Queues formed outside the US Apple and AT&T stores last Friday as iPhone frenzy reached fever pitch on the much-hyped handset’s launch day, and initial reviews were generally positive, suggesting Apple could surpass its sales targets despite the high price of the unit. But while Apple loyalists fought to get their hands on a device, the battles that will really make or break the company’s fortunes in a harsh new market are still in progress – notably which operator will take the product into Europe, and under what conditions. Vodafone is emerging as the front runner – unsurprisingly, given its market reach – but it may have more cards on the table in negotiating with Apple than AT&T did.
At first glance, it seems that Apple might have an easier time in Europe than the US, where AT&T had the bargaining advantage of being by far the largest GSM carrier. Verizon Wireless may have famously backed away from the iPhone, but a deal with a CDMA carrier would have been tough for Apple too, forcing it to make a version of the handset for that network as well as for international GSM, and therefore to get involved with Qualcomm. However, AT&T could not really afford to let the iPhone slip away, especially with the threat that the rejuvenated T-Mobile might use it to lever its ambitious growth plans (and potentially sign a cross-border deal involving its sister companies in Europe). So AT&T agreed to an agreement with Apple that is unprecedented in north America in terms of the control and revenue share it gives the device maker, and a setback for the general operator push to grasp the balance of power with the phonemakers.
In that battle of wills, AT&T may well have seen support for Apple as a way to sideline Nokia, especially with Motorola failing, in the past year, to come up with a suitably iconic homegrown handset to lead its charge for customers. Apple may have huge brand power, but it has none of the influence on the wireless industry of Nokia, which is engaged in something of a stand-off with the US’ leading cellco.
While Vodafone would also happily weaken Nokia’s power, especially as the Finnish giant is on the ascendant in the wireless power struggle right now, it is less likely than AT&T to do so by giving away key control to another potential thorn in its side. The company is the most powerful negotiator in the business because of its huge scale, and – along with the Asian majors whose upper hand against the phonemakers it would like to emulate – leads the charge for operators to drive the industry. The kind of coordinated marketing and promotion that Vodafone could bring the iPhone across different territories would be a major lure for Apple.
Vodafone, whose share price was rising all last week on anticipation that it would win the Apple deal, will have to be careful not to be too aggressive and play into the hands of other bidders such as T-Mobile, Orange and Telefonica O2, all of which have greater track records in generating customers and ARPU from high profile support for stylish, if low volume, units. Losing the deal to one of these rivals – especially if a multiyear exclusive is on offer, as in the US – would hit Vodafone’s share price hard, at a time when it badly needs to win some brownie points with its disgruntled investors. In a research note last week, Credit Suisse said: ‘The winner could sell more than 6 million such devices over the next three years. Assuming half these were new customers, this could add 8p to our valuation if Vodafone were to win.’ The phone is predicted to retail at about €450 when it launches in Europe at the end of the year.
It is not only the carriers that stand to gain profile and revenues from snagging an Apple exclusive. There is also stock movement over the identity of the iPhone’s component suppliers, with Marvell, in particular, seeing heavy trading and a stock rise of 5.8% now that it is clear that it provides key chips. One analyst estimated that such a deal for the iPhone could equate to a 7% increase in Marvell’s sales in 2008, despite the relatively small volume targets – compared to those of mainstream phonemakers – for the Apple device. Marvell is looking for major expansion in the handset space, following its acquisition of Intel’s XScale line, and the Apple talk is certainly helping to raise its profile during a critical transition period, but it has not supplied XScale, only a wi-fi chip.
The actual content of the iPhone teardowns seems to agree that Samsung has supplied the NAND Flash memory and the ARM applications processor, it has a Wolfson Electronics audio chip, a Linear Technology USB Power Li-Ion Battery Charger, a Marvell WiFi chip, a Skyworks GSM/Edge Power amplifier, a CSR Bluetooth chip, an Intel NOR Flash memory and a Broadcom I/O controller and finally a Texas Instruments power management chip among others.
Other news accompanying the launch included support for the YouTube video sharing site, whose owner Google has begun encoding its videos in the H.264 format to improve quality and save battery life when viewed on wireless devices. Apple claims that its phones will be the first equipped to use the new format and that over 10,000 videos will be available to iPhone users at launch, with the entire catalog available by the end of the third quarter. The iPhone will include a built-in Apple designed YouTube application.