The iPhone – an Operators Worst Friend?

John Strand, CEO of Strand Consult, argues that some network operators have been seduced by the allure of the iPhone, to the detriment of the majority of their customers

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 Apples PR department has created a unique PR campaign, around a product that is seemingly beautiful 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. So what do we make of the iPhone?
Well, in the same way that Apple primarily handles the interests of its shareholders, we believe a number of operators ought to focus a little less on the iPhone and a little more on their shareholders.

Limited segment
The iPhone attracts a limited market segment, Apples 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.
Operators that have partnered with Apple have spent an incredible amount of management resources on the iPhone. If you examine the time spent 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 its 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 operators profit for their shareholders.
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 operators existence? These are all questions that the industry should seriously contemplate.

Voice, not data
Many operators have emphasised the volume of data consumption among iPhone customers, but comparing an iPhone customers data consumption with the rest of an operators customer base is misleading. We believe that most iPhone customers were already data customers before buying 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.
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 increase in revenue. You could compare the operators attitude towards the iPhones data consumption with a restaurant owner that has an all you can eat for 10 buffet, and that is most proud 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.

Website not mobile sites
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 means that when an iPhone user browses a typical news site, an ordinary web page will be around 1MB, while the mobile version of the same page will often be less than 100kB. It is significantly cheaper for an operator to produce 100kB of data than it is to produce 1MB, and it is much more sensible to deliver 100kB rather than 1MB when you are selling data at a flat rate.

Restrictive policy

There is also no doubt that Apple has a restrictive policy regarding the iPhone. Not only does it want a kick-back from the data traffic generated by the phone, but it also keeps all revenue from iPhone-generated sales of Apples 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 Apples hardware, while at the same time letting Apple keep all the premium revenue streams generated by the product after the customer has purchased it?
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 its 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?

Unlocked iPhones
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 (Subscriber Acquisition Cost), while another non-Apple partner only needs to sell a SIM-only product with a low SAC and attractive voice and data prices.
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.

Good business?
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 managements focus, subsidies, marketing and distribution power on a product that is admittedly beautiful, but which 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 Apples unique PR machine – and that have not analysed and examined the underlying business models and the financial success of the iPhone from an operators point of view.