 The Apple iPhone is the one of the most widely anticipated devices in years.
Apple’s well established reputation for innovation has created almost feverish
expectations that it will revolutionize mobile communications. Consumer or Business
Device?
Reviews of the iPhone and its capabilities have been widely published and therefore
will not be one of the main topics of this paper. Rather, we will focus on a number
of key features and their implications for customers, device manufacturers, and
the mobile carrier, media and cable industries.
Consumer or Business Device?
While Apple and AT&T naturally hope the iPhone will be popular with corporate
users who comprise the majority of the smart phone market, the iPhone is likely
to remain primarily a consumer device. The main reason is many corporate IT departments
do not want to support the iPhone due to security concerns about supporting a
new non-Blackberry/non-Windows mobile device. Apple could choose to license software
from Research in Motion or Microsoft to allow iPhones to interact with corporate
Blackberry and Windows email servers respectively, but there are no indications
that it will do so. Alternative solutions require opening corporate email servers
to the public Internet and inherent security risks.
The second reason why the iPhone is unlikely to appeal to most business users
is that the touch screen keyboard will not satisfy a business person’s messaging
needs. The keyboard works well with one finger, but it performs poorly when using
two thumbs similar to what most Blackberry and other smart phone users do today.
Jump Start for the Mobile Web
By embedding a full-fledged web browser and running Mac OS X on the iPhone, Apple
effectively has taken its desktop computer and made it mobile. The Safari browser
will help to fragment the walled garden carrier deck model by giving consumers
the ability to more easily surf the mobile web (i.e. off-deck sites) in the same
way they do on computers today. The scaled back browsers on most other phones
have limited mobile browsing capabilities to this point.
Will full browsing with a mobile device become mainstream or will content providers
need to develop content tailored to mobile devices? That probably will remain
an open question until Apple releases the next-generation iPhone for 3G networks.
Initial versions of the iPhone will operate only on AT&T 2.5G EDGE network
rather than the 3G HSDPA network, resulting in significantly slower data speeds.
Apple argues that the iPhone can utilize Wi-Fi networks for data intensive needs,
and initial reviews agree that the iPhone effectively identifies and accesses
Wi-Fi networks. While this is an acceptable alternative for stationary users,
it does not work for those on the go, roaming between different Wi-Fi networks.
Apple vs. Traditional Handset Manufacturers
With the iPhone’s release, Apple immediately has become a major player in the
handset market. The threat of Apple’s entry into the mobile handset market has
already spurred innovation as competitors such as Nokia, Sony Ericsson and others
rush to deliver handset and smart phones with more advanced features. Apple’s
entry can be expected to drive faster product cycles and increase the pace of
innovation in the mobile handset industry. Apple is targeting total iPhone sales
of 10 million units by the end of 2008, which represents about a one- percent
market share. However, the share is much higher when considering the just the
smart phone market or domestic markets alone. According to the research firm M:Metrics,
about 19 million people in the U.S., or roughly nine-percent of cell phone users,
are highly interested in purchasing the iPhone, even knowing they will need to
pay $499 or $599 to buy one of the two versions and will need to be an AT&T
subscriber.
While the iPhone definitely represents impressive steps forward in terms of software,
user interfaces, and music and video playback, it is not without limitations in
comparison to other devices. The lack of a SIM card prevents using the iPhone
internationally, except with a roaming plan from AT&T. Although its battery
provides an impressive eight hour talk time, lack of a replaceable battery means
that users must monitor their use of the advanced features or be prepared to charge
the device frequently.
On the software level, the iPhone is a closed environment and developers cannot
create native applications for it as they can for Windows Mobile, RIM, Palm and
Symbian. Third-party applications for the iPhone can only be run through the web
browser interface. While Apple has embedded an impressive array of applications,
the closed environment restricts outside innovation that could spur broader capabilities
and adoption. A key gap is that the web browser is still missing support for advanced
features such as Adobe Flash.
New Pricing Model for Devices?
The iPhone’s $499 and $599 price points run strongly counter to the existing
model of highly subsidized cell phone pricing in the US, where users often receive
their devices for free in return for two-year contracts. If successful, the iPhone
may pave the way for unsubsidized pricing models that are more prevalent in other
areas of the world and allow other feature-rich phones to be offered without such
long break-even periods for carriers due to handset subsidies. This would bring
more feature rich phones to the US market, but the question is whether other device
manufacturers can match Apple’s level of innovation and develop comparable consumer
demand. While Motorola’s RAZR initially created very high demand and some people
paid $500 or more immediately after its release, carriers later subsidized the
RAZR as the initial craze faded.
