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How Apple played it smart with iPhone exclusivity

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Apple (s aapl) may be on the verge of opening up its Japanese iPhone sales to another cellular service provider, ending SoftBank’s exclusive hold on the popular smartphone. A new report says that KDDI au, one of Japan’s three major mobile carriers, could get the iPhone 5 beginning next year.

Nikkei Business Online (via TechCrunch) is the source of the report, and also notes that the iPhone 5 will support CDMA as well as GSM, which could open up the possibility that NTT DoCoMo, Japan’s largest mobile carrier, might also be able to get in on the action sometime down the road. Japan is one of the last major markets where iPhone availability is still limited to one carrier. China, another lucrative market where that’s currently the case, also seems to be on the verge of entering a partnership with a second provider.

A growing trend

Early this year, Apple opened up iPhone sales to a second provider in the U.S. when it introduced the CDMA iPhone 4 on Verizon’s (s vz) network. It also started selling the iPhone 4 factory unlocked, so iPhone buyers could take their business (albeit minus 3G speeds) to T-Mobile, which it turns out has a very high number of customers using Apple’s smartphone.

Apple’s trajectory with exclusivity reflects a very smart and elaborate plan which helped make the iPhone the success it is today, and now that exclusive carrier deals are ending, Apple stands ready to reap the rewards it has sown.

Why exclusivity used to matter

In the beginning, exclusivity served to help Apple gain concessions from cellular providers it might otherwise not have been able to negotiate; the iPhone carries no on-device carrier branding, unlike most other phones, and also doesn’t come with a lot of pre-installed bloatware from network operators, the way most non-iOS phones do. Apple essentially cut carriers out of the software and services side of the equation, and even though it had its marquee brand and the success of the iPod backing up the potential success of an iPhone, it wasn’t necessarily a “sure thing.”

Aside from appeasing carriers, exclusivity also made it easier for Apple to guarantee a uniform experience across all its iPhone devices in the early days, but more importantly, it helped promote an air of scarcity around the phone. The iPhone is by no means a limited edition collectible, and Apple was doubtless happy to sell as many as it could produce, but making it available on only one carrier at launch helped it feel like a rarity without any artificial limitations on production numbers.

Why exclusivity no longer matters

But exclusivity has exhausted its early usefulness. Carriers no longer need convincing that Apple’s model can be lucrative for them, even if it does mediate their relationship with customers to some extent. Apple doesn’t need to make concessions to negotiate with carriers anymore; if anything, the reverse is true.

Also, the illusion of scarcity is no longer necessary to make Apple’s products appealing in the eyes of buyers; even after more than a year since introduction, the iPhone 4 is the highest selling Apple smartphone in the U.S. and iPhone owners are the most likely to stay with their handset maker more of any smartphone buyers.

On the flip side, ending exclusivity across most major markets opens Apple’s business to a huge number of new potential customers. Android (s goog) devices are available in more markets and on more networks than Apple’s iPhone. Anything that helps narrow that gap should help Apple win back market share from Google’s mobile OS.

The staged ending of exclusivity also means that Apple effectively gets a brand new launch every few years. An iPhone might not be totally new anymore, but it’s new to a network’s subscribers if an exclusivity deal was previously in place on a competing network. That will help it appear more attractive to customers tied to their carrier who’ve been watching and waiting as their friends on other networks had all the fun. Restricted access breeds interest; Apple likely anticipated that when it penned the original iPhone exclusivity deals with AT&T (s t) and others around the world.

Everybody wins

In the end, we all benefit from Apple’s approach to exclusivity. Consumers get a pure iPhone experience, mostly unadulterated by carrier demands, software and restrictions. Apple gets more control over its product, and a staged global rollout of its handset that keeps momentum rolling in its favor. Carriers, too, benefit. Even those that suffered as rivals rode the early success of the iPhone now get a chance to steal some of that thunder at the expense of their competitors; Verizon has AT&T’s history of sub-par iPhone service in major urban areas to parlay into switched subscribers, for instance.

The iPhone 5 will be a massive hit when it arrives (most likely next month), but if it also comes with expanded availability thanks to the continued erosion of exclusivity deals with carriers worldwide (and at home in the U.S., too), sales of Apple’s latest smartphone should easily smash previous records. This is definitely the one to watch.

23 Responses to “How Apple played it smart with iPhone exclusivity”

  1. Stuart Grimshaw

    well, i can’t comment on how it ran in the u.s., but all across europe the networks were standardised and fast. apple just got lucky that the competition didn’t have much to parry the iphone with. the eclusivity deals didn’t harm apple, but doubtlessly reduced iphone sales.

