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Apple iPhone and the Telecom
Industry
By
Charles Goldfinger, May 2007
The story of how Steve Jobs redefined
the digital music industry, through the 2001 launch
of an innovative music digital player, iPod, and associated
online music store, iTunes, is the stuff of legend.
So when the same Steve Jobs announced in January 2007
the launch of a new mobile telephone, iPhone, an unavoidable
question was raised: will the iPhone revolutionize the
mobile telecom industry?
It is still early to pass definite
judgment on a product which, at the time of writing,
is not yet even on the market (it will launch in the
US in the early Summer 2007). However, based on an analysis
of the iPod experience and the appreciation of the current
competitive landscape of the mobile telecommunications,
we doubt that iPhone will profoundly transform the mobile
industry. Actually, we believe that in order to succeed
in this market, Apple will have to substantially adjust
its strategic approach.
The
iPod's success can be attributed to three major strategic
factors:
- Focus on aesthetics and fashion
in product design rather than on extensive functionality.
- Innovative approach to the
marketing of musical downloads: a network of copyright
agreements with music suppliers, a single price for
a download (99 cents per song) and, less visible but
just as important, a robust and restrictive Digital
Rights Management (DRM) policy.
- Astute reversal of the classic
razorblades business model. Instead of selling cheap
razors and expensive blades (or like Hewlett-Packard,
cheap printers and expensive cartridges), Job decided
to sell cheap songs and expensive players. Apple revenues
from selling iPods are six times higher than those
from iTunes downloads.
In mobile telecommunications,
fashion-oriented design has already been adopted by
major players (Nokia, Motorola and LG) and therefore
cannot really constitute a main differentiation factor.
As for the marketing of content,
the one-size-fits-all approach is unlikely to work.
A mobile telephone is a multi-functional device to begin
with. And as wireless broadband becomes widespread,
content transmitted over the mobile will become ever
more diversified. Video, still pictures, and various
kinds of music cannot be priced in the same way. Furthermore,
this diversity of content cannot be accommodated by
overly restrictive and rigid DRM policies. Those conclusions
are not purely theoretical. They are based on the previous
venture of Apple into mobile telephony through the launch
of a hybrid mobile phone with iPod capability, ROKR,
in association with Motorola. The ROKR was a resounding
failure,
mainly because of the restrictions imposed by Apple
on musical downloads.
This experience may explain why
Steve Jobs recently made an apparent U-turn and came
out against the general use of DRM, which he now considers
as an obstacle to a speedy dissemination of digital
music.
In its presentations so far of
the iPhone, Apple has adopted a reverse razorblade model
and set the price of the unit at 600 dollars. Contrary
to widespread practice for high-end terminals, the iPhone
will not be bundled at a cheaper price with network
subscription fees (despite the fact that it will only
be marketed by a single network operator per geography).
It remains to be seen whether this rigid attitude will
stand the test of time and market reaction.
Apple
and Steve Jobs have been highly successful by developing
closed eco-systems, tightly controlling their various
elements (hardware, software, distribution, maintenance).
Such control will be difficult to achieve within the
mobile telecommunication eco-system. Will Jobs adjust
his strategy or seek to exploit the forthcoming transformation
of the mobile telecom industry and develop a new eco-system?
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Highdeal Point of View
Apple
has a brilliant knack for combining the talents of the
best industrial and user interface designers on the
planet to come up with products that "just work." In
an industry still obsessed with geeky feature lists-speeds
and feeds-the Apple brand promises a 10x better end-user
experience. With its solid reputation and cult like
following, Apple will appeal to a wide range of customers
who are tired of broken software and hard to use technology
products and is well positioned to persuade them to
try something different.
While
mobile phone manufacturers and their operator partners
already deliver on this same promise for basic communications:
mobile voice and simple messaging "just work" and are
ubiquitous, the mobile industry has failed to deliver
on the promise of advanced mobile communications. The
blame for this is shared: user interfaces on high-end
phones are way too complex for advanced services, many
leading smartphone operating systems are notoriously
full of bugs, and operators have not yet figured out
how to build, promote, price and bundle mobile-friendly
content and services. Whereas, Apple already has an
exisiting global reputation with iPod, iTunes, and their
computers, for having these abilities and strengths.
The
600 dollar price tag for the iPhone was also most likely
set by Apple to ensure that they were not competing
with the iPod which retails for around 250-350 dollars,
but the iPhone is clearly not targeted at a mass market.
Apple has announced that their goal is to take 1 percent
of the world market for mobile phones by the end of
2008. This may seem like a modest amount, but with a
billion handsets sold worldwide last year, it would
mean 10 million iPhones sold-a healthy supplement to
the 39 million iPods that Apple sold in 2006.
High-end
phones and smartphones represented less than 10% of
all mobile devices sold in 2006 and operators are not
generating great revenues from these devices. Data ARPU
figures for operators are still only growing sluggishly
and the history of 3G service rollouts is littered with
failures. The entry of Apple into this market consequently
makes great sense for them: there is a situation that
is ripe for their brand promise at the high end of the
mobile phone market.
Apple
does indeed have to prove that they can figure out a
better way to structure and manage the mobile ecosystem,
but they are building on their existing reputation for
doing just this. If they succeed in making significant
numbers of consumers comfortable with advanced mobile
communications and if Apple competitors can learn from
this success then the overall market will be greatly
expanded and everyone will benefit.
Learn
more about the Highdeal solution for next generation
service pricing, rating...
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