The end of an exclusive?


O2’s exclusive offering of the Apple iPhone in the UK has done it great favours in terms of driving footfall, revenues and brand power, but could the relationship be drawing to a close?

Neither party has revealed the exact tenure of the agreement, except to say it is “multi-year”. But rumours persist the contract is scheduled for renewal within the coming months.

The commercial detail of the existing agreement between O2 and Apple is speculative, but it is widely suggested by analysts that Apple receives the bulk, if not all, of the data revenue generated by the device, as well as picking up 100 per cent of revenue from App Store downloads.

If widespread and feverish rumour on internet forums and blogs hold any water, the O2’s exclusive on the iPhone could be coming to an end sooner, rather than later.

O2 maintains the relationship is as strong as ever. Nothing official has ever been suggested otherwise.

But Apple has rolled the iPhone out to more than 70 countries, and certain of those already work on multi-network distribution models. Orange and Vodafone both enjoy rights to the device in other markets, and both have been tipped as realistic suitors for an expanded UK distribution model. Orange is consistently been considered most likely suitor, as it sells the iPhone in more markets than any other network.

Apple won’t speak of it, and its partners are gagged by it; running scared of blowing the whole thing by misplaced comments to the press. Which appears to heighten the iPhone’s importance to the mobile market, and eggs on the gossip mongers.

One senior source at a rival manufacturer went so far as to claim to Mobile News he would bet his house on the iPhone becoming available on multiple networks in the UK by the end of 2009, highlighting Vodafone and Orange as the most likely, and potentially even T-Mobile depending on its own success with Android devices.

He suggets: “If it’s a ‘multi-year’ agreement, it means it’s not a set contract. Otherwise they would just say so. Apple has different agreements with all different networks across the world. It will definitely be made available to those that want it. Orange and Vodafone have a strong relationship with Apple globally, so they are the most likely.”

Ovum analyst Seth Wallis-Jones claimed it would be a “massive” PR blow for O2 if it was to lose the handset altogether, but claims demand for such handsets has dropped – despite O2’s latest Q1 results demonstrating strong customer trends towards both higher-end devices and budget phones.

“The iPhone is more of a flagship item rather than a product that is really beneficial to the bottom line for a carrier in terms of volumes,” claims Wallis-Jones.

“Apple maintains the brand value with some level of exclusivity, and getting a good deal from the carrier in return which I would guess it sees as worth the lower unit sales – unless they are not performing as hoped.

“Apple would undoubtedly shift more units if it had more carriers selling it, especially Vodafone for those more rural users where coverage is a deal breaking issue.”

Fellow analyst Steven Hartley suggests the iPhone is likely to be released on other UK networks. “It’s the interest of Apple to maximise its potential audiences. It will eventually want more rather than fewer networks taking the iPhone once exclusivity contracts are up,” he says.

He also reckons that should Orange or another network share distribution of the device, or even gain control from O2, it would be crucial for these networks to differentiate their offerings from the O2 model, most notably through pricing.

“Early excitement has given way to a calmer reality,” says Hartley. “There is very little operator involvement in the iPhone model. Therefore, if they were on the same terms as O2 then Orange would just end up trimming margins when demand has already spiked.”

UK sales figures of the iPhone remained shrouded in mystery until O2 announced it had reached the one-million mark in February, some eight months after the launch of the original device.

However, sales figures may not necessarily reflect the amount of iPhones being connected through O2 due to widely reported problems of box breaking. But O2 claims this represents only a tiny proportion of overall sales, calling it a “niche” activity.

Box breakers and unlockers, as well as store staff within O2 and Carphone Warehouse, would disagree with this. O2’s defence the device goes unsubsidised does not matter much if potential data revenues from usage of it on its network are lost to box breaking.

Orange perhaps has more reason than most to be associated with the iPhone due to Orange’s relationship with Apple in 27 of its 29 operating markets already. In the UK, the consensus is it could do with it too – it lacks a realy humdinger of a flagship phone, unlike O2 with the iPhone, T-Mobile with the G1, Vodafone with the Blackberry Storm and even 3 with its differntiating Skype and INQ models.

When asked if Orange would be selling the iPhone in the UK this year, one network vice president said cryptically: “I know the answer, but I really can’t tell you.”

A similar answer was given by Orange senior vice president devices Yves Maitre recently. “With Apple we have to respect some rules, which is normal in a partnership. Apple is very cautious and we understand why for different reasons and we totally respect those,” he said.

“Apple is really helping our customers to enjoy mobile multimedia. We have launched in 27 countries, and it would be a great pleasure to launch the iPhone in all of our countries.”

Multi-network distribution Down Under

Are there benefits to selling the iPhone on more than one network?

In Australia, the other side of the world to the UK, Apple works a distribution model that is diametrically opposed to the UK version. The country boasts an opposite iPhone distribution model, as well as opposite seasons and dominant football code.

