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Did Apple’s ‘early mistakes’ screw up the iPhone potential? Nonsense.

Thanks to reader Jeffrey who emailed me this piece from MacNN published earlier this month. Jeffrey’s writing a paper for his board and wanted to know what I thought of the issue. I knocked off some thoughts to him and then asked if he wouldn’t mind if I published a summary here.

The post reckons that Apple has committed ‘two meaningful errors’ and quotes Piper Jaffray analyst Gene Munster outlining them. Gene reckons the two screw-ups were thus:

1. Apple did not get subsidies for the iPhone
2. Apple signed an exclusive agreement with AT&T in the States

Surely Gene must have been in the room when the iPhone launched?

Getting a carrier to anything on your terms at this point was almost impossible at this point of time. Exclusivity built demand. It built demand and really, really wound up the carriers who didn’t get the iPhone — many of whom were severely pummelled by their shareholders for this ‘failure’. It also really annoyed consumers who were delighted (or, perhaps ‘content’) with their existing carrier and had to go through the rigmarole of swapping.

Apple had to get a top carrier on-side. They had to make sure they got complete control of the purchase experience, of the price plans and other features such as visual voicemail. Indeed, ‘inclusive data’ integrated into a price plan was nigh on invented by Apple as far as most people are concerned. It was certainly available beforehand but Apple were able to insist on a whole raft of requirements from their exclusive partner.

And if you think this is old hat, just remember how iPhone is priced today. Apple still maintain strict control over the amount of minutes, texts and so forth the carriers are allowed to include. The price plans need to be ‘Appleified’. That is, small, medium and large. And it has to cost money. Famously Apple never make a loss on anything they sell. There are (virtually) no loss leaders at Apple.

And let’s get to the nonsense of subsidy. Zero carrier subsidy was a masterstroke. Of course everyone-and-his-dog would have purchased a shiny iPhone if they’d got the opportunity to do so ‘free’ with a 2 or 3-year contract. Of course. Apple are masters of marketing. Not for nothing was the iPhone branded the ‘Jesus Phone’.

We had a good two or so years of only the rich elite being able to afford iPhones (though that has changed, see: Vicky Pollard has an iPhone 4; You are not cool anymore). In many markets, the operators were simply banned from selling them on a Pay As You Go basis. Why? Because Apple said so. Apple’s message? If you want an iPhone, you’ll need to pay for it. This helped Apple manage it’s back-end logistics (I doubt they could have coughed out 100m iPhones in the first year). Simultaneously Apple benefitted hugely from the fact that the devices were ‘valuable’.

Every player in the industry benefitted. If you’d like a super (and highly vexing) example, just look at the insurance premiums for the iPhone. Whilst I insured by Vodafone-supplied Nokia E90 (£700 value) for just £6 per month (for all my phones), when I went to buy an iPhone I was astonished to find a £570 iPhone requiring a ‘special’ £12/month insurance premium. That only covered that iPhone. No other phone on my account. You what? Push the sales person and they’ll explain that ‘it’s an expensive phone’.

What did we all do? Well most of us secretly felt a bit good and paid the extra cash. Just in case. Because the phone was only partly subsidised. You know, it was ‘valuable’. Whereas the £700 Nokia model … well, that was ‘free’ as part of the contract, right?

Even today, you can ONLY get a ‘free’ iPhone (i.e. completely subsidised) in the United Kingdom if you commit to the carrier’s largest £75/month price plan. Way out of the reach of the UK’s £30-35/month majority.

Exclusivity helped Apple guarantee the experience and it was instrumental in ensuring the carriers in other international markets played ball too.

Subsidy wasn’t a problem. If anything, it was a huge, huge benefit. Admit it, you rather enjoyed walking about with your ‘expensive’ iPhone whilst everyone else looked on in admiration.

Gene reckons that Apple was really hurt because they didn’t do a deal with Verizon. Like they could have just knocked out a CDMA version in twenty minutes. Apple had to focus on GSM in order to get the international footprint.

Are you ready for a final bit of JesusPhoneLovin’?

Here’s the last paragraph from MacNN’s post:

Exclusivity is the only reason Android phones are outselling the iPhone in the US, the analyst claims. “As an example, in countries where the iPhone is available on multiple carriers and competes with Android, we see the iPhone outselling Android,” he says. “The greatest factor in the success of Android has been Verizon. Customers are loyal to their carrier, and once Verizon gets the iPhone, we believe Android’s success in the US will be tested.”

Customers are loyal to whatever’s cheap and provided by the carrier. Can Apple’s Foxconn production centres knock out enough stock for them to supply all carriers? Nokia, they are not. Nokia and Samsung can turn out hundreds of millions of devices in a given year — but I really wonder if Apple is built, yet, for this kind of volume.

