I went back and listened to the Con Call a few times the last few days.  Tim Cook mentioned something I didn’t pick up on the first around time in regards to carrier exclusivity.

Tim said doing away with exclusivity may not have any effect on iPhone ASPs which were noted by Peter at $600.  In addition, Tim noted multiple interested parties in the individual countries where exclusivity exists.

If this is indeed the case, why would Apple continue the model of exclusivity? I was under the impression exclusivity justified the fat subsidies Apple was receiving (which is of course true). Furthermore, it seemed logical if there were multiple carriers, the subsequent drop in ASPs due to lack of large subsidies would be made up in terms of # of units sold.  However, if other carriers are willing to pony up the same juicy subsidies and have networks capable of handling the data traffic, then what would be the reason/s to continue relationships with carriers like AT&T?

What would hold AAPL back at this point? I can’t see why they would continue to use just AT&T here in the States if the high ASPs would remain the same. I must be missing something here. Hopefully I didn’t miss it in previous discussion on this board.

M

Tim Cook may not have been speaking specifically about the US in terms of the advantages (or lack thereof) in exclusive arrangements. He mentioned the development and release of features such as visual voicemail as one benefit of exclusivity along with the hefty investment an exclusive carrier might be willing to make in their network (such as AT&T).

I don’t think exclusive arrangements will continue much longer and do expect AT&T’s exclusive on the iPhone to end in 2010 (sometime). Still, Verizon will not be getting the phone. The end of exclusivity may mean little domestically when the iPhone is offered to competing services.

Ok I have written about this before.  ATT will keep the iPhone because they benefit from the exclusivity just as much as Apple.

Folks keep in mind that Apple thinks 5 to 10 years ahead.  When they made reference to the fact that competitors are trying imitate the original iPhone but Apple has moved on from the original iPhone, they are damn serious.  We are now 2.5 post the first iPhone.  Apple will blow us away in the next three years.

The network and margins are the keys. The ATT network is one that is used by multiple players in the world, therefore Apple can offer it to many more carriers around the world and not increase manufacturing costs.  Keep in mind that over 50% of iPhones were sold internationally.  It was not cheap for Apple to create the software that allowed its computers to run Windows but it was worth it. Macs are the bread and butter of this company.  In this case it is not worth adding an additional radio system just to allow Verizon to have the iPhone.  Sure the selling price would be the same but the cost would increase therefore decreasing a kick ass margins.

The future is LTE and we won’t be ready for that until 2014 on a major scale.  The only other carrier that can offer the iPhone is tMobil.  ATT has enough buying power to keep them out of the equation.

When ATT talks about ending exclusive selling of the iPHone they are not referring to this year or next.  It will happen when the iPhone no longer can maintain the high margins and it is beneficial for Apple to open it up to other carriers in order to maintain its 30% market share of smart phones.

One needs to look at the iPod to learn what Apple will do . First of all it was sold only in their stores or exclusive distributors.  Over time like five years after introductions, they were offered at Best Buy, Radio Shack, and Wal Mart of all places.  Before that happened Apple already had 70% market share and the price were still in the $250 range from the original $600.  When Apple started selling iPods under $200 you started to see more resellers, until then they were able to maintain strong margins by selling high priced iPods in their stores and exclusive resellers.

What I think will happen to the iPhone is another price drop of $50 to $25 to reel in a few more switchers from Verizon, then Apple will go for the jugular.  In two or three years they will introduce a revolutionary iPhone for $300 to $500 that will be the final straw for Verizon.  At that point they will start serious negotiations to be part of the game.  Apple will be ready and the system in place.

One needs to remember that the iPhones is a means by which Apple is trying to achieve increases in Mac share.  Sure it makes a ton of money for them, but ultimately it helps increase brand awareness, store expansion, and finally increased market share of all Apple products.  Time is on their side more then ever.  They are in the driver’s seat and don’t need to compromise on margins by making different iPhones.  I think they have a plan for that $34 billion of cash but it will not be put in action until it get closer to $100 billion in about 5 to 7 years.

In 5 years the world as we know it for iPhones will be radically different. Apple will continue to see ASP of $600 if not higher, but enjoy a comfortable market share of 30% that can not be easily defeated. They have managed to protect their iPod market share for over 4 years.

