The price of Apple’s closed iPhone strategies

Apple’s been showing its true colors this year with the iPhone and iPod Touch. While most of the songs on a typical iPod are using the (patent encumbered) “open” MP3 format, the new Apple products derive more of their value from closed, proprietary choices made by Apple.

Probably the most controversial choice is Apple’s decision to give Cingular (now AT&T) a reported five year exclusive in exchange for control of the experience and a share of the ongoing service revenues. This week, the WSJ interviewed a number of Mac fanatics (like me) about why they won’t buy an iPhone, and top of the list was unwillingness to switch carriers. In some cases, people are enduring terrible phones rather than incur the switching costs.

In the same article, AT&T bragged that 40% of its iPhone buyers switched from other carriers. OK, so let’s do the math:

• 600,000 customers from AT&T (which has 27% share overall)
• 400,000 customers from everyone else (which have 73% share)

That’s a high school algebra problem: 600,000 is to 0.27 as X is to 0.73.

Solving for X gives 1.6 million — so Apple would potentially have sold another 1.2 million phones if it weren’t exclusive, or more than twice as many as it actually sold. Would such openness have been more profitable? Right now we don’t know what % of Apple’s iPhone profits come from the undisclosed share of AT&T