iPhone revenue share deals will bring plenty of high-value customers, but also foreshadow potentially dangerous territory for mobile operators. If operators give away too much leverage, they may have a bleak future as the next generation of dumb pipes.
Shaking the value chain
The latest and most substantial European iPhone rumour (as reported in FT Deutschland) claims that a handful of major operators have agreed to share 10% of iPhone customer service revenue with Apple. A similar, but unconfirmed, story has circulated regarding Apple's partnership with AT&T in the USA. If true, these represent the first known cases of a handset vendor successfully negotiating a direct share in the mobile service value chain. Even if the real details are never released, the upside for Apple's operator-partners is substantial; not only does Apple have what is arguably the most sophisticated, user-friendly handset on the market, but it can also bring to its chosen partners a community of (iTunes) users who download and exchange music, images, films, TV programmes, and videos in a way no other community of users does. Also, Apple's deal with YouTube to give it a prominent position on the iPhone start page brings another set of committed users. These users will quickly become the passionate, sophisticated, high-traffic and high-ARPU customers of their new mobile phone operator. In addition, while the operators may be giving away some control and revenue, they are retaining control of handset distribution and other key service enablers.
Dangerous territory for mobile operators
On the surface, this kind of deal appears to be what the mobile industry needs in order to achieve strong growth in non-voice ARPU, which is essential given the ongoing decline in voice ARPU. Provided that operators continue to open up the mobile Web-browsing experience and tariffs are kept simple, non-voice ARPU should increase considerably in coming years, from 19% of total ARPU today to over 32% by 2012 (see Figure 1 and Analysys Research's recent report, The Western European Mobile Market: trends and forecasts 2007–12).
Figure 1: Non-voice ARPU and non-voice services as a percentage of total ARPU in Western Europe, 2002-12 (Source: Analysys Research, 2007)
However, operators need to be very careful how the next wave of partnership deals are structured. In the Apple case, operator and original equipment manufacturer (OEM) have similar goals - to broaden the appeal and scope of what is essentially a semi-closed community of high-value users (i.e., Mac and iTunes users). Other potential partnership combinations, for example with Google, Disney, or with a handset vendor that brings its own pre-packaged Google interface, could bring a very different and potentially dangerous dynamic. If an operator surrenders too many of its leverage points with customers (handset distribution, billing, location / usage information), it could find itself limited to the role of dumb pipe, a scenario most operators want to avoid (see Analysys Research's recent report, The Future of the Global Wireless Industry: scenarios for 2007–12).
Operators should divide and conquer
Fortunately for mobile operators, there is only one Apple, and there are unlikely to be other OEMs that could demand (or offer) so much. Other alliances may arise (for example, involving Google or RIM) that will require careful observation. More importantly, operators should act quickly to improve the mobile Internet experience on sustainable terms by more aggressively partnering with sources of content and software on their own (rather than waiting for Apple or Google to do it for them). This will bring compelling applications (for example, mobile blogs) to the handset on terms that keep the operator in the centre of the mobile value chain. It will be possible for operators to open up the mobile Internet experience successfully, but it will require decisive action and direct partnerships with software and content providers decoupled from handset vendors in order to work.
Further information
The wireless industry faces greater uncertainty than ever before regarding the future of voice telephony, non-voice services, technology evolution, industry structure and the relative importance of developed and developing markets. This could lead to very different outcomes for mobile operators and equipment vendors during the next five years. Organisations need to develop robust plans in order to steer the industry in their preferred directions and to ensure success regardless of how the market develops. This may require a change in attitude to risk, investment in new areas of business, as well as experimentation and different approaches in different markets.
Analysys has developed its mobile industry knowledge and expertise through cutting-edge consulting and research projects in developed and emerging markets. We have worked for clients across the entire industry value chain, including network infrastructure suppliers, operators, MVNOs, content providers, investors and regulators and are therefore able to bring a wide range of perspectives to all of our projects.