Now in regards to why ATT will remain exclusive.  They will do anything to keep the iPhone, so Apple will not have to lower the price.  Secondly the family plans that Verizon has is what is preventing ATT ‘s ability to bleed Verizon much more then they can for the moment.  Corporate accounts also make it difficult.  But they will make nice slow strides one quarter at a time and take advantage of innovation.  They also understand that the market for the iPhone is limited due to price.  Offering it to another carrier only moves people to the best carrier, since price will be the same.  Verizon does not have what Apple wants so no need to give them the iPhone.

We live in a very materialistic world full of people who want the latest trendy devices.  Peer pressure in a very subtle is at work here. The biggest advertisement is the consumers playing with them at work or in the wild.  Everyone wants an iPhone like every teenager wanted a iPod.  Over 8 years 80% of them had iPods.  Apple will be satisfied with 30% market share of smart phone business, but it will not go much beyond that because of margin protection and carrier subside. Over time more and more people will get the iPhone by switching carriers, to the point that Apple is ready to increase carriers to increase or maintain their comfortable position in this market.  By then we will be talking about some other product that they are introducing or trying to manage its incredible success.  Margins have increased over the last 10 years because Apple has been able to leverage different products at different times and transition them from one to the other.  They did so very well with the iPod.

It started with SJ coming back, then the iMac, then OSX, then iPod, then iPHone, and we don’t really know what is next.  But in the mean time enjoy the ride of a lifetime.

omacvi brought up a number of good points.  As far as the US goes, the only GSM 3G player in town is AT&T.  T-Mobile 3G coverage is practically non-existent, even compared to AT&T’s anemic 3G coverage, per the coverage maps.

GSM is said to be the worldwide market share leader by miles.  Apple likely knew from the start that it wanted to go worldwide so GSM certainly seems like the best choice, and as far as starting in the US, AT&T was the biggest GSM partner.  People can complain about AT&T service all day long but its name recognition can’t be denied and all those customers can’t be _that_ wrong.  Also, many of AT&T current customers are from Cingular, and I don’t remember hearing endless complaints about Cingular’s network.  Then again, there weren’t millions of iPhone users rewriting the books on network overhead back then.

I happen to think Apple “intentionally” “limiting” its growth opportunities is a good thing.  Working with one cell phone standard, at least at first, with a gigantic addressable market worldwide and carefully measured rollouts can only help iPhone’s sustainability, both in getting its launches in every new country done right and ramping up production with high quality control.  IIRC, Tim Cook said the iPhone business was a marathon, not a sprint during a conference call a few quarters back—and this is already one heck of a fast-paced marathon considering iPhone’s growth.

In the end I think Apple would be thrilled with <10% market share from a single handset (or, a combo of the newest iPhone and the discounted prior year’s version).  Just 50 million units/year would be an easy $20-30 billion/year add, and the profit margins would be through the roof.  And if/when the iPhone starts sprouting variants like an iPhone mini…look out, mobile phone marketplace.

Apple’s executing the expansion phase of the iPhone strategy perfectly, IMHO.  The only real barriers to truly stratospheric growth in the future are cel phone data network expansion and monthly pricing.

Great posts. I immediately noticed Tim Cook’s statement that ASP doesn’t change when they go multi-carrier, and even rewound to check I’d heard right. I was surprised to have got this wrong, and here’s how i fitted it in with my assumptions.

Single carrier rollout did indeed let Apple secure a higher ASP at launch. And it also let Apple dictate that uncapped mobile data contracts at an affordable price went with every iPhone. That was essential to establish a new usage pattern; the iPhone could have flopped if most people bought it as a phone, possibly even without a data contract, with only business power users actually using the mobile internet.

Once iPhone was established as a success, there was no going back on the user experience, and I suspect it’s principally a volume commitment that Apple required in order to extend single carrier deals. When O2 or whoever can’t commit to deliver Apple’s required volume growth, and Apple opens up iPhone to other carriers at the same price and terms, who’s going to say no?

As regards AT&T, what is the aggregate mobile data bandwidth they are delivering? Given the relatively enormous data use of iPhones versus other phones, it seems to me that if VZ and AT&T were to swap data traffic loads, it could easily be VZ that offered the inferior service by far. Before iPhone, all carriers operated on the walled garden, sky high rates model that allowed them to make large data profits out of a small aggregate bandwidth network. Vz’s biggest problem may be that it is falling far behind AT&T in deploying the network infrastructure to deliver a large aggregate bandwidth. So Vz might be driven into a cycle of decline before LTE arrives unless it rolls out an iPhone equivalent experience. Hence Droid.

