Monday, February 18, 2008

About Apple's "locked strategy" for the iPhone

An article in today's New York Times chronicles the smuggling of iPhones across the planet, notably to China, where a large part of the "missing" phones are reported to be. The author explains that this "shows what happens when the world’s hottest consumer product defies a company’s attempt to slowly introduce it" and that the smuggling, while further proof of the iPhone's popularity, is a blow to Apple’s business model of exclusive partnership deals, similar to their partnership with AT&T in the United States.

To be sure, Apple is not getting as much money from unlocked phones, since they are not receiving any cut of the monthly subscription fees for those phones (reportedly a part of all of Apple's agreements with carriers in the US and in Europe to date). And it is also accurate that Apple is continuing to seek similar exclusive agreements in the new markets where it wants to offer the phone, and may be struggling to achieve those in China.

However, I feel that the article fails to mention an important reason behind Apple's initial marketing strategy: Apple offered exclusivity to US phone carriers such as AT&T and Verizon partly as a carrot, in order to ensure they had enough leverage to push through their Visual Voicemail feature. Visual Voicemail can require significant changes in the back-end operations of a cellular carrier's network, and is therefore not as attractive a feature to those carriers as it is to consumers. However, Apple believed strongly in changing the game for voicemail (thank god) and they promoted this feature right from the beginning, so they had to offer something in exchange for the carrier's efforts.

So while Apple could certainly choose to forgo its demands to share in the monthly subscriber revenues, the following quotes from analysts do not reflect the entire situation:
Some analysts say abandoning the locked phone system and allowing buyers to sign up with any carrier they choose, in any country, could spur sales.

“The model is threatened,” Mr. Wolf, the analyst, said. But “if they sold the phone unlocked with no exclusive carrier, demand could be much higher.”

From Apple's standpoint, "allowing buyers to sign up with any carrier" assumes that all carriers offer Visual Voicemail capability, and it would be tough to convince those carriers to spend the money for those network modifications without the promise of a large uptick in subscribers...

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