Behind the slick exterior of the Apple iPhone is a shrewd business model set to revolutionise the mobile phone industry.
By Charles Wright
For all of its ability to command the headlines and excite consumers, there was something vaguely nonsensical about Gerry Quach's decision to spend $610.00 to buy an Apple iPhone from a US online store a few months ago, and have it shipped to Australia.
The Sydney IT specialist wasn't alone. Dozens of Australians did precisely the same thing. They were entranced by the spell weaved by the Apple marketing machine, and declarations by the international digerati and assorted celebrities that this device, featuring its sexy new interface and its marriage of voice and data communications with portable entertainment, had re-invented the concept of the mobile phone.
By mid-January, just over six months after its release, Apple reported total sales of more than four million iPhones, giving it 19.5 per cent share of the US smartphone market.
Those who resisted the hype wondered, perhaps, whether the normally sensible British actor Stephen Fry was closer to a less attractive truth than he intended when he rolled out the epithets, 'Beauty. Charm. Delight. Excitement', and compared the iPhone to 'some glorious early-60s sports car'.
It's undeniable that for all of the attractive features, Quach uses it every day to listen to music, watch video podcasts, read e-books and take snapshots, the iPhone is somewhat behind the pace on modern communications highways. The current generation works only on frustratingly slow EDGE data networks rather than superfast 3G, and lacks several features that would make it a business phone rather than a personal weekend appliance locked to a specific carrier.
And there are at least equally compelling new interfaces on other new mobile phones, among them the TouchFlo technology on the Taiwanese manufacturer HTC's Touch phone, and the LG-KS20, both of which are built on Microsoft's Windows mobile platform.
The glorious early-60s sports car had some other shortcomings, as Quach quickly discovered. You can't synchronise documents such as PDF, Word or Excel files from a desktop to the iPhone for offline viewing, and, remarkably, since the iPhone does sync with practically all of Mac OS X's productivity applications like the iCal calendar, Mail, and iPhoto, there's no to do list. Even the notes application won't sync with the desktop computer, and corporate necessities such as compatibility with Microsoft exchange server, which underpins Outlook, are a 'no go' area.
To have it work at all, Quach, like thousands of iPhone enthusiasts around the world, had to technically break the thing. In the jargon of the rapidly growing international community of iPhone users, the process, which Apple initially countered, then grudgingly accepted, is called a 'jailbreak'.
The owner takes a deep breath and installs a utility that unlocks the phone's SIM, severing its exclusive ties to the carriers in the US, Britain and Europe that have partnered with Apple. The jailbreak also patches the inbuilt software so it will load third-party applications.
That was the point where Quach's real financial hazards began. If he were to have used the iPhone in Australia in the way it was designed for US, British and European customers, he would have needed very deep pockets indeed.
At its heart, the iPhone is a Trojan horse. Beneath that beauty, charm, delight and excitement is a shrewd business model that turns the mobile phone industry on its head. Rather than simply selling hardware to the networks, Apple takes a substantial slice, as much as 20 to 30 per cent, of the revenue generated by the devices, an arrangement that China Mobile baulked at in January, but which other carriers have accommodated.
Gene Maffray, a telecoms analyst at Piper Jaffray, used data gleaned from statutory bookkeeping requirements imposed on US companies by the Financial Accounting Standards Board to calculate that Apple's US partner AT&T pays it $US18.00 a month, on average, for each iPhone activated on its network. At US$432.00 over a two-year contract, that eclipses the $US399.00 purchase price.
The iPhone gobbles mobile data the way a glorious early-60s sports car consumes petrol, its best points include a browser that encourages owners to go online as if they were using a PC, which is why Telstra executives are drooling at the prospect of sealing an exclusive deal with Apple when a 3G version of the iPhone becomes available. Given Apple CEO Steve Jobs' near paranoia about even discussing future plans, no one can be positive about the timing, but according to AT&T, it's likely to be this year. On its current mobile data plans, the iPhone would provide Telstra with an unspeakably rich revenue stream, and potentially drive users to the point of bankruptcy.
In the US, as little as $US59.99 a month buys AT&T's iPhone customers unlimited mobile data, plus 450 minutes of voice calls, 200 SMS messages and 5000 minutes of chatting at night and on weekends.
In Australia, even after a $70.00 price cut last December, in response to a new cheap data plan from Vodafone followed quickly by Hutchison's 3 network, Telstra's cheapest NextG data plan would set users back $114.05 per month for 3GB of data, on top of its voice and SMS charges. One Australian user reported to an online forum that just one hour of web browsing on an iPhone hooked up to a local network without a data plan cost him $90.00. This is why Quach confines his online iPhone sessions to when he's on a free Wi-Fi link, suggesting that for local users, Apple's reinvention of the concept of mobile phones isn't altogether positive.
Communications analyst Paul Budde is less pessimistic. In his view, the iPhone and an emerging band of competitors, most significantly one due in the second part of this year from a consortium led by search engine giant Google Inc., are dialling up a new future for users.
What they promise, he says, is a complete reworking of mobile data plans by Australian mobile networks. He says current data charges in this country have been designed to protect SMS traffic, the margins for which are frankly obscene, and they have strangled mobile data use. Only 3 to 5 per cent of Australian users have used mobile data, most of them corporate employees who enjoy substantial discounts, largely because, according to Budde, 'they have absolutely no idea how much they will be charged until the bill arrives'. Horror stories such as a $2000.00 monthly fee are by no means uncommon.
'The iPhone and Google phone are disruptive technologies that will force the telecoms industry to completely re-think their business models,' Budde says. 'They have been pipe operators, notoriously poor at coming up with real value-added services. They have had 10 years to come up with compelling services, and all they have done is discourage users. They are going to have to adapt quickly to what will be an increasingly competitive environment.'
The new mobile phone era, he says, will be led by competitors with different business models, gaining revenue through advertising, subscriptions, or pay-per-view.
That's clearly the intention of the Open handset alliance, established by Google and 34 partners, including hand-set manufacturers such as Motorola, HTC, LG and Samsung; carriers including US-based T-Mobile and Sprint, NTT DoCoMo and KDDI of Japan, China Mobile and Telecom Italia of Italy; and semiconductor conductors Intel and Qualcomm. Google, which already has a sizeable piece of the mobile applications puzzle in place with its Google Maps, is making its phone application Android available as free open source software to developers and manufacturers.
As this article went to press, Google was planning to bid for wireless spectrum in the US, against predictable competition from AT&T, and also Bill Gates' former partner Paul Allen, who has recently been amassing commercial airwaves.
Budde predicts overseas organisations will play a major role in providing new, open wireless networks in Australia. If so, Quach may finally be able to use that iPhone the way Steve Jobs intended.
