The iPhone has created a revolution and has changed the mobile landscape significantly more than any other handset. Surprisingly, it is not its amazingly user-friendly UI, ultra cool design or the ease of integration with iTunes. It is the revenue model that redefined the business dynamics between handset manufacturers and mobile operators. Other manufacturers are now trying to follow the same path.
Apple has been offering the iPhone exclusively through four selected mobile operators in Europe and US, after having negotiated revenue share agreements. Mobile operators have agreed to give much more to a handset manufacturer than they usually do: AT&T has been rumoured to be giving $150-200 back to Apple for each iPhone plus a percentage of monthly revenues from the subscribers that have signed up for an iPhone contract. Orange, O2 and T-Mobile are expected to have signed similar agreements. A back-of-the-envelope calculation yields the following:Addressable market (1Q 2008):153 million usersMarket penetration:3-5%Shipped iPhones (1H 2008):4.02 millionRevenue per iPhone sold:$153iPhone Published revenues (1H 2008):$619m
Apple is the only manufacturer that could demand this from mobile operators and get recurring revenues. By doing so, mobile operators have access to high spending customers (in essence, this is a form of negative Channel ARPU – read previous post).
So can Apple do the same with the new version of the iPhone? First of all, lets look at how you could, can and will be able to get your hands on an iPhone.
How you could get an iPhone From its launch until April 2008 and if you lived in the US, France, UK or Germany, you could walk in an operator retail outlet and sign up for an agreement and get an iPhone. Or you could go to an Apple store, buy an iPhone (the 16GB version was sold in both operator and retail shops for the same price) and activate it through iTunes, where you had to enter a contract to activate your iPhone.
How you can get an iPhone From April 2008 until today (May 2008), Apple stores list all iPhones as unavailable (in all countries where it has been previously sold). If you currently want an iPhone, you can only get one from an AT&T store (but you need to be an AT&T customer or sign up).
How you will be able to get the iPhone 3G Instead of having exclusive agreements with few operators, Apple has signed blanket deals with operator heavyweights: Vodafone, Orange and several others. In parallel, Apple is expected to be selling the iPhone 3G in retail shops without getting mobile operators involved (yes, this has happened in Germany but the iPhone has been selling there at â‚¬1000 – just to conform with legislation).
What has changed? Apple may have realised that exclusive deals with mobile operators may provide sustainable high-margin revenues but at the same time this limits the scale of volume shipments due to the smaller number of exclusive agreements possible. The original iPhone revenue model has been disrupted by unlocking and shipping to grey markets (1 million iPhones are reported to have bypassed the activation process) which has deprived Apple of its recurring revenues. Nevertheless, the iPhone ecosystem includes iTunes and even unlocked iPhones can generate revenues for Apple when a user buys content through the online shop.
Why has Apple changed its strategy? Apple may have realised that singular, exclusive agreements cannot provide significant revenues. In order to bring in more revenues, higher volumes are necessary and possibly smaller revenue shares in order to lure mobile operators. By doing so, Apple can get access to a much larger addressable market, have a larger market share even if the profit margins are not as high as those of the original iPhone. Apple may have learned its lesson: restricting user choice is not a good thing and users are most likely to find a way to get their hands on an iPhone.
A sign of the new strategy is that the iPhone is not available in Apple Stores (where a user can buy it and unlock it) but only in AT&T where you need an agreement with the operator to buy one. Apple may have ran out of stock but I find it quite unlikely that the manufacturer goes out of stock before the mobile operator. Apple may be creating a new market for its new iPhone 3G – the retail environment where anyone can just walk in and buy an iPhone with no strings attached. I suspect that the iPhone 3G will be selling in many markets without a contract – or with a contract and subsidized.
Lets assume that Apple will make a modest $50 on each iPhone 3G sold and that iPhone penetration will remain at 3-5% (both are likely to be higher). Total revenue from iPhone sales for 2H 2008-1H 2009 can be estimated as:Addressable market (2Q 2008):575 million usersMarket penetration:3-5%Expected shipments (2H 2008-1H 2009):23 millionRevenue per iPhone 3G sold:$50Estimated iPhone 3G revenues (2H 2008 – 1H 2009):$1.15bn
I would argue that the iPhone 3G will cause a bigger revolution in the mobile market: it will expose its design, UI and software to a much larger audience and increase pressure on other OEMs to develop more advanced software and UIs (see the S60 Touch UI, Sony Ericsson XPERIA, Nokia Tube, Philips X800, HTC Diamond). I guess we will all have to wait for WWDC for Steve to pull one of his usual product releases. The iPhone 3G is suspected to be made available shortly after, so I will hold my breath until then.