  2. Michael W. Perry

    “Apple’s trajectory with exclusivity reflects a very smart and elaborate plan which helped make the iPhone the success it is today…”

    Yeah, but it did nothing to fix the pitiful lack of genuine competition in the cellular market. Merely letting T-Mobile in, would markedly improve competition, particularly with AT&T. I’ve got my iPhone on T-Mobile and love it, but not everyone wants to jump through the unlocking hoops.

    A near universal phone would help generate competition between Verizon and AT&T, if that is what the iPhone 5 is. But it needs to come with the ability to move a contract to another provider even before a phone is paid off. And if the industry refuses to offer that, we need to mandate it by law much like we did with phone number portability.

  3. Walter Hutchens

    Rather than being some brilliant marketing strategy to end carrier exclusivity in phases, isn’t it more likely 1) Apple was able to get a slice of the carrier revenues with AT&T from the beginning so exclusivity was attractive to them b/c of the profits plus 2) US carriers have the stupid phone-from-carrier model that is less common in the rest of the world so that was the norm in the industry in the US when the iPhone launched and 3) trying to replicate the stupid US model of carrier-indentured-servitude (for customers, with more revenue for Apple), the largest carriers in China and Japan balked at the deal, so Apple went with the smaller carriers who were more willing to accede to its terms in those markets and 4) now Apple realizes it can sell more handsets/make more net $ not trying to export the bad-for-consumers US model or even trying to continue it here . . . Apple has made some great decisions, but I don’t see a grand strategy behind their carrier deals so much as ad hoc market forces and responses to them . . .

  4. Petri Ojala

    You must realize that while all that might be true, it’s very market specific. Most of the markets you mention are very limited in customer choice; the carriers use different technologies, phones are mostly subsidized, long contracts, and heavy carrier influence in the handsets.

    Then there’s the other part of the world where the mobile market is more free and more competitive.

    I didn’t benefit from iPhone exclusivity because the Apple didn’t choose the local carrier for their services or technical excellence. I had to buy all the three iPhones from abroad, from countries where they were available unlocked and without contract, and used them with the local carrier of my choice which had the best service.

    Today all the local carriers sell iPhone — the only difference is that only the official Apple partner carrier has it locked to their network.

    One could easily argue who cares about the small countries, but ten small countries total a bigger country and at the end, they actually matter. Apple sells more iPhones outside the US than in the US already. It doesn’t show in their products, though.

    • Hamranhansenhansen

      In the US, Apple gets criticized for too much international focus. The fact that the first iPhone was GSM was roundly criticized because there was no nationwide GSM at that time in the US, and definitely no GSM 3G. The original iPhone was just a beta, it was US only and sold only 6 million and they could barely keep up with that at the time. The iPhone 3G was really the iPhone 1.0 and it was sold in many countries, and sold 2/3rds internationally. The fact that Apple makes only one product for the whole world is a very international strategy.

      I think your complaints are just the fact that Apple has only been making phones for 4 years. They do not have the carrier relationships that you expect them to have.

  5. Don’t forget that, in the very beginning, Apple was only able to sell their phone idea to Cingular. Nobody else was savvy — or desperate — enough to support a future phone that Apple wouldn’t even show to them.

  6. Idon't Know

    Apple never needed to make concessions to the carriers. From the beginning they did not allow carrier branding, bloatware, contracts for hotspots etc. Unlike Google and the Android carriers who completely rolled over for the carriers to the detriment of their customers.

  7. Seth, when I compare the average selling price of an iPhone to an Android phone, I see that Apple is able to maintain much higher margins. Much of this is due to carrier negotiations and exclusivity. Sure, it’s also due to having a superior product, but carrier exclusivity was part of the equation.

    Further, seeing as though Apple owns 2/3 of the profit for the mobile market, I’m not sure how you can claim that Android owns the mobile market and that Apple did it wrong. Market share without profit is meaningless. Just ask HP who’s leading the PC market share (race to the bottom) but deciding to exit the market entirely. At the end of the day, profit is the only measure of a company’s strategy / success that matters. Apple’s success essentially nullifies your opinion here.

    • Idon't Know

      They maintain margins on handset, apps, and the entire iPhone ecosystem whose revenues dwarf Androids. So do people who develop iOS apps and accessories. Nobody else is even close. Not in customer satisfaction either. Apple cares about the entire customer experience in minute detail. Google cares about selling ads.

  8. You make some good points, but I think you also miss some of the more subtle ones – engineering issues.

    We should remember that Apple had never made a phone before, and no one had ever made a phone this complex before. Apple knew that it would be very problematic with a high possibility of serious bugs in the system.

    Exclusive deal with ATT allowed it to have many benefits, all aimed at simplifying the debugging system.

