iPhone: Vodafone Calling

The deal, announced today, May 6, will put Vodafone-branded iPhones in 10 countries, Australia, Czech Republic, Egypt, Greece, Italy, India, Portugal, New Zealand, South Africa and Turkey, later in 2008. Right now, iPhone is available from various carriers in Austria, France, Germany, Ireland, the United Kingdom and the United States. Distribution also has been announced in Canada.

Increased distribution will legitimately bring iPhones to many countries where they already are available on the gray market, meaning as forcibly unlocked devices purchased in the European Union and the United States. The Vodafone deal may be a sign of big changes ahead, as Apple moves away from the exclusivity that the iPhone was launched with in the United States and early European markets. Exclusivity means a carrier-locked device, except in areas where local laws intervene.

Vodafone's announcement was surprisingly short, just two sentences. Piper Jaffray analyst Gene Munster sees something in what's missing. In a company note on Apple released today he wrote:

"We believe Apple's agreement with Vodafone in these 10 countries is not exclusive, based on the language of Vodafone's press release today. In the past, carriers have announced exclusivity as a key component of the agreement, but Vodafone did not reference any exclusive terms."

Gene had expected Apple to sell 12.9 million iPhones during 2008, a number he said he doesn't expect to increase because of the Vodafone deal.

I expect nonexclusivity to be Apple's fundamental approach for all new iPhone carrier agreements. The phone's sales success gives Apple broad negotiating freedom; carriers want the iPhone. Forcibly unlocked phones account for at least one-quarter of sales, based on Apple statements made in January. Recent iPhone shortages in Apple stores, coupled with increasing disparity between units sold and carrier service activations, suggest the percentage now is much higher.

Apple needs two things from the iPhone right now: rapid increases in unit sales and as broad distribution as possible. Locking phones to single carriers through exclusive distribution undermines both objectives. If Apple can quickly achieve both goals, it can do with the iPhone something limited with the iPod: establish a new content platform with a potentially wide reach. The iPod has a platform's breadth but not its depth; the iPod is too limited to music. By comparison, the iPhone has sweeping platform potential and in a category with huge sales (about 1 billion units a year). Microsoft doesn't dominate the category, which removes monopoly as a barrier.

The iPod succeeded because:

• Apple got basics like size, battery life, user interface and PC-to-device distribution right.
• Consumers had plenty of content (CDs ripped to MP3s) to put on the device.
• Apple marketed the iPod more than any other technology product on the planet.
• Apple made the iPod available through tens of thousands of locations.

The iPhone shares with the iPod the first three attributes, but distribution is constrained. Apple can't open the distribution spigot by way of locked phones and exclusive carrier arrangements.

Apple is lining up the planets—3G device, SDK, iPhone 2.0 software, unlocked mobiles, nonexclusive distribution and new carriers—for a massive second-half 2008 sales push. Apple will apply the lessons learned from the iPod to the iPhone. If successful, the iPhone could be the content platform that replaces the PC. That's no bold prediction, nor is it by any means a certainty. How Apple executes and how competitors respond during the 12 months from June will matter much.

But there's no denying the amount of carrier, content distributor or developer interest in the iPhone SDK, iPhone 2.0 or even the v1 device. Today, Associated Press announced the beta Mobile News Network for iPhone. Already, a surprisingly large number of Web sites or services offer iPhone-formatted Web pages, including Amazon.com and some banks. Apple has sold about 6 million iPhones since the launch. The number is paltry compared with the 1.1 billion mobiles sold in 2007. In that context, the amount of attention given the device is much greater than its global presence.

Apple needs to get iPhones everywhere, and that has got to happen quickly following the release of iPhone 2.0 software. Hardware competitors like HTC and Sony Ericsson are applying iPhone concepts to newer phones like the Touch Diamond (announced today) or the Xperia X1, running Windows Mobile. Microsoft also plans to fix its mobile Internet Explorer later in 2008. The point: Fierce iPhone competition is coming in the second half of the year.

From my perspective, the two mobile content platforms with most adoption potential are Nokia's N Series phones and Apple's iPhone. Apple's device delivers superior content consumption capabilities, while Nokia phones are much better for creating content. Most people consume, so Apple has the advantage there. Nokia is the undisputed leader in distribution with global market share of 39 percent (as revealed with the company's first-quarter earnings results).

The smart phone will be dominant platform in the future, I predict, and smaller mobile devices will displace PCs. It's inevitable. Can the iPhone dominate that market like the iPod did music players? The MP3 player market was small when the iPod was released. The cell phone market is huge, and there are many competitors. But the iPhone will be nowhere if Apple fails to rapidly increase distribution over the next six months. A nonexclusive Vodafone deal, and many others to follow, would be the best way for Apple to sell more iPhones more places—and quickly. But the window for success won't stay open for long.

Related Posts:

• Subsidized iPhone? I Wish, Apple Watch, April 30, 2008
• Content, Context and Compromise, Apple Watch, April 28, 2008

Posted by Joe Wilcox on May 6, 2008 3:13 PM