The Apple iPhone is available across three of the four network operators in the land, and the fourth (3) was bought by Vodafone recently anyway.

In Australia, the media hype and extended queues on launch day remained the same as the UK launch event, but ploys to snare customers from competing networks and other shenanigans were largely unheard of.

The networks, instead, worked around the device to each find an edge to gain sales of the dvice.

Incumbent network Telstra, the market leader, used the iPhone as a flagship device to launch its content play, using its reputation as the country’s largest and most efficient network as its marketing ploy.

Number-three Vodafone partnered the iPhone with the launch of its converged tariffs, which include unlimited internet as a default for the first time.

Second-placed Optus headed up iPhone market share with the most aggressive marketing campaign of all, which proved a financial burden on the company.

3, even though it wasn’t awarded the privilege of stocking the device, released iPhone-specific tariffs encouraging customers to unlock and churn to its network, and made its tariffs in general more aggressive.

And not only was the iPhone available on multiple networks, but it was also made available through exclusive retailers of those networks, as well as Optus-hosted MVNO Virgin Mobile, which came out with aggressive pricing at the expense of subsidies on its other prepay handsets.

Steve Morley, head of retail at Australia’s biggest mobile retailer, Crazy John’s (bought by Vodafone last year and likened to Phones 4U in sales approach and Carphone in market share), observes that immediately following its launch, the iPhone was Australia’s number one selling handset thanks to its widespread distribution.

But, it did fall back to third or fourth place several months later when it was superceded by Nokia handsets with greater mass appeal, which indicating the open distribution strategy may not have had greater impact than an exclusive.

Not so, claims Morley, a UK expat. He says: “There were three networks to give the new product a big push, with a bigger combined marketing budget than an exclusive would have, which increases the momentum of a device and creates more of a buzz with the consumer because everyone is shouting about it, not just one network.

“We prefer to see a device come out on general release, because our business works better that way.”

Morley adds that exclusive deals limit sales opportunities for manufacturers. “In the UK, Apple has precluded a big chunk of the market place by making the iPhone available on just one network,” he claims.

When contacted by Mobile News, most of the Australian networks did not offer any comment, as to be expected from a standard Apple relationship.

Optus went as far as to say as everything that could be said on the issue was already on public record.

This public record included a statement from parent company Singapore Telecommunications that said, despite 55 per cent of Optus’ iPhone activations in Australia being new to the network and it being market leader for sales, Q2 2008 saw EBITDA reduce by S$27 million (£11.58 million) in Singapore and approximately A$44 million (£21.81 million) in Australia.

It was put down to “the incremental impact of iPhone 3G activations”.

It said it would look to recoup the activation costs through iPhone ARPU, which it claimed would be about about 1.5 times higher than an average contract customer.

John Fardoulis, editor of Australian mobile trade magazine Mobility, explains that Optus has garnered about 65 per cent iPhone market share, almost double its real market share of around 35 per cent.

According to Fardoulis, the network also reckons half the iPhones being activated on its network were from new customers, most likely churned from Vodafone and 3 – apparently not as big a deal as them coming from the mighty Telstra.

“Telstra customers are generally pretty sticky and Optus is Telstra’s greatest rival, so it wouldn’t be as radical as if they were poaching Telstra customers,” says Fardoulis.

Fardoulis adds that while an exclusive can sometimes add more to margins, and may have gained a dominant network extra market share, open distribution works better for the customer and the manufacturer.

“If there was going to be an exclusive here, it exclusive would have had to have been with one of the top two networks, and they wouldn’t have been able to push it as hard,” he notes.

“And acquiring a deal with one of the big operators is not always easy. Telstra wouldn’t have thrown in much more in terms of a subsidy.”

Vodafone managed to escape the financial situation Optus found itself in, responding that there was “no risk” in connecting its customers to the iPhone and its bundled data packages.

Vodafone Australia product manager for mobile data Joe Ferrar, also a UK expat, says that while the network’s marketing budget was lower than its higher placed rivals, it was able to be buoyed along by its competition’s advertising.

“The cross-country launch was beneficial for us as there was a national hype, and so much marketing spend from all carriers,” says Ferrar.

“But as an exclusive tool to Vodafone Australia, we launched converged price plans for businesses and consumers, which had voice and data bundled, driven through the devices. We determined our iPhone proposition based on, not necessarily what our competitors were going to do, but our real focus was the first true big demand (in data) for the consumer market.”

Ferrar comments that the iPhone was also elevated by smartphones in general taking the spotlight in network, retailer and manufacturer marketing campaigns, as well as proliferation in the Australian market being heavily dominated by older handsets, with the hope that many of their owners would trade in and up to a data rich device.

Despite heightened network rivalry, it would appear Australian consumers, free to snap up an iPhone on any network, were the winners in a multi-network distribution strategy. Can UK shoppers say the same when it comes to the iPhone? Perhaps they will, come the end of this year.