Under the Spotlight: Intrigues as the Battle for Europe's iPhone Deal Plays Out  

Following what appears to be a successful first week for Apple's iPhone in the United States, attention has shifted to Europe, where the device is expected to be available before the end-of-year season. Reports suggest as many as 700,000 iPhone units were sold in the United States in the first weekend of sales, although some minor connection issues with a few AT&T customers gave the odd piece of negative publicity. While announcing plans to launch the device on 29 June in the United States on the AT&T network, Apple had pledged to roll out the device in Europe in the fourth quarter of 2007 and in Asia some time in 2008. Since then, speculation has been rife as to which European operator would win the exclusive rights for a Europe-wide deal, with the iPhone expected to be rolled out first in France, Germany and the United Kingdom.

But the scramble has thrown up other concerns and there is uncertainty in the air. Apple had been expected to sign a pan-European deal in order to avoid having to negotiate individual contracts for different countries. Expectedly, Vodafone, with operations in 16 European countries and partnerships in a further 18 countries, was the leading contender to win the rights. However, in the past week, press reports have began suggesting that T-Mobile is set to win the rights for Germany, with O2 winning the rights for the United Kingdom. It is pertinent to note, however, that none of the operators have confirmed a deal and O2 has refuted the story (see United Kingdom: 5 July 2007: O2 Set to Win Exclusive U.K. iPhone Deal – Reports, Germany: 4 July 2007: T-Mobile Wins German iPhone Deal—Reports and Europe: 28 June 2007: Vodafone Tipped for European iPhone Supply Deal).

Apple's Change of Tactics

Apple's apparent change of tactics suggests that the iPod maker has opted for localised contracting rather than a pan-European deal. The emergence of T-Mobile and O2 for Germany and the United Kingdom respectively is an indication that Apple is going for the largest operators in their markets of interest. T-Mobile is Germany largest mobile operator, with a 39% market share at end-2006. Similarly, O2 is the largest U.K. operator with a 27.47% share at end-2006. Following on from this, Apple would thus be expected to deal with Orange in France, Telefónica in Spain, and Telecom Italia Mobile in Italy.

The Bone of Contention

While Apple may have opted for local deals, it is becoming clearer that disagreements over profit sharing, and the volume of handset sales is a big stumbling block. Consequently, efforts by the "newcomer" Apple to rewrite established operator-vendor rules on handset sales is proving difficult to swallow. Mobile operators are used to wholly "owning" the customer, once they make that initial capital outlay to subsidise the handsets from the vendors. The operators thus decide the services on the handsets, and retain total control of the revenue stream.

But Apple wants to change all that and take a slice of the revenue from the customer, introducing a revenue-sharing formula that is alien to the modus operandi of the mobile industry—though Research in Motion has a similar model, managing the push email service for which its BlackBerry handsets are famous. Apple would also have a say in the content available on the devices, diluting the "walled garden" portal approach of many mobile operators. Furthermore, Apple wants a guarantee on the number of devices that will be sold, effectively slamming an obligation on the mobile operator to sell the devices, even if consumer interest wanes.

Outlook and Implications

The iPhone Hype: Although Apple has whipped up a huge frenzy for the iPhone, Global Insight does not believe that "iPhonemania" will alter the existing market-share structures in the mobile handset market. Apple may have sold up to 700,000 iPhone units in its first weekend of sales, but its planned 10 million iPhone sales in a year is markedly insignificant in the global mobile handset market, where market leader Nokia shipped 347 million units in 2006. Importantly, there is no genuine guarantee of an iPhone mega-market beyond the early rush by members of Apple's "Machead" community. And with mobile penetration at maturity levels across much of Europe, there is no ready pool of willing and able customers, as many would already be locked into long contract deals. Besides, if the iPhone debuts in Europe without 3G, it will be a contradiction of sorts for the operators, which have invested heavily to roll out 3G and are encouraging customers to use more mobile data services. Admittedly, though, the willingness of customers to pay the full price for the iPhone has triggered a rethink of the existing subsidies that mobile operators pay for handsets, and operators would be looking at how to lure more customers to pay for their handsets in the future. But, firstly, the operators would have to wean European mobile users of their appetite for cheap or free mobile phones (see World: 29 May 2007: Q1 2007 Mobile Handset Update).

The iPhone Gain: While the iPhone may not trigger an astronomical rise in customer numbers for a mobile operator, it will create a feel-good factor for any operator that wins the right to distribute it. And that halo effect can percolate into other areas, cumulatively boosting an operator's brand perception, ego and financial standing. The iPhone may also evolve in the BlackBerry's direction, bringing with it recognition of modernity, dynamism and affluence for any operator offering it.