Industry Analyst Predicts Apple Wireless Service, We Doubt It

| Analysis

Apple Wireless Service?Apple will go into direct competition with iPhone carriers AT&T, Verizon, and Sprint by launching its own wireless service, according to wireless industry strategist Whitey Bluestein. Speaking at the Informa MVNO Industry Summit in Barcelona, Mr. Bluestein argued that Apple has the assets, intellectual property, and cash flow necessary to go into direct wireless business for itself.

“The battleground is set, but Apple will be the first mover,” Mr. Bluestein said, according to Boy Genius Reports. “Google will have to scramble because it lacks retail distribution, experience with subscriber services and the iTunes ecosystem of content. iTunes and the iTunes Store provide Apple with one-click buying and customer care. Google can acquire most of these capabilities, as it has before, but it is not a core competency of the company.”

The move would be a bold one for Apple. It would not only represent a new business for the company, it would put the hardware company into direct competition with the very companies that have been instrumental in Apple’s extraordinary rise in revenue in profits.

The carriers do the work of providing and maintaining the wireless networks that most users find reason to kvetch about at one point or another, but they also pay Apple the highest subsidies in the industry. Those subsidies reduce the retail price of the iPhone to something vaguely affordable (including the “free” iPhone 3GS).

To that effect, Mr. Bluestein said, “What has been holding Apple back from becoming a wireless provider already are the enormous handset subsidies paid by mobile operators, which amount to about $381 for each iPhone sold today. That has been a short-term stumbling block for Apple, but the company has its well-known cash reserves and could seize the initiative at any point.”

More specifically, while carriers pay those subsidies, they are still able to make a profit on the wireless and data plans make those iPhones actually work. That means there is money and beyond those subsidies that Apple could conceivably earn. With US$110 billion in cash, the company can easily afford to turn those direct subsidy payments into monthly revenue.

Yeah, but…

The question is where is Apple’s physical wireless network going to come from? Will the company lease bandwidth and capacity from existing carriers? Is it in the process of building its own physical network as we speak? That doesn’t seem likely, because such projects require all manner of regulatory processes, time, and lots and lots of deals with property owners. No word of such deals or regulatory filings have yet to surface.

Apple could, of course, buy an existing carrier or any number of regional carriers. AT&T (which isn’t for sale) is worth $194.2 billion; Verizon is currently valued at $115 billion; and Sprint is worth a mere $7.6 billion. T-Mobile isn’t traded publicly, but when AT&T tried to buy the company from parent Deutsche Telekom the deal was valued at roughly $39 billion.

Clearly Sprint is the most vulnerable target—Apple could buy that company at a 25 percent premium out of the profits from a single quarter and still have enough left over to buy everyone in the country a venti iced latte and a scone from Starbucks, with a generous tip for the barista.

That said, the valuation of that firm (and all of the telecoms) includes all sorts of yucky feature phone and Android smartphone customers that Apple has zero interest in. The idea of Apple buying unwanted customers is not consistent with the company’s modus operandi to date.

Another thing to contemplate is that Mr. Bluestein didn’t cite sources, but is instead pitching his own analysis. It’s analysis we find suspect. In addition to the above-mentioned factors, Apple risks alienating carriers who are already tense about the level of subsidies they’re paying.

Can Apple launch its own wireless network and keep its carrier partners? Maybe. If not, the company would have to believe enough customers would be willing to switch to its branded network to replace the customers it garners through three competing carriers. That seems a big if.

Lastly, Mr. Bluestein positions this move as something Google would feel compelled to match. Google has seemed unwilling to even take advantage of the hardware company it bought for $12.5 billion. Google seems quite content to let anyone and everyone else build hardware and sell devices on every possible wireless network, and the notion that they would want to bring that in house seems like hogwash.

Control

Apple, on the other hand, is all about control. We can certainly believe that Apple would be attracted to taking ownership of this last aspect of the end user experience it doesn’t already control. If Apple thought it could make more money by doing so, it surely would.

That’s the rub, though. A lot of the math doesn’t work, and even if it did, it would take a lot of time to develop the physical infrastructure to provide this kind of service. It is almost certain that word of the company’s efforts to build such a network will leak long before Apple is ready to announce it.

In other words, don’t hold your breath on this one.

Image made with help from Shutterstock.

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Comments

Lee Dronick

iSky, which is Apple’s satellite cell phone system. smile

Whitey Bluestein

Apple’s patent, filed in October 2006 just before the first iPhone was announced and renewed last June, allows it to connect to multiple carriers from whom it would buy wholesale voice, data, messaging and roaming service. By connecting to more than one carrier, they would be able to optimize service while managing costs. Apple’s recent battle over the NanoSIM is thought to be more than to allow a smaller form factor, but actually to allow Apple to end run the operators and provision/activate a new iPad, iPhone or other device, then let the user buy service from the iTunes Store. They are unlikely to build or buy their own network; instead, buying wholesale services and connecting to their patented platform would allow Apple to control the entire user experience. It’s going to happen; it’s a question of when, not if.

Lee Dronick

You maybe correct Whitey.

skipaq

How about that? Someone makes a questionable prediction and steps up to defend it. Kudos, Mr. Bluestein. Do you see this going global? I would see it as doubtful anywhere as long as the subsidies keep flowing.

Whitey Bluestein

I see a gradual roll-out. First, they will bundle iPads with data plans from wholesale agreements, much like Kindle includes “free, always-connected 3G wireless” with three of their e-readers. Then Apple will offer data plans and international roaming plans through iTunes. And finally, they will negotiate the wholesale deals to bundle iPhones with voice, data, messaging and roaming as a virtual provider. Will they go global? Not all at once. They would start in markets where they could get good wholesale pricing. Don’t forget that the “Prisoner’s Dilemma” will cause operators to offer favorable wholesale terms out of fear that Apple will go to a competitor. They’ve negotiated great deals so far. It’s only going to get better for them.

FredR

Apple is about to increase retail locations from 250 to 4,000 with the expected presence at Walmart. That’s twice as many stores as Verizon has now. This only makes sense if indeed Apple has plans beyond the current mode of operation. Just a thought.

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