Will Apple stick with O2?

Will Apple stick with O2?

How many more iPhones would Apple sell if it added another network? Most people who want an iPhone simply switch to O2.

Carphone Warehouse CEO Charles Dunstone said 50% of the customers he was signing up for the iPhone were from networks other than O2.

Operators do not have the level of loyalty from customers to deter them from switching networks to buy an iPhone. Apple, on the other hand, has a customer following that borders on worship.

Apple is fully aware of the value of its brand and what it needs to do to maintain it. It also knows that it can charge a significant premium for its devices.

Protecting its brand and controlling distribution are critical to the bigger company ethos.

There is a risk of losing that scarcity value around the brand by making its products available more broadly.

Apple’s management team would have looked at the incremental cost if they opened up the iPhone to another network, and considered the number of customers they could add.

My belief is that the number of customers who will only take an iPhone if they can get it on their network is too low to justify the extra technical cost. It is also not worth surrendering Apple’s negotiating power with O2 or undermining its brand control and scarcity value.

Apple knows it can charge a premium to O2 because of the new customers its products bring, as well as the rich ARPU.

There are also some technical problems involved in adding another network. It is much easier to manage supply chain, network issues, customisation, billing and marketing when you have a single network.

A decent side business is growing in the form of applications where Apple gets 30% of the revenue made by application developers, simply by making them available through their stores. Apple is still pursuing things like visual voicemail and other services, which are not only hard to bring to another network but suggest the business is not simply about widespread distribution.

Is the ‘iPhone Mini’ next?
One important question is, what happens when Apple has soaked up initial demand for the iPhone? Apple has already applied the ‘succession product’ strategy, which exists for iPods and iBooks, to the iPhone. Die-hard fans simply upgrade to the latest version.

If it extends to more devices, logic suggests that a pared down, affordable iPhone Mini is next. This could play into O2’s hands, given its success in the youth market over the last few years.

O2 will continue to plough money into Apple’s mobile phones if they see high spending consumers coming to them. O2 would not pay the same unit prices and make the same volume commitments if it was not the only network the iPhone was available on.

The iPhone is making a hefty margin for Apple, with costs gradually coming down.

It is interesting to see how all the noise surrounding revenue share has virtually disappeared after the excitement of its launch. My hunch is that Apple has realised that revenue share is a pain to integrate
into its model.

The volume and margin strategy allows Apple to focus on selling more devices that people want, while charging O2 a decent price for exclusivity.

Exclusivity and scarcity value give Apple a much better margin opportunity for the iPhone than a similar device from Nokia or Samsung.

Apple does have a multi-network approach in other countries (Italy and India, for example) but its approach for each country is different. This concerns distribution more than the principle of having a single network. Apple can easily extend UK distribution by making the iPhone available in Phones 4u. That would result in, arguably, a bigger spike in sales than adding, say, Orange.

If there was any more evidence that Apple’s single network model is worth pursuing, I would point anyone to BlackBerry and HTC, which, for the same reasons, are adopting Apple’s formula of working more deeply with one network.

Written by Mobile Today
Mobile Today

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