Sticky Smartphone

Posts tagged iphone

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4 Ways That AT&T Screwed All Carriers with the iPhone

The iPhone was a ‘great success’ for AT&T initially, but they made a couple of crucial mistakes that changed how all carriers are perceived and all the carriers negotiating power. Pre-iPhone, carriers were in control, they could accept and reject any phone, push out requirements to manufacturers and control the whole process.

  • Want VoIP in your phone? AT&T the carrier could ask for custom software.
  • Want WiFi enabled on your phone, the carrier can ask for it to be disabled.
  • An App Store? No Thanks, the carriers were trying to build their own app stores following the successful Docomo model in Japan. 
  • Update your phone software… sorry, that’s controlled by the carrier too.

In fact, if the manufacturer wanted a phone to be subsidised by a carrier they usually had to customise the phone software in some way, otherwise a Vanilla version meant the customer would have to pay full price. If a phone was ‘in demand’ negotiations over customisations may be easier. Effectively, the carrier wanted to own the customer, afterall, they held the customers billing details, and importantly their phone number.

So what did AT&T do wrong?

  1. Mistake 1 is the well documented unlimited data at $30. This effectively anchored a whole industry to a price point that was not sustainable. Before this offer came about, it was not possible to get an unlimited data plan. It caused an ‘arms’ race between carriers which meant increased capital expenditure costs in building up enough bandwidth to cater for unlimited data usage and half opened the door to over the top services.
  2. Mistake 2 is subsidising the iPhone too much. The subsidy for the iPhone ate into their profits and their profits increased after sales of iPhone decreased from 4.3M to 3.7M units from Q1 to Q2 2012. The subsidy and corresponding price that AT&T agreed with Apple, and the success of the iPhone anchored the expected price customers would pay for the iPhone. This affected all carriers.
  3. Mistake 3 was giving control of software updates to Apple. Previously, all software updates were controlled by the carrier. AT&T gave this control over to Apple. The original iPhone did not have an App Store, “Web Apps would have done”. But Apple could upgrade all iPhones and push an App Store that they controlled. All carriers who were trying to build their own app ecosystems were pushed out of the way in one fell swoop. AT&T gave away app store control and made that decision for all carriers. Over the top services (such as whatsapp, Line, Wechat) took advantage of this because no carrier owned App Store would ever approve these type of apps. 
  4. Mistake 4 was ceding activations to Apple and ownership of the user. Previous to this, who “owned” the user? The carriers effectively controlled the user because they had their phone number, and they had the billing relationship. Activations and the App Store ecosystem ensured Apple could move in and take ownership of the customer away from carriers.

One of AT&T’s requirements for the iPhone was am attempt to control media sharing by locking down Bluetooth. Ring tones were big profit earners and they didn’t want people to be able to easily share music files and make them into ringtones. With control of iTunes, this was not important for Apple.

These main strategic errors by AT&T affected all carriers and led to, price anchoring for unlimited data, over the top services, profit reducing subsidies and the battle of ecosystems that is all about who owns the relationship with the end user.

Filed under iphone att carriers app store user relationship price anchoring unlimited data app ecosystem

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Google Wants $1.7 Billion from “unfair” iPhone Royalties

The royalty rate that Motorola Mobiity wants from Apple for using its patents is 2.25% and Google are stating they will not change the policy. Cries of “unfair”, they are of a FRAND (Fair, Reasonable and Non Discriminatory) nature, so is 2.25% excessive? Even Samsung are demanding 2.4%!

Apple have complained to ETSI (European Telecommunications Standards Institute) and Microsoft are supporting Apple’s complaint claiming that the rate is far too high.

So the real question is what is considered fair and is Apple’s complaint valid?

Why isn’t mobile be the same as the wired world? 

Mobile has been different from the outset. Spectrum is owned by governments, is licensed for specific uses and is limited in its resources, this means that the technology required for delivering larger amounts of data on such a narrow amount of available frequencies requires investment and a return on the investment.

Apple and Microsoft do not have substantial patents in this area. They have both come from the wired world which has a different value chain and different (strong) players at each layer. There is no equivalent of Qualcomm in the wired world, there are no gate keepers that can prevent your mobile phone from being easily supported such as carriers. 

Is it really fair, what has history told us?

Apple previously lost a patent dispute with Nokia. Probably involving patents of a FRAND nature. The value is around 4.5% of the cost of building the device. Previous patent agreements have been around 5% 

Qualcomm won a patent case against Nokia, with Nokia settling for an alleged $1.8 Billion in patents and agreeing to pay a royalty of approx 2%. Qualcomm’s average royalty rate is around 3.5% according to this chart . At the time, Nokia were also complaining that Qualcomm were not complying to FRAND. 

