Words From a Wicked Woman

I’ve been perusing the Mac/Apple sites this weekend catching up in the aftermath of the iPhone launch. I came across some information that originally posted in January after the iPhone introduction at Macworld SF (MWSF) about the decision to go with AT&T as the sole service provider and thought I’d pass it along. I wrote elsewhere that people had to remember that this is an Apple product and the company insists on control over the way their products are perceived by the end user. It is for this reason that Apple writes the operating system and much of the other software for its own hardware products, not to mention strictly controlling the user interface for those software programs written by third parties. Love it or hate it, the user will never find another product with the Apple look-and-feel. It is that insistence on control–and, by extension, quality–that underlies the partnership between Apple and AT&T.

Apple initially approached Verizon about a deal, but the carrier declined. “Among other things, Apple wanted a percentage of the monthly cellphone fees, say over how and where iPhones could be sold and control of the relationship with iPhone customers,” said Jim Gerace, a Verizon Wireless vice president in a January 29, 2007 USA Today article. In summarizing a February 17 Wall Street Journal article, the Mac Rumors website confirms the information in the USA Today piece.

Clearly, AT&T met Apple’s terms. The iPhone is only available through the Apple retails stores, including its online store, and AT&T company-owned retail and online stores. In addition, unlike any other mobile service, activation takes place online–through Apple’s iTunes. In this way, the iPhone customer deals primarily with Apple and Apple employees, taking advantage of Apple’s legendary customer service and ease of use. The only time an iPhone user has to interact with AT&T with its infamous customer service is if something goes wrong.

Something did, indeed, go wrong during the first few days after iPhone went on sale. Thousands of customers attempting to activate their phones and contract for service with AT&T were met with seemingly endless delays due to the wireless company’s failure to plan for the onslaught. In addition, some business customers had to convert their accounts to individual subscriptions because the iPhone calling plans are not available to businesses.

Buried in Verizon’s reasons for passing on the iPhone distribution deal is a little nugget of information of great interest to Apple shareholders: Apple wanted a piece of the revenue pie above and beyond the sale of the iPhone itself. I wish I could take credit for finding this tidbit, but I must give it to Tommo_UK over on the Mac Observer forums. In a thread titled “iPhone Subscriber Revenues Massive Earnings Boost?” he points out that Apple will add a significant new revenue stream to its books even at the $5/month per subscriber fee that AT&T pays Research In Motion (aka RIM) for Blackberry subscribers.

A July 6 Guardian Unlimited article reports that Apple reached agreement with wireless carriers O2 (UK), Orange (France) and T-Mobile (Germany) for exclusive European distribution. However, the same hurdles that dissuaded Verizon from partnering with Apple also put the UK’s Vodafone off the deal: Apple wants a chunk of the monthly subscriber fee. No doubt the selected European partners complied.

If first weekend sales are any indication, Apple should have no problem reaching the 10 million unit sales figure Apple CEO Steve Jobs projected by 2008 at the MWSF intro and repeated elsewhere in the press. A Bloomberg article quotes analysts’ estimates of sales anywhere from 250,000 to 700,000 units as of July 2 after a June 29 launch. Truth be told, no one is really certain how many iPhones were purchased except Apple. Be that as it may, that would make the iPhone launch the most successful of any consumer product in history. CNN Money says there is general agreement among analysts that the company will sell approximately 3 million units this year alone.

In my personal opinion, Jobs was conservative in his estimate. Although Apple has a standing policy of never predicting unit sales for any individual product, they do typically forecast earnings, tending to err on the side of caution. Jobs broke with the policy of not predicting sales figures and, as some on the Mac Observer forums have speculated, must be exceptionally sure of his figures if he’s doing so. If one assumes Apple reached agreements with the European carriers similar to the one reached with AT&T, approximately $5/month per subscriber goes into the company’s coffers–that’s $600 million by 2008.

Apple is a company that is almost phobic about losing control of the user experience. Verizon and other cell carriers would not sacrifice their desire to control customer interaction nor would they relinquish a small percentage of monthly revenue, even if that meant they’d gain additional subscribers. In the end, I believe the companies that passed on the deal will look back with regret. Apple chose partners that would allow it to remain the customer oriented company that it is, even if that means ceding a bit of their usual interaction with subscribers. In return, those wireless companies received a five-year exclusive sales agreement, the coolest consumer product on the block, new customers and the promise of things to come. They also gave up some of the hassle of servicing the product, leaving that in Apple’s very capable hands. Apple gets $600 million of new revenue, the security of knowing that the iPhone will be usable in the vast majority of the U.S. (in the case of AT&T) and any possible halo effect the iPhone may carry onto other Apple products like the Mac computer line. Forget about an unlocked iPhone because it isn’t going to happen. There is far too much incentive for Apple to keep this little circle of love closed for many years to come. Again, thanks to Tommo_UK on the Mac Observer Apple Finance Board for the heads-up.

In the interest of full disclosure, I wrote an article for the Mac Observer in 2003 about the opening of the Cleveland area Apple Store.

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