It's Only Rock & Roll

Apple’s much hyped media event “It’s only Rock & Roll” failed to spring any surprises. A thin, frail-looking Steve Jobs quietly strolled back to his normal self. IPod Nanos were updated as expected with new features including cameras and radio (!?!). IPod Touch doubled its maximum storage (64GB). IPod Shuffles are more colourful and have voiceover functionality. ITunes 9 was launched with an enhanced interface and some cool new features such as Genius, Home Sharing, iPhone App management etc. iPhone OS 3.1 was launched with the extended genius functionality. The Apple store too was updated with the availability of Cocktail and Pre-cut ringtones (I would rather buy a song than a ringtone). The biggest disappointment however, is the missing camera on iPod Touch and the unavailability of Beatles tracks on iTunes. Apple countered iPod Touch, by projecting it as a handheld gaming console with some interesting games (Assassins Creed 2, Madden 10 etc) being developed solely for them. Most importantly, there were price cuts across the entire iPod range. So does Apple continue to reign the roost?

A couple of days prior to the event, while skimming through news websites, I noticed a very obscure but potentially daunting article on how Apple’s iPhone is not spelling success for mobile network operators. The article was based on a research conducted by Strand Consult, a Danish Consulting firm, which for long claims to have predicted the failures of businesses where industry watchers had predicted otherwise. Intrigued by this revelation, I requested for a free copy of this comprehensive report.

A Squeeze on Shareholder Value

The report is extremely insightful, interesting and dispels all myths surrounding the iPhone. I have an affliction towards Apple’s superiorly creative offerings, which upon arrival shifts the market power and I am inclined to believe that Apple’s radical designs spell profits. Rightly so, given Apple’s super strong annual growth. However, iPhone is the first product where Apple has had to rely on external sales channels in the form of network operators to reach out to customers. Given the hysteria surrounding the initial launch of the 1st generation iPhone, helped by the company’s notoriously secretive approach to product development, iPhone was bound to be a success even before its launch. Apple consolidated the initial reception by entering into exclusive contracts with a handful of networks in mature markets. The networks on the other hand, were keen to differentiate from competition by being associated with Apple, which as a brand stands for being trendy, cool and sophisticated. So why does Strand Consult think that Apple doesn’t enhance shareholder value to the networks it is associated with?

Ever since, I have first held my mobile phone, there has been plenty of talk in the technology circles on how convergence of technologies will define the future of the mobile phone market. We have seen bursts of innovation showing glimpses of what convergence could achieve with a slew of new handsets being launched over the years with newer technologies. Cameras, MP3 Players, TV & Gaming on Mobile, eBooks etc. Except for Cameras and MP3 players, none of the other technologies have stuck on as they fail to deliver what they promise. In fact, until the iPhone, even the Cameras and MP3 players on mobile phones weren’t nearly good. The iPhone definitely is an industrial design which has turned the mobile market upside down.

But, it is not an invention which is new, but rather, a reinvention of a mobile phone with pre-existing technology. The only difference being the product performance features of the mobile phone which is being utilised to its optimum capabilities. For example, Touch Screen is not a new concept. I clearly remember a mobile phone which I owned five and half years ago, a Motorola A925 on Three network. It had everything an iPhone has now. It was a 3G phone, touch Screen, no separate keypad, it had video calling, camera, MP3 capabilities with an added memory card etc. Even the much talked Apps aren’t new. There were companies offering third party apps for mobile phones. Apple just rehashed the existing technology in a better way to give a superior product, in the process creating additional platforms to monetise self. Like I noted in one of my earlier posts, this has been the case with every product it has developed so far, be it Macs, iPods or iPhones. But all of these products have been tremendously successful.

Motorola A925

Going by Strand Consult’s report, iPhone sales haven’t been as dramatic as they seem for many reasons. Firstly, the product was launched to a select few countries and network operators when it launched. AT&T in the US, O2 in the UK, T-Mobile in Germany & orange in France representing a fraction of the market it serves to today. iPhone is now available in over a 100 markets and Apple has non-exclusive deals with multiple network operators, meaning customers have a choice to choose the network. Clearly, Apple’s comparative year on year growth is not an ideal representation given the expansion in markets. Secondly, the devout Apple consumer is usually one who is techno-savvy and seen as an early adapter. Given the contracts which the networks have in place to own an iPhone, it’s only the 1st Generation iPhone owners who are choosing 3GS. The 2nd generation customers have a few months to run out of their contracts and cost associated with early exit from their contracts deters them from adopting to the 3GS. New consumers embracing Apple is far and few as the market is flooded with iPhone look alikes with almost every mobile manufacturer offering wide, touch screen mobiles with similar functionalities.

Apple Squeeze

Also, Strand notes that despite iPhone’s initial exclusivity deals, networks haven’t seen an increase in marketshare and the high subsidies they have to offer to consumers, makes it difficult for them to cash in on other services. Unlimited Data, inclusive minutes and texts etc mean that there is no other value added resourced a network can offer the consumer at an additional cost, other than roaming which doesn’t rake in the desired moolah. With Apple widening it’s market reach by making the iPhone available through multiple networks, exclusive networks stand to loose further. In fact, Apple’s contract with O2 runs out in September, following which the iPhone is expected to be available with other UK networks, although O2 claims that it has renegotiated the contract.

I believe and attribute this to clever marketing by Apple. It has kept the company-consumer dialogue going while suppressing the delivery medium (networks in this case). Apple consumers are more connected to the company than the network. They interact with Apple more frequently than they do with their networks and in someway have developed a relationship which overrides their relationship with the operator. The efficiency and authenticity of the Apple brand stands taller than the service.

When the iPhone was due to be launched, networks clamoured for exclusivity and as a part of the bargain agreed on subsidies by giving up their part of the bargain. Now with their contracts running out they are still where they were with no bargaining power, while Apple has a larger base to choose from. Also, not to ignore the fact that Apple’s still charting an enormous positive growth irrespective of relational markets. Ultimately, what matters for a business is to be successful which can be measured by shareholder value and Apple has consistently achieved this with a number of channels. Be it an iPhone or a Macbook. However, this is a big dilemma for networks as they all want to be a part of something which hasn’t proven to offer much value. Operators have to radically realign their strategies if they were to compete in Apple space and Strand offers some valid arguments on this.

To know more, you can request a free copy of Strand’s Report here: The Moment of Truth – A True Portrait of an Iphone