Effects on Mobile Carriers
We have already noted that the Safari browser may weaken the walled gardens within
carrier portals. The iPhone connection with iTunes is another factor that will
weaken carriers’ control over handsets and how subscribers use them. Though initial
iPhone versions do not allow iTunes downloads over the carrier network, users
will side-load content through synchronizing with their PCs. In addition to listening
to songs on their iPhones, users will be able to select 30- second clips from
songs to use as ring tones at a cost of $0.99 for licensing the song for ring
tone purposes (total costs of $1.98 per ring tone including the initial $0.99
cost to purchase the entire song from iTunes). These costs compare to $2.99 pricing
for ring tones on carrier decks. While non-iPhone users will continue to purchase
ring tones from carriers, the iPhone is a serious threat to this very lucrative
carrier market.
From a mobile carrier subscriber perspective, the iPhone represents a significant
boon to AT&T. While AT&T remains the largest U.S. carrier in terms of
subscribers, its lead on Verizon has been dwindling, and Verizon has been viewed
as more innovative. AT&T is counting on the iPhone to reverse these trends,
and some projections indicate that as many as 60% of iPhone customers will be
poached from competitors. This could result in as much as a five-percent market
share shift to AT&T by end of 2008. T-Mobile USA may be the carrier at greatest
risk of defections based on its high percentage of subscribers in the 18-24 age
group, who are especially attracted to the iPhone rich multimedia capabilities.
An M:Metrics survey shows 12.5% of T-Mobile USA customers express a high interest
in the iPhone followed by 8.1% for Sprint Nextel Corp. and 6.7% for Verizon Wireless.
Aside from market share changes, it also should be noted that AT&T was forced
to make significant concessions in return for being the exclusive U.S. carrier
for the iPhone. Apple refused any AT&T branding on the device, controlled
which applications would be included, and determined the pricing and warranties.
Based on these concessions, other device manufacturers will try to negotiate similar
conditions with AT&T as well as other carriers for their latest and most innovative
handsets.
Finally, because the iPhone provides both Wi-Fi and 2.5G cellular network support,
it may encourage the trend toward fixed-mobile convergence. An all-in-one device
like the iPhone could spur consumers to ditch their landlines if they can use
it as a phone over their home Wi-Fi network with support for solutions such as
UMA or the addition of a VOIP client such as Skype. This would have wide impact
not only on landline service but also on cellular service. VOIP over 2.5G or 3G
could change the economics of voice plans in the same way iTunes changed the economics
of the music industry with its 99 cent song downloads.
Impact on the Media and Cable Industries
Media
IBB predicts the iPhone will accelerate over-the-top place-shifted content as
well as over-the-top content in the living room. Winning media companies will
be those that make their content available across all platforms and offer extras
for the iPhone. Apple has realized that content is king, not only over the air
and over the Internet, but also over mobile channels. The deal with Google to
make YouTube content available on the iPhone is proof of Apple’s commitment to
this strategy, whereas Verizon is only now beginning to build out the content
library for Vcast. In addition, the combination of the iPhone with an upgraded
Apple TV has the potential to allow for an easy way for consumers to use their
content across multiple platforms.
Cable
The iPhone represents a threat to MSOs plans for a quad-play with Sprint. This
threat results from the iPhone, iPod and Apple TV finally giving consumers a viable
way to move content around anywhere and enjoy it any time. The pace of Apple’s
product innovation may exceed that of the Sprint JV with the Cable MSOs. That
said, we believe the MSOs will spring back quickly and offer comperable devices
in partnership with Sprint.
Conclusion
Reviews in advance of the iPhone launch indicate the device is mostly living
up to expectations for a truly innovative device pushing the bar higher for smart
phone capabilities and usability. IBB expects the iPhone to remain a consumer
rather than corporate device, but it has excellent potential to encourage broader
roaming on the mobile web and the collapse of carrier walled gardens. Though deserving
of much of its hype, the iPhone is not without limitations and competing handset
manufacturers can be expected to step up their innovation and product cycles in
response. The iPhone may serve as a catalyst for Fixed-Mobile Convergence, and
smart media companies will make their content available across all platforms with
extras for the iPhone.
Interactive Broadband Consulting Group, LLC (IBB Consulting) is a premier boutique
consulting firm serving leading broadband-related product and service providers
in the Cable, Mobile, Media and Technology industries. We offer the collective
expertise of a team of broadband industry veterans, with world-class industry
knowledge and business, technology and operational experience.
Throughout the history of the broadband industry, we have helped our clients
conceive, build and grow some of the industry's most significant strategic, marketing,
product, technology and operational initiatives.
To learn more, contact us at
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www.ibbconsulting.com.
See Also:
For more on the iPhone see iPhone Update - The iPhone Blog! |
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