Baruch has already forgotten about the iPad. Whether chick magnet or large print e-Reader for the elderly, any ideas we have about its significance are speculation at this point, and will probably unravel in the face of reality. The most tangible action at the moment is in the iPhone, and the most interesting thing that didn’t happen last month is that Verizon didn’t get their own CDMA iPhone announced alongside the iPad.
This was seized on last week by a number of Wall Street analysts who concluded that poor old Verizon won’t get an iPhone at all this year. Credit Suisse reckons there’s a “75%” chance the iPhone stays with AT&T in 2010. I read the research, which also suggested that AT&T might have made some interesting concessions in order to persuade Apple to play along. Barclays Capital (I haven’t read theirs) thinks the fact that Apple is sticking to AT&T for the iPad is a “vote of confidence” in the AT&T network; that, and the comments Apple have made to the effect that they think the AT&T network is very nice, thanks, and they are very happy with it. They don’t see a VZ iPhone in the works either.
Hey, sell side analysts! Are you totally, like, stupid!? There is no way you can make that conclusion on the facts we have so far. The rudest understanding of what Apple is trying to do here and the opportunity set it faces would tell you that the most mind-bogglingly idiotic thing Apple could do would be to keep the iPhone as an AT&T exclusive a moment longer than it has to. And I am not alone assuming that Apple is not mind-bogglingly idiotic.
Why would an iPhone Verizon be so important? Well, lots of Americans are surprised when they come to Europe, and they see just how many people have iPhones here versus back home. Apples’ dominance of the high end market here is quite astonishing. Well over 1 in 4 adults in my office have one in, and I, Baruch, reckon that may be the rate across the tonier parts of the continent. We know that 75% of contract sales in France are iPhones, and in the UK the handset has topped the best-seller lists wherever it is on sale, be it Amazon.de, Phones4U, wherever. Not bad for a $700 handset.
The indispensable Admob gives us the terrifying statistic that fully 78% of all browsing on mobile phones in western Europe takes place on iPhones or iPod Touches. In the US, its home market, Apple’s share of mobile browsing is a “measly” 54%.
Why the difference? Easy. In Europe all the operators can sell iPhones. Apple has gone non-exclusive in France, Germany, and was always non-exclusive in Italy. Hell, in the UK you can get it at sodding Tesco’s. In the US it can only be sold on the AT&T network. Which everyone knows is shit. BTW I have no idea what the setup is in Oceania, wherever that is, but I bet it’s non-exclusive there as well.
Now, when an operator has the iPhone and it’s making up 70% plus of their contract sales, it looks like most of them don’t really see the need to push anything else in smartphones, whether RIM Blackberries, high end Nokias, certainly nothing on a Palm OS. The central purchasing office might flirt with Android vendors for the sake of dual-sourcing, but their hearts aren’t in it, and more importantly the reps in the shops aren’t going to push the more difficult sale of Android handsets unless you bribe them. No; when an operator gets iPhone, it effectively closes that channel until further notice to any other smartphone vendor who wants to sell in decent volume.
This, I think, is why Android share in Europe is so weak at 8% versus the US at 27%; shut out of the amazing success of iPhone so far, Verizon has had to push something, and for better or worse Android is it, together with RIM. European operators have carried as many Android models as their US counterparts, if not more, but they also all have iPhones to sell. Android is actually more available in the EU than the US, and has been for longer. But no-one buys them.
We’ve talked about the opportunity Apple has created for itself with the iPhone on this site already. It’s nothing less than the dominance of the mobile internet — in the same way that Google has over the “fixed”, PC-based internet, but better. Google doesn’t make a 50% gross margin on the equipment, and it doesn’t get a 30% cut of each and every sale of software and content. Staggering, unbelieveable riches await Apple if events continue in their favour (as well as, I am sure, a date with the DoJ and the European Commission, but that will likely be well in the future, after most of the staggering riches have already accrued). Steve Jobs must be pinching himself every morning.
Android and Google are one of the few things left in the way to getting these riches. “We did not enter the search business”, Real Steve Jobs told the faithful recently, talking about Google. “They entered the phone business. Make no mistake they want to kill the iPhone. We won’t let them.” The marketplace they’re engaged in is a “Highlander” market — there can be only one*; the benefits of being first will be grossly assymetric to the gains of the one in second. It is an unforgiving market; you can lose everything in an instant if you screw up, if you lose your edge –look at Motorola. Apple (and Google) knows it is all about the apps, about persuading others to devote their efforts to making product for your platform. Developers, as much as customers, are going to determine final victory. It’s still Apple’s game to lose, but if a killer app emerges on the Android platform tomorrow it could all change. If Android is out to get them, the only right thing to do is mercilessly crush them; in the words of Fake Steve Jobs, “knock them out and take a dump on their chest”.
Right now the one thing sustaining Android adoption in the developed world is Apple’s exclusivity with AT&T, and the concomitant support of Verizon. These incredibly well paid geniuses at CS and Barcap think there is a chance Apple will keep the iPhone monopoly with AT&T a moment longer than they have to? There’s no doubt in my mind that AT&T’s network problems are causing Apple to lose sales. What could AT&T possibly give to Apple that would compensate for this, and the huge strategic risks they’re running by giving Android breathing space? Assuming the AT&T contract has expired and the CDMA-EVDO hardware is ready, Apple’s going to go for Verizon like a dog gobbles a sausage.
There are two ostensibly reasonable objections to this that Baruch can think of. The first would come from Barcap: if you’re so clever, Baruch, BarCap dude could say, tell me why Apple went with AT&T for the iPad?
Well that would be because GSM-WCDMA is the dominant wireless standard in the world, BarCap dude. You need to think outside the US. The first iPad generation should address as many markets as possible, and there’s just no way you’re going to do that with an iPad on the CDMA-EVDO standard. That means the first iPads in the US are going to be sold through AT&T or T-Mobile USA. Which one would you choose? Given its huge edge in distribution, even if AT&T are the irresponsible fucktards who starved their network of capex, it’s a no-brainer. Apple could have made the first iPads “worldphones” running on both GSM and CDMA, but that would have added to the price and just drained battery life. And as for the fact Apple said they’re happy with the AT&T network, well, I hate to break it to you but they probably lied. What do you think they’d say when asked? No, we think AT&T are fucktards and we can’t wait to get rid of them? So that’s not a good objection.
The second ostensible objection would come from the Credit Suisse analyst: Baruch! he would bark; how do you know AT&T’s exclusivity contract with Apple ends this year at all? What if it doesn’t? Wouldn’t that make everything you just wrote a pointless exercise in wibbling?
Well, yes, actually, you would be right. But, CS analyst, most of the exclusivity deals Apple signed with operators outside the US have indeed recently expired. Why should AT&T’s be any different? Apple signed these other deals, with Telefonica, Deutsche Telekom, France Telecom etc, around the same time as it modified the original iPhone deal with AT&T, which saw AT&T agree to subsidise the 3G iPhone in return for no longer having to pay Apple a share of the revenue generated from the old 2.5G original. The gossip at the time (mid-2007) was that the deal would last 3 years — which would take us to mid 2010. In fact the main reason why we haven’t seen a Verizon iPhone yet may not be because the contract with AT&T is still valid, but simply be because it probably takes time to build one. Whatever. The chances of the deal expiring this year strike me as much higher than the 50% you put in your research report, anyway, Credit Suisse.
I don’t know, analyst dudes; you may still be right, and Verizon gets no iPhone this year. Stranger things have happened. But it just seems the more unlikely outcome.
*also known as one of “increasing returns to scale”, or an “ABBA market” — where the winner takes it all.