    1- One and only one carrier for Apple to deal with. No questions like “Gee does it do the same thing on V?”

    2- Effort and dollars spent by ATT on developing support systems up to Apple standards.

    3- A deal with ATT that Apple would handle all but first contact issues. Anything that ATT help center could not fix (i.e anything above simple user errors) would immediately escalate to Apple.

    We need to remember that to Apple the end user experience is what matters most. This simplification of overall process was a huge factor in their success. Many issues did come up, but Apple was able to resolve them so quickly that no one even remembers them anymore.

    I might add, that the same simplification argument is what motivated so many of the “missing features” that detractors were so fond of listing back then. Apple knew that if they wanted the phone to work and be easy to debug, that it would be a lot easier with a simpler system. Things like global Cut & Paste are exactly the kind of thing that can wreck havoc in software and be difficult to find. By assuring the stability of the underlying system first, they were better able to add the features without a lot of errors. (It was interesting to note that WinMob also came out initially without Cut & Paste and no one raised an uproar!)

  9. I mostly agree. The carrier’s chokehold on services and devices would not have been broken If it were not for Apple’s exclusivity arrangements. We would still be suffering with cluttered carrierware and the status quo without Apple shaking the market up. Too bad Eric Schmidt ended up being an unethical backstabbing dolt. I liked it when Apple and Google were allies. Now I have major trust issues and an uneasy distain for what google is proving to be about.

    • nikolaus heger

      That is a valid point… so exclusivity was needed for
      – Breaking the chokehold carriers held on services (now accepted practice)
      – Getting unlimited data plans (later became commonplace)
      – Allowing Apple to share monthly revenue (later scrapped)

  10. I don’t agree. If anything, the one thing that Apple failed on was being exclusive. In the US for instance, it allowed Android to explode and own the Mobile Market.

    You say that Exclusives got concessions from carriers. So, now that Verizon has the iPhone in the US, how has that changed AT&T’s prices/plans, etc.

    Apple has done a lot of things right but carrier exclusives is definitely one thing they did wrong.

    • Apple did not have a choice — Verizon refused to cary the iPhone. And I’ll bet AT&T only agreed on Apple’s desire to keep the iPhone free of carrier crap in exchange for exclusivity. Don’t try to rewrite history.

      • I believe you have it wrong.

        First: “And I’ll bet AT&T only agreed on Apple’s desire to keep the iPhone free of carrier crap in exchange for exclusivity.”

        this is exactly what the article says!

        2- Verizon had many difficulties one being CDMA being incompatible with the rest of the world. Second, V may have rejected the offer from Apple (if it ever happened) precisely because of the Apple’s demands. It is a decision they regret as they lost millions of customers due to the iPhone.

    • nikolaus heger

      Totally agree. The iPhone became a raging success _despite_ carrier exclusivity.

      You have to look back to history to see why exclusivity was really needed for the 1.0 iPhone:

      – Unlimited data plans were unheard of at that time. Yet it was required to make the iPhone experience a good one. Without unlimited data plans the iPhone might have been a failure. Apple needed to get carriers to introduce unlimited data plans. That was at a time when data was sold by the Kilobytes!
      – Apple’s misguided “revenue sharing” model. Remember that Apple was sharing monthly revenue with AT&T in 2007? That was yet another colossal failure and never would have worked on a world-wide scale.

      Apple’s marketing of the iPhone is a history of mistakes and bad judgement. But the phone was so good, Apple had plenty of time to adjust and alter their strategy, and to their credit, they did. And guess what the iPhone is now marketed almost exactly like other phones in the market. Either sold free and unlocked, or locked and subsidized.

    • Hamranhansenhansen

      You act as if they withheld iPhone from Verizon, Sprint, T-Mobile. No. Those 3 carriers run nonstandard networks. Apple would have had to make 4 different iPhones. They did not have the resources to do that. The first year of iPhone sales were only 6 million. Verizon was also offered iPhone but insisted on crapware being on there.

      Also, remember that AT&T had just formed a national carrier by joining a bunch of regional carriers, they were young and hungry. They built a GSM 3G network just to run an unmodified, GSM standard, worldwide phone. That joined the US with the global network and in no time, 2/3rds of iPhones were sold internationally.

      And the thing is, iPhone is the most popular phone on Verizon in 2011. The iPhone installed base in the US is bigger than Android installed base. You need to read numbers, not propaganda.

    • Uh…what are ou even talking about? Exclusive… in only 1 carrier officially selling the phone in a given market. Concessions… in leverage from the phone carriers to basically get what they wanted. (No VZware, they sold the first one with no contract, etc.)