I think that is what Apple will be looking into.
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