Tuesday, April 28, 2009

Apple partnering with Verizon? I don't think so

It's that time of the year again - Apple's Worldwide Developer Conference (WWDC) is coming up and the rumour mill is spinning like a dervish on speed. One of the rumours gaining a lot of traction, reported by USA Today, is that Apple is going to partner with Verizon for a new mobile device. In case you're wondering, this isn't going to happen.

Verizon (and Sprint) use a mobile technology that is incompatible with (roughly) the rest of the world, including the other two US mobile carriers (AT&T and T-Mobile). In fact, Amazon's decision to use Sprint's network for its Kindle e-book reader is the main reason that device is only available in the US right now - and will require significant re-engineering before it can work anywhere else. I seriously doubt Apple will decide to develop hardware that only works in the US when it has already committed to the worldwide GSM standard with the iPhone, in fact Apple COO Tim Cook specifically said so in the recent analyst conference call when Apple's quarterly results were announced. What probably sparked the USA Today rumour is an earlier statement by Verizon CEO Ivan Seidenberg to the Wall Street Journal about possible co-operation with Apple; not only do I think that's wishful thinking on his part, he was talking about the time (a couple of years from now) when Verizon moves to the new LTE standard that will finally bring them in line with the rest of the world.

But hey, any run-up to a major Apple conference is when the speculators go crazy, and the analysts feed the frenzy. One of the clips Jon Stewart used in his infamous Jim Cramer interview specifically mentioned Apple conferences and how speculative trading makes AAPL jump up and down as rumours are first reported, then spread, then refuted, then finally confirmed or denied. Just in case you were wondering, the crap that brought about the credit crunch is still around and no stimulus package is going to make it go away. I don't trade, and I won't offer you any advice as to how to make money off this, but perhaps it's an illustration of how broken the financial system is. In the end it doesn't matter if the rumour is obviously false - the traders will have their fun (and risk your money) with it anyway.

The noise about Apple and carriers is not limited to Verizon, however; Apple's exclusivity deal with AT&T is due to expire next year and the buzz on the street is that AT&T is anxious to extend it. At a personal level I'm against it; the fact that the iPhone is tied to specific carriers has caused me no end of grief as an iPhone user, first because I'm tied to a different carrier and second because I often travel abroad and like to use my iPhone with local carriers. I can, however, understand why Apple signed a deal with the devil in the first place - they needed a solid data network and a reasonable price plan to launch the damn thing (otherwise everybody would be complaining about slow network access and dropped connections, which I often get on my non-Apple-approved carrier), and they needed carrier co-operation to launch some features like Visual Voicemail.

But this is not 2007, we're not in Kansas anymore and Apple has done the impossible: Made the wireless carriers go to handset manufacturers begging for them to bless the networks with their phones instead of the other way around. Before the iPhone, it was the Nokias and Motorolas of this world who had to go to the carriers and have their designs approved before they built them, because the carriers were the sales channel. Everybody thought that this was now the way of the world, because (short-lived fads like the original Motorola RAZR notwithstanding) very few mobile phone users actually set out to buy a specific handset; they got a list of subsidised handsets from their carrier and picked one. If Vodafone didn't put Nokia's new gadget on its list, Nokia wouldn't sell in any volume.

Apple changed all that; for the first time in years they managed to create a handset that users wanted. For the first time, people went shopping for iPhones and signed up for AT&T service because it comes tied with the phone instead of going shopping for AT&T service and getting whatever handset was tied to that; the balance of power has shifted perceptibly, and AT&T has seen a huge boost in subscriber numbers clearly attributable to the iPhone. Apple probably has enough clout already to tell AT&T and all its other partners to go hang and sell the iPhone to all comers, but knowing how protective it is of its seamless end-user experience I think they'll be extending the AT&T contract for a while - but don't be surprised if they attach a few conditions to that now that they have the leverage.

Specifically, Apple will be looking at network upgrades to ensure AT&T's network gets better data speeds by deploying new technologies faster. I also wouldn't be suprised if they argued for cheaper price plans (I talked about how ridiculous those are in my last post) especially when it comes to data roaming and text messaging. More importantly than that, many of the things the iPhone could do are currently disallowed because the carriers don't like them. Remember when the iPhone originally launched and you couldn't buy music unless you were connected to a WiFi network? This was because the carriers viewed the iTunes store as competition for their own (overpriced and generally disappointing) music stores. The carriers have relented on the music purchasing thing since, but other items like instant messaging, audio and video chat and anything else that the carriers offer or would like to offer as a premium service are no-nos because if they go over the data network, the carriers can't charge extra for them.

Sadly for the carriers, that business model will never fly. Experience has taught us that most users have a fixed budget for their mobile phone and won't use newfangled services until the price drops to within that budget. The carriers have to accept that what they sell is bandwidth, and what users choose to do with that bandwidth will eventually be none of their business - just like the way it works with home broadband providers (or at least, the saner ones). As we saw last time, the carriers have a government-mandated monopoly of the namespace (phone numbers); they also have a government-mandated monopoly on the network layer (spectrum licenses) so up until now they've been resisting the deployment of all these services in order to protect their business model, desperately trying to find the premium features that will make users spend more on their phone bills. Expecting them to realise the futility of this approach is probably asking too much, but with Apple (and others close behind) pushing them from the handset front and VoIP providers pushing them from the services front they will eventually have to relent (there is a service the carriers can offer that can make them more money, but it's not along the lines any of them are thinking - and I'll deal with that in the future).

So, don't expect Apple to be partnering with Verizon until the latter has a functioning LTE network, which could be several years down the line. Expect Apple to renew its exclusivity agreement with AT&T for a couple of years longer, but also expect it to attach some conditions to the agreement that no carrier would have accepted a couple of years ago. When that exclusivity agreement runs out, if Apple continues to have this unbelievable momentum in the mobile space that it has today, expect it to shake AT&T down for all it's worth - and probably do the Right Thing and start selling iPhones to all the carriers.

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