Telecoms fight for the right to party with iPhone 3G

By Prince McLean

Apple's iPhone 3G is exciting more than just tech-savvy consumers wanting to play with the latest gadget. Worldwide, mobile service providers are fighting tooth and nail for the right to sell the new iPhone because of its ability to attract new customers and sell them on data service plans, which providers have previously found to be a difficult sell.

Tough times for a rough market

According to Strategy Analytics, 1.12 billion mobile phones were sold last year, and 1.24 billion are expected to be sold this year. Forecasted growth of phones in general has slowed slightly due to difficult economic conditions worldwide. Intense competition between phone makers has also taken its toll on the weakest handset manufacturers.

Nokia has held onto the lead with its 38.8% share of the world's phonesets in 2007, while Samsung came in at second place with a 14.3% share. A lack of compelling new phones models from third place Motorola caused the company to slip dramatically down to a 14.1% share; it was hit particularly hard in the fourth quarter. Fourth place Sony Ericsson has also slipped downward to 9.2%. LG rounded out fifth place with a 7.2% share.

Apple's share of all phones sold worldwide last year was just 0.6%, but that represents more than half of what Steve Jobs originally outlined as Apple's goal for the end of 2008: a 1% share of the entire market. Apple's share of all phones sold is a misleading metric however, because the demand for more sophisticated phone units is rapidly outpacing the growth of mobile phones in general

Eyes on where the puck will be

While Strategy Analytics has pegged the overall phone market cooling from 12% growth in 2007 to just 10% expansion in 2008, smartphone sales are expected to continue their rapid ascent, with Gartner forecasting growth of 42% this year.

Incidentally, those growth numbers parallel the difference in growth between Apple's white hot Mac sales and the tepid PC market in general. Just as Apple has left the high volume but low profit commodity PC market for Dell and HP to fight over, it has similarly targeted the smartphone market exclusively, leaving mass market, lower profit "feature phone" sales to Nokia, Samsung, Motorola, Sony Ericsson, and LG.

In the US market, the iPhone rapidly carved out a 27% share of smartphone sales within its first few months. Worldwide, Apple's launch of the iPhone 3G has promised to further muscle into the high growth smartphone market, with providers fighting over regional rights to sell the new phone.

Fighting for exclusive rights

Last year, AT&T signed a deal with Apple for exclusive rights to sell the iPhone in the US market through 2009. On Thursday, USATODAY reported that the company extended its contract with Apple for an additional year through 2010, an endorsement of the iPhone's impact on AT&T's growth and profits.

Similar exclusive deals were signed in Europe. For example, Telefónica's O2 is believed to hold an exclusive contract on iPhone sales in the UK through 2012, according to a report by The Guardian.

These exclusive deals are actually being sought out by the telecoms themselves; Apple is understood to have an escape clause written into its contracts which will allow it to terminate the deals if "it does not think the phone is being marketed successfully," according to the Guardian.

The reason that mobile providers are fighting for exclusive access to the iPhone (or trying to buck against exclusive access by rivals) is that the iPhone is a hot seller that has the power to pull subscribers from other companies. Now that most users already have a phone, the goal has shifted toward nabbing customers from rivals rather than trying to recruit entirely new users.

The race toward smartphones

Further, the holy grail of the mobile industry is to sell data service on top of basic voice access, since this results in double the revenue for the same number of subscribers. Mobile providers have had a hard time marketing their data services, but the simplicity of the iPhone's network-savvy Maps, Mail and the mobile Safari web browser sells data plans hand over fist.

Simpler feature phones from Nokia, Samsung and others, which make up the majority of thier sales, don't sell these profitable data plans so mobile providers are subsequently less excited about selling them to consumers. Since most phones are sold by the mobile providers, this has a huge impact on where phone sales are headed.

Stealing rival provider's feature phone subscribers and upgrading them to an iPhone with a data plan is the ultimate win, as it erodes the competition while substantially boosting profits. In order to make this happen, providers are willing to heavily subsidize the iPhone 3G, paying Apple upfront in order drop the hardware entry price for consumers. That in turn erases the remaining allure of cheaper feature phones, pushing consumers toward smartphones even more rapidly.

L'Eggo my Eggo

Orange, owned by France Télécom, signed exclusive rights to sell the iPhone in France last fall. It has since muscled into other markets including Switzerland, where it now sells the iPhone 3G in competition with Swisscom, which was originally assumed to be region's exclusive iPhone provider. Apple has partnered with more than one mobile provider to sell the iPhone 3G in a number of new markets, including Australia, Austria, Czech Republic, Egypt, India, Italy, Poland, Portugal, Slovakia, and ten markets in South and Central America, according to a list maintained by iLounge.

Orange is now rumored to be trying to fight its way into the UK market to compete against O2, hoping that it can break its rival's exclusive lock on that market by the end of 2009. For its part, O2 staged a promotional discount on the original iPhone prior to the launch of the iPhone 3G, a trick it has since credited with being able to grab over 137,000 subscribers from rival providers, according to a report by Jonny Evans in Macworld UK.

Until it can force its way into the UK market to sell the iPhone 3G, Orange has begun including a free iPod touch in its contracts for the phones it already sells in the UK through Carphone Warehouse. That deal is also being pushed by rival mobile providers in other markets; in Switzerland, Sunrise similarly bundles a free iPod touch with some of its phone contracts in a bid to compete against the two official vendors of the iPhone 3G.

Apple's partnerships mean automatic sales

All of this is great news for Apple. A decade ago, the company struggled to sell its technology in partner's retail stores such as Sears, BestBuy, and smaller independent computer stores. The problem was that those retailers could make more money selling cheaper and higher profit PCs; they actively funneled interested Mac buyers toward their own store branded computers running Microsoft Windows.

Apple is now selling its computers itself through its own retail stores, using sophisticated marketing to inform users of the differences between its products and commodity PCs. With the iPhone, that sale is even easier, since mobile providers are happily motivated by higher profits to push the iPhone 3G themselves. Additionally, with rivals of Apple's official iPhone partners marketing the iPod touch, Apple is selling its WiFi mobile platform from every outlet, broadening the value of the iPhone itself as that software platform establishes itself.

In many ways, Apple is creating a broad, automated sales channel similar to that created by Microsoft in the 90s, where PC hardware makers effectively sold Windows on the company's behalf to enable them to rival Apple's Macintosh. This time around, it isn't hardware makers selling Microsoft's software, but rather mobile service companies selling Apple's hardware and software.

That's terrible news for struggling handset makers such as Motorola and Sony Ericsson, and a direct challenge to most profitable markets of the high volume handset leaders including Nokia, Samsung, and LG, which haven't been able to tap the heady interest in iPhone despite a series of flaccid attempts to steal the thunder of their new American rival with iPhone-lookalike products. All Apple has to do is maintain its lead in software, a task that will become increasingly easier as it builds a worldwide ecosystem around the iPhone.

Later this month on August 22, Apple will expand its iPhone 3G launch to 20 additional countries, and 30 more countries are planned to be added by the end of the year.

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