I’m bullish on AT&T.

I’m glad to read other AFB members have seen the benefits of the initial exclusive arrangements Apple negotiated as the iPhone made its debut both domestically and in foreign markets.

The exclusive agreements allowed Apple to release the iPhone in new markets while providing for some level of control of the service quality and created closer relationships for Apple with those service partners. It also allowed Apple to establish higher ASPs at the start thus enabling the company to maintain high ASPs as new service agreements are signed with non-exclusive carriers.

AT&T will most likely lose its exclusive rights to the iPhone sometime in 2010. But I suspect the exclusive agreement will be extended through the next iPhone refresh with a new carrier or two in place for Christmas 2010. In all I don’t think it will be a big deal for either AT&T or Apple when the exclusive agreement between the two companies expires.

AT&T has learned quickly about the unique outlook and desires of Apple product users and will use that expertise as a competitive advantage in both keeping existing iPhone customers and attracting new ones.

Who else would Apple go to in the US?  Would Apple really go to Verizon, “competitive environment” (smack talk Droid ads, “there’s a map for that”, etc.) aside, and release a non-GSM phone for what I think would be the first time?

Could well be that “exclusivity” expires for AT&T, but nothing really happens as a result.  Unless Verizon can swallow its pride (Sprint: even less likely), or T-Mobile can actually throw a decent 3G network together.

Mav - 24 October 2009 04:42 PM

Who else would Apple go to in the US?  Would Apple really go to Verizon, “competitive environment” (smack talk Droid ads, “there’s a map for that”, etc.) aside, and release a non-GSM phone for what I think would be the first time?

Could well be that “exclusivity” expires for AT&T, but nothing really happens as a result.  Unless Verizon can swallow its pride (Sprint: even less likely), or T-Mobile can actually throw a decent 3G network together.

Thank you for restating a previous point in direct and concise terms. 

You’re right. Where else is Apple to go in the US? Verizon is not getting the phone. In my view the moment “the iPhone is coming to Verizon eventually” bubble is burst and Verizon customers know definitely it’s not going to happen the sooner a few hundred thousand customers (or more) will buy an iPhone and move to AT&T.

In the US it’s really a non-issue. Neither Sprint nor T-Mobile pose a threat to AT&T’s iPhone dominance.

Here is someone who explains it much better then I when it comes to the technical issues.  Verizon does not have a prayer for the iPhone, but is in a good position to get the iTablet.

http://lowendmac.com/nash/09tn/no-verizon-iphone.html

It goes beyond technology in my view.

DT has it right on the money.  Once the Verizon folks realize that iPhone is not coming next summer, they will jump ship by the hundreds of thousands.

Apple does not need another carrier when it is expanding its share of the smart phone market at such a rapid pace.  About 6 months ago I would have argued that Apple could sell more iPhones if they went to Verizon, but now that the data is in, it is obvious that they know what they are doing and from a business standpoint there is no need to go to Verizon.

I think Apple’s plans for the tablet are firmed up by now. The devices are being tested, possible built and stockpiled awaiting an OS software refresh. Is it likely that Apple has created a tablet with 3G using a different cell format?

The whole subscription issue has me puzzle. How many teens, or adults, can afford a second monthly bill in order to stream media to their tablets. I think the potential buyers would already have a cell phone, possibly an iPhone ($70+/month). Would they agree to a second costly network fee? Wouldn’t Mobile Me, in some variation, be a better solution for Apple? The server farm they’re building is for iTunes isn’t it? And won’t the streaming service for the tablet’s media be based in iTunes? Either Apple has to eliminate the Cell networks from the equation and start it’s own varient, or the tablet will, even subsidized, be seen as too costly for most familys.

Is it possible for the tablet to go to Verizon? The iPhone orchard of functions at ATT and the tablet at Verizon? It would surely spread out the burden of system overhead between the wireless resources available. Could you heap the tablet burden on an already struggling ATT system? Great days ahead.

danthemason - 25 October 2009 10:34 AM

Is it possible for the tablet to go to Verizon? The iPhone orchard of functions at ATT and the tablet at Verizon? It would surely spread out the burden of system overhead between the wireless resources available. Could you heap the tablet burden on an already struggling ATT system? Great days ahead.