As for Android outselling iPhone. Get over it. Verizon is selling FREE Android devices. Take the Motorola Citrus, for example, a perfectly nice ‘entry level’ Android device. That’s free. You can pick up the rather fancy LG Vortex (in Violet colour, no less) for a measly $39. Or you can plonk down $179 for the sumptuous Motorola Droid Pro. All of these, obviously, need you to agree to all sorts of 2-year contracts, data packs, mail-in rebates and the like.

Android is going to continue to outsell iPhone for donkeys years.

Until, that is, Project Nano appears on the horizon. Whatever Steve tells you, their sales of iPhones are not in any-single-way stratospheric compared to Android, Nokia and RIM. There’s a reason RIM is the #1 smartphone in a bunch of countries around the world, not least the UK, most of Latin America and quite a bit of Asia. But when Apple decides to get real and introduce a $200 iPhone that it WILL allow carriers to subsidise, the market will get rather exciting.

It’ll get even more exciting if Apple decides to use a bit of it’s cash pile and put 300 million iPhone Nano $49 devices into the market in one year. That would set the market alight. And it would probably need another person as CEO who will apply old fashioned economics to the industry.

Until then, suck it up.

Update: I forgot to point out the Android price-point. In the UK, you can now pick-up a pretty good Android ‘smartphone’ for £70-80 or just over $100 — that’s for the handset itself, no service plan, no contracts, just ‘pay-as-you-go’. No wonder Android is outselling iPhone. As Martin points out in the comments below, it’s all about the price.

By Ewan

Ewan is Founder and Editor of Mobile Industry Review. He writes about a wide variety of industry issues and is usually active on Twitter most days. You can read more about him or reach him with these details.

18 replies on “Did Apple’s ‘early mistakes’ screw up the iPhone potential? Nonsense.”

Phones 4 U has been doing cheaper fully subsidised iPhone 4’s. My partner got a brand new connection on Vodafone for 24 months (!!!) for a mere £40 a month.

Very, very sensible article. A lot of the web discussion of the history of iPhone revolves around “it can’t have been that good” / “Apple will repeat its Mac vs MSDOS history” / “Look at Android, it’s outselling iPhone (in US – other markets don’t matter)”. None of these have any real analysis behind them.

Apple — as you point out — was entirely right to keep the iPhone brand in the market premium position. There were no serious competitors at any price, so going into any kind of discounted selling or subsidy would have been simply foolish. Although Apple-haters squeal with delight now that Android is here and Apple’s US market share is rising less quickly than Android’s, the reality is that Apple’s actual sales continue to rise. The eerie resemblance between the Android phones and the iPhone means that a lot of customers will be thinking that they are getting something ‘as good as an iPhone’, or ‘the same as an iPhone’. As other data shows, a higher proportion of existing smartphone owners want to buy an iPhone than non-smartphone owners. In other words, once people are in the smartphone-owning market segment, their aspiration is more likely to be iPhone. A close imitating competitor willing to compete on price is always good for sales of the premium product.

The other part of the equation that is missed in regards to the whole AT&T-exclusivity is that Verizon wouldn’t give Apple the time of day. I’m not sure if they checked with T-Mobile or Sprint.

Remember, when the iPhone came out, Apple was the beggar. They needed a partner who would do Visual Voicemail. There was investment of time and effort on carriers’ part. Apple had to hook up with someone who would help blaze the trail.

Once Apple got in, this made it easier for Android devices to get into Verizon, Sprint, T-Mobile, etc.

Now, IMHO, I believe it was a “mistake” for Apple to sign an exclusive with AT&T. Personally, I think Apple should have created a phone that would work on AT&T and T-Mobile and sold the phone “unlocked.” As I’ve said before, those thousands of people were not standing in line for AT&T Service, they were standing in line for an iPhone. If Apple had said “We’re selling a GSM phone that will work on AT&T and T-Mobile here in the U.S.,” AT&T and T-Mobile would have set up booths right outside an Apple Store to sell people service and would have been competing against each other. If Apple published the protocol for Visual Voicemail, AT&T and T-Mobile would have done it themselves in order to get those customers.

The other part of the equation that is missed in regards to the whole AT&T-exclusivity is that Verizon wouldn’t give Apple the time of day. I’m not sure if they checked with T-Mobile or Sprint.

Remember, when the iPhone came out, Apple was the beggar. They needed a partner who would do Visual Voicemail. There was investment of time and effort on carriers’ part. Apple had to hook up with someone who would help blaze the trail.

Once Apple got in, this made it easier for Android devices to get into Verizon, Sprint, T-Mobile, etc.