The main thing to note is that these royalty percentages are above what Motorola and Samsung are demanding. In this context they seem fair……. however,  the main difference (in the Motorola case) is a % of what? Motorola are asking for a % of the average sales price, whereas previous cases are about a % of the cost of building a device.

Here is a BOM breakdown of the iPhone 4S -

 

WIth a sales price of $599 for the 16GB and $699 for the 32GB version that means Motorola are asking for around $13.48 and $15.72 per device respectively. Whereas at Qualcomm’s estimated 3.5% of BOM, that figure is $6.58 and $7.25 respectively. This is likely the driver of the ‘unfairness’ claim. 

It’s not the % in itself, it’s what it’s a % of.

How much are they asking?

Smartphone growth is forecasted to slow to 22% in 2012. If Apple maintain their current market share then the amount they are looking for in 2012 is worth $1.7B.

Compare that to the BOM version which is worth only half a billion and is likely to be less due to deceasing prices of components over time.

Number of Patents

If we look at the LTE patent pool and see who owns what, this is another argument for the unfairness of the request. Although the dispute is not about LTE (where Apple has acquired Nortels patent pool), it puts the size of the patent pool and the amount Qualcomm request vs what Motorola/Google are requesting into perspective.

Is asking for $1.7B fair?

(Image from 401K)

Filed under iPhone FRAND Patent dispute Google Motorola Google Motorola

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Android and Apple have NOT won the smartphone war.

Techcrunch made this claim (for the US market), but it’s far too early to call and history tells us that mobile and PC industries are not the same. Android and iOS has only been around a few years and has been swinging around wildly in its young history. If we look at mobile market share for the ‘top end’ in the past 20 years, there has probably been 5 different dominant OS’s/Manufacturers.

Motorola -> Palm -> Blackberry -> Apple -> Android

In the USA, Motorola dominated early on and then the ‘advanced’ phones marched in. By 2004 Palm were the dominant smartphone platform.

Fast forward 3 more years to 2007 and Blackberry take the US title.

The iPhone was introduced in 2007 and took 2 years to take the mantle, by September 2010 it was number 1 in the USA

Currently, it’s Android, which assumed the position in early 2011

The current incumbents (Apple & Android) are less than 5 years old! There is still plenty of time for change, and change has been happening fast. That’s an average of just over 4 years for each incumbent, but the trend suggests change is happening faster.  

Apps make them sticky

"It’s all about the apps". Actually, apps are only a part of the equation and having an ‘ecosystem’ worked well in the PC industry… This isn’t the PC industry. There’s a few examples and reasons why apps aare not the killer feature that makes a platform sticky as well as some other strategic factors.

Game Consoles are a prime example of people abandoning platforms, upgrading to a new one and buying a bunch of new games (apps). The next cycle of gaming consoles is coming soon, that means another new sales cycle of new games and apps.

Developers will always be looking for ways for recurring revenue, and upgrading or changing an ecosystem is a good way to generate sales. As the platforms evolve, developers want to tie in users to their system in much the same way that platforms want to control their users. Apps is the platform way, facebook do it via their social graph. The larger developers will want to evolve a way to wrestle some control over ‘its’ users, potential methods include web apps, although they are still not mature enough for mobile because  ‘native apps’ perform better, but it gives users a lower hurdle to ‘switch’ platforms when it is ready.

Carriers do not want a single ecosystem in control. As soon as this happens, all the revenue will be taken away from them because they will lose bargaining power if everyone demands the same device. It’s in their interest to promote competition and they do this with their subsidies. They are the biggest difference between the PC industry and the mobile industry because they act as the gatekeeper to your wireless service. They can and will help swing platform battles. Nokia failed with Symbian in the USA… how many Nokia smartphones were subsidised by US carriers? 

Manufacturers do not want to be owned by a platform that they have no control over. If a platform dominates, then the profits will be extracted out at the platform level, they lose loyalty towards their brand. Nokia abandoned Symbian and Meego, yet they still announce that they will work on Meltelmi. Samsung are working on Bada and now Tizen. In China there is Tapas, OMS. They also do not want to be controlled by the carrier,  a prime example is the amount of control that Docomo have over Japanese manufacturers, they set the specifications, the standards and take most of the profits.

There are far too many layers battling over control that it does not become a consumer choice. Strategic alliances and enemies are created all the time. The original formation of Symbian was a strategic alliance against Microsoft. The split of Symbian and move to Android was a strategic move away from the control of Nokia (major Symbian shareholder).

The smartphone war has not ended.. it’s still in its early stages. 

Filed under smartphone android apple iphone nokia motorola symbian