I suspect the tablet will be carrier agnostic.  What does Apple gain by a launch tied to a particular carrier?  A device subsidy to lower the initial price and always on networking.  Depending on the use cases for the tablet, IMO since it doesn’t fit in my pocket, the networking portion will mainly be used at a fixed location which will in many cases support WIFI.  Apple is more interested in getting consumers attached to their ecosystem then a $200 dollar subsidy which ties the device to a particular provider and their branding.  If Apple learned anything about their exclusive with ATT, it’s that the carrier network affects your reputation as much as your device.  Apple will not build a device without wifi and bluetooth so even if they don’t integrate a GSM/EVDO/LTE chipset into the first version of the tablet you should be able to tether the device to an Iphone or a MIFI.  I agree with Willrob on the cost issue.  Until they allow a mobile bundle which allows you to operate all your devices for one fixed fee most folks will just stick with a cell phone data plan.

Perhaps a Mac tablet will be available to Verizon. But I still see T as the clear winner. If I’m in the market for a service for the tablet I will obviously choose the enterprise that provides my cell service. The issue for Verizon is picking up customers who do not already have an iPhone (most already their own customers in the States).

My expectation (based on no real product information to-date) is the tablet will become my laptop substitute and will allow me to share iPhone OS apps I’ve purchased or downloaded for free across multiple devices.

This will be Apple’s assault on the netbook market. But let’s be careful about expectations. The net book market is huge (and growing) and I suspect Apple will focus its sales and marketing efforts on perhaps 25% of that market - people interested in an eBook reader, news reader as well as Web surfing and email device. I’d like to see a variation of the iLife and iWork apps that allows for light word processing and spreadsheet work as well as iTunes functionality for music, movies, apps and games.

DawnTreader - 25 October 2009 11:41 AM

Perhaps a Mac tablet will be available to Verizon. But I still see T as the clear winner. If I’m in the market for a service for the tablet I will obviously choose the enterprise that provides my cell service. The issue for Verizon is picking up customers who do not already have an iPhone (most already their own customers in the States).

My expectation (based on new real product information to-date) is the tablet will become my laptop substitute and will allow me to share iPhone OS apps I’ve purchased or downloaded for free across multiple devices.

This will be Apple’s assault on the netbook market. But let’s be careful about expectations. The net book market is huge (and growing) and I suspect Apple will focus its sales and marketing efforts on perhaps 25% of that market - people interested in an eBook reader, news reader as well as Web surfing and email device. I’d like to see a variation of the iLife and iWork apps that allows for light word processing and spreadsheet work as well as iTunes functionality for music, movies, apps and games.

Excellent points DT.  I think people will be given the option to buy with contract from T or Verizon. It will be designed to compete with netbooks and compliment the iPhone.  There will be those who don’t need or want iPhone but would love an iTablet.  Keep in mind if Apple owns the $1000 and above market, can easily make it up with an $899 subsided iTablet on Verizon or T for those who may not have cell phone contracts.  For the rest they can just use existing contracts or tether.

By the way I am enjoying this discussion.  You all make very good points and it makes me think about this issue more and more.

Great Blog DT.

Both T and VZ are aggressively pursuing high value wireless customers (data service plans). People are unplugging their home phones by the millions each year and that market will never return. It’s best to invest what revenue and margins remains in that market in a buildout of wireless data and voice infrastructure. Thus, I think subsidies could be rich, dropping the subsidized price lower and in a range to compete with netbooks. I don’t expect a $399 tablet but don’t see it as $899 either. I’d like to see it in the $499 to $699 range. Imagine a hardware device that could function like a laptop or netbook with constant connectivity and 100k of low-cost/no-cost apps available. Now imagine T bundling services for both an iPhone and data plan for a tablet. Verizon desperately needs a winner and a product that would stem the flow of defections to the iPhone. There are millions of people that might put up with a cheap and crappy cell phone as long as a wireless data device was available that was both portable and could make use of the iTunes stores for music, movies, apps and more. Perhaps a few million more that would make use of a low-end iPhone (or other smartphone) as long as a tablet device provided a satisfactory entertainment experience.

As much as I really enjoy my 3GS iPhone, I’m not one to try and read a book on it and would use it to watch a move only under rare circumstances.

There can’t be an option (T or Verizon) unless two versions of the tablet are made, with unique cell radios. WI-Fi may be the best solution.

If it can work with the Apple wireless keyboard and mouse when at home/office, then the tablet can eat into the netbook market. But I don’t see a software keyboard leading to a hurt for Apple’s MacBook line.