Now, IMHO, I believe it was a “mistake” for Apple to sign an exclusive with AT&T. Personally, I think Apple should have created a phone that would work on AT&T and T-Mobile and sold the phone “unlocked.” As I’ve said before, those thousands of people were not standing in line for AT&T Service, they were standing in line for an iPhone. If Apple had said “We’re selling a GSM phone that will work on AT&T and T-Mobile here in the U.S.,” AT&T and T-Mobile would have set up booths right outside an Apple Store to sell people service and would have been competing against each other. If Apple published the protocol for Visual Voicemail, AT&T and T-Mobile would have done it themselves in order to get those customers.

I think you make a very valid point — Apple was the beggar when the iPhone
came out.

I do think that exclusivity with the carrier gave them enough leeway to make
significant demands around the pricing, display and associated services. The
last thing Apple would have wanted, I suspect, is being an equal 50:50
partner with the carrier making suggestions and changing things around. Can
you imagine how Apple would have reacted to AT&T demanding that the iPhone’s
front-screen be changed to ‘properly reflect the AT&T brand’ — something
AT&T has demanded (and achieved) from every other device manufacturer it
chooses to range.

I remember at the time remarking on how amazing it was that the device was
going to have a single ‘ROM’. It wasn’t unusual for your average high-spec
Nokia to have about 100+ different ROMs each slightly customised to a
specific carrier’s exacting (and often clueless) requirements. Even today
one of the first things I do with a Nokia is strip out the carrier’s rubbish
and put on the very latest vanilla Nokia firmware.

And the price plan! The carrier owned all this stuff. Never would a
manufacturer be able to influence pricing or demand their devices were only
sold with ‘unlimited data’ plans.

Apple were able to achieve this kind of influence over the carrier with the
stick of exclusivity. Agree?

These carriers are not friendly. At all. They’re about making bucketloads of
cash and they’ll protect themselves and their interests fiercely. They
needed a kick and a stick from Apple to do anything. Look, for example, at
Google’s Nexus One. Google planned to subsidise the handset to make it $199
(rather than $399) to get it into as many hands as possible. Only… wait…
yes, no sodding carrier would take it. Indeed they made it as difficult as
possible for Google to succeed with the Nexus. Do you remember? Google was
trying to completely change the dynamics of purchasing a phone — their
idea, you head to http://www.google.com/phone, select your (Google-subsidised)
device then, almost as an after thought, you selected your operator. It got
lukewarm fake-smile support from the carriers before … boom… it all fell
on its face. And Google, famously, screwed up the logistics. (More on how
things *were* looking at the time back in January <a href=
http://mobileindustry.wpengine.com/2010/01/the_new_way_to_purchase_a_consumer_phone_googlecomphone.html

Munster was right in his assessment.

Apple controlled demand-headaches by carefully planning its product rollout by market. Carrier exclusivity was not good for users or Apple. It gave carriers the ability to ‘abuse’ potential customers by demanding they take on long contracts and buy into data plans. Many average users could get by with wi-fi alone but no carrier was wiling to allow that. Spain’s Telefonica demanded a minimum of 16 euros a month to get on the iPhone train (and they had a two year exclusive deal). Of course the desire to have an iPhone was created by Apple marketing and the carriers played off this.

Apple lost out big time as sales were lost in their thousands because customers who were already under contract would have to pay penalty clauses only to have forced data plans shoved down their throats together with new contract obligations.

Apple would rather have sales than its users’ feeling a sense of exclusivity. Those sales would have brought production costs down too which would in turn lead to higher sales and market saturation thereby cutting off the ‘food’ to its competitors.

As it didn’t choose that route, competitors soon got their collective feet in the door and Android finally took off. I actually think this was a good thing as I’d hate to see an Apple monopoly of the Smartphone sector

The iPad launch reflected Apple’s change in attitude with regards to a new product launch and I feel certain that many in Apple feel the iPhone launch was hindered by the decision to use exclusive carriers in detriment to pure volume which could have been achieved by using multiple carriers. Apple is hedging on volume as being the best way to keep the iPad affordable and ahead of competitors on price (a la iPod).

Got to agree with the points you make in this article, and I’ll add my data point that I’ve been meaning to post.

I was chatting to a student acquaintance recently who’s been working part time in a T-Mobile shop in Sheffield, so a pretty representative data point imo. I don’t get out of the core network area much, so obviously was interested to hear what’s going on on the street. Anyway, his experience is that Android purchases are almost exclusively price-driven. The typical exchange will surprise no-one I expect:

“Hello, I’d like an iPhone please”.

“Certainly sir, that’ll be £189 + £25/month for 500Mb internet for two years please.”

“Whhhhaaat?”

“Or you could have this HTC Wildfire, it’s free and £20/month for unlimited internet for two years please. It does Facebook just like the iPhone”

“OK, I’ll have one of those then.”

I think you’re right in the subsequent point that an iPhone Nano would kill a lot of Android sales.

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