Analyst Angle: The Apple MVNO

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Jupiter Research’s Julie Ask, iGR’s Iain Gillott and more.
In my last column I discussed the challenges of MVNOs and how different handset strategies play into the business model. But I left one MVNO out. As of last week it became clear that Apple is also an MVNO, provided you stretch the definition of the term a little-but only a little.
When Apple signed up with AT&T as its exclusive distributor of the iPhone in the U.S., there were already signs that Apple’s deal with AT&T was unique: AT&T admitted it gave Apple total control over the iPhone’s features, design and pricing. (Contrast this to Verizon Wireless demanding its user interface be installed on all its feature phones.) Not only does activation occur offsite, but Apple gets to set up a separate billing relationship with the customer for iTunes. The iPhone requires a contract, but does not come with carrier subsidies.
So Apple turned the traditional vendor-carrier relationship on its head a bit. But, by itself, these concessions are not that revolutionary. After all, tight integration with iTunes is a key product benefit, and, given how great (cough cough) carrier services and interfaces sometimes are (or aren’t), giving Apple free reign to design its own device and pricing makes a certain amount of sense. What was deeply unsettling to the status quo were rumors-which no one would confirm at the time-that part of the AT&T/Apple deal has AT&T kicking back a percentage of service revenues to Apple.
In the U.S., carriers are the gatekeepers to consumers; it is hard to imagine selling high volumes of unlocked phones in the U.S.- the educational costs alone would be staggering (“It will work with any carrier in the U.S. that uses GSM technology on the following frequency bands.” Good luck with that.) So Apple’s deal with AT&T could very well have been hardware-only. Besides, didn’t AT&T give Apple enough already?
The bigger question was how Apple would distribute the iPhone in Europe. The mystery has now been solved: Apple has cut individual deals with specific operators in specific countries (so far O2 UK, T-Mobile in Germany and Orange in France have been announced). The phones are locked to those operators, which require post-paid contracts but carry no subsidies. On the face of it, this distribution strategy makes no sense. If Apple wanted to sell the most iPhones possible, its approach should be simple: Sell them unlocked. In fact, that’s how Apple is selling its phone-less iPhone, aka the iPod Touch-buy it anywhere, in dozens of countries, and use it with any hotspot network you like. But that hasn’t been Apple’s approach to Europe for the iPhone at all.
Apple may be many things, but it is not stupid. The only way it makes any sense for a hardware company to deliberately limit its sales is if it is banking on revenues from services. O2’s CEO has all but admitted the company is sharing iPhone service revenues with Apple, and European journalists have reported the terms of the agreement may be as high as 40% of voice and data revenues. Whatever the amounts are, if they are material, Apple is a public company so we should get a sense of the service revenues when the company reports its financial results.
The iPhone user interface is extraordinary, but the business model Apple has concocted for the iPhone is unprecedented and almost unbelievable. Here’s how it works: Apple sells iPhone hardware at a tidy profit and maintains complete control of its margins across its product line as Apple sets pricing itself without the confusion of carrier subsidies and rebates. Apple gets a cut of the service revenue the hardware generates. Apple maintains a separate billing relationship with the customer and uses that to sell content to users (music, movies and ringtones now, with games almost certainly coming soon) and takes a cut of that revenue as well.
However, like an MVNO, Apple doesn’t have to deal with any of the hassles of buying spectrum, building out networks, or maintaining them. Unlike an MVNO, Apple doesn’t even have to worry about managing billing for voice and data, or managing customer service. Apple also gets to piggyback on top of the carrier’s retail distribution network and advertising instead of competing with them. Apple’s model includes all the benefits of being an MVNO without any of the risk, and all the benefits of being a high-margin hardware vendor without many of the usual carrier constraints.
Wow.
Avi Greengart is the Principal Analyst, Mobile Devices at Current Analysis Inc. Avi can be reached at agreengart@currentanalysis.com. You can contact RCR Wireless News at rcrwebhelp@crain.com.