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Posted by Thomas Husson on October 23, 2009
Let's be a bit provocative after this week's announcement from Apple letting us know that they had sold 7,4M iPhones during the last quarter (+7% yoy). Apple's stock valuation was even higher than that of Google (as of October 20, 2009): $179 bn vs $173 bn. I am not a financial analyst so I won't comment the results from a profitability perspective, but would just like to throw out a couple of ideas to discuss whether this trend will last in 2010. Let's add a pinch of salt without taking into account the fact that Apple could (and certainly will) surprise us with new products.
Beyond the terrific iPhone user-experience, the power of Apple's marketing and the AppStore's ecosystem, part of the success is due to Apple's new business model introduced in July 08. When launching the 3GS, they also announced lots of international (and non-exclusive) deals with operators worldwide and finally accepted to let operators subsidize the device. No doubt there is a huge consumer demand for the iPhone but operators will have to solve a complex equation. It is a little dirty industry secret that many carriers are analyzing the profitability of the iPhone model:
The subsidy is quite high and close to 300 € in many European countries (looking at the difference between the wholesale and the retail price) but the incremental revenues are primarily driven by slightly more expensive voice/data packages (content sold through the App Store do not appear in operators' P&L), around 10€ / iPhone user / month. Let's do the math: to recoup the investment, the lifetime customer value has to be over 2,6 years. Of course, the equation is much more complex than that but if you take into consideration that network costs are exploding (just think about the YouTube traffic), it becomes to be challenging.
If you also take into account the product life cycle, the price point will soon be lower and I wouldn't be surprised to find iPhones at a retail price of 49€ in the coming months (of course you can have them for free but usually for high end voice/data packages). The sur-subsidy was really interesting in the context of an exclusive distribution agreement. Looking at Orange France, they managed to attract the most valuable customers before the regulation authorities imposed a non-exclusive agreement that opened the door for SFR and Bouygues. It is less interesting now to say the least. Operators are thus bound to find the right balance between answering consumer demand and challenging Apple's growing power by promoting alternatives such as...Android.
New device makers (ACER, ZTE, Huawei and many unknown Chinese sub-contractors) have bold ambitions and want to enter a volume war. To do so, they are likely to rely on the cheapest OS that is also following a volume play to monetize its mobile audiences...Android/Google.
I wouldn't be surprised to see iPhone-like devices for half or even a third of Apple's wholesale price. Of course, the brand won't be there but this might be a game-changer in the years to come.
Bear with me one second. I am not saying Apple's iPhone won't continue to overperfom the market, gain significant market share, expand in China and be profitable. The iPhone is probably the best thing that happened to the mobile services' industry. There's little doubt that the iPhone has acted as a powerful catalyst for mobile services adoption. The list of brands that have launched iPhone applications is comprehensive and covers many different industries. Apps can offer a truly rich media experience that matches brands' quality standards and can interact with higher-end consumers that are more likely to buy their services. However, iPhones are not necessarily a panacea:
iPhone users offer growing but still limited reach in Europe.
Brands will soon realize that they need more metrics to engage with iPhone consumers. Detailed analytics are critical and the industry will move away from reporting uniquely a number of downloads. What brand should care about is frequency of use and profile of (potential) users.
Basic commercial rules will apply in the Apple App Store just as in any retail environment. Few applications manage to be really viral and appear in the top 20 apps that drive audiences and revenues; most of them are lost in the back catalog of more than 85,000 applications. To fully promote an application and make the most of the iPhone audience, brands will have to integrate mobile with their digital and offline communication plans and use basic merchandizing tools and promotions.
Other distribution routes will open up for applications. Replicating Apple's success is not an easy task, but most mobile stakeholders are strengthening their alternative retail stores.
Also, there is life beyond applications:
The consumer benefits of mobile applications will diminish over time. The real benefits to consumers of applications are their provision of a richer user experience and the fact that they make the most of the core characteristics of different OSes and handsets, such as cameras and GPS chipsets. If your services do not specifically require these elements, an optimized mobile Web site can deliver benefits just as well. In addition, browser solutions will improve in the coming years and will be better integrated with OS and handset capabilities. For example, they will offer the ability to enter geo-localized information into the browser itself. Html 5, Skyfire and Google Gears are good technology examples of this trend. In addition, mobile websites (call them Webapps if you wish) increasingly support Ajax and Flash (as per Adobe's recent announcement).
Mobile Web sites offer wider reach and are less costly to develop. Mobile Internet penetration currently stands at 13% in Western Europe. Growing penetration will increasingly offer direct-to-consumer opportunities. Applications and browser-based solutions are — and will continue to be — complementary rather than competitive.
SMS offers the only mainstream way to reach consumers.
Many other technologies exist beyond the mobile Web and SMS
Technologies evolve quicker than one could expect. That's the reason why brands should start thinking about analyzing the profile of their customers first, define their objectives and strategy and then only decide which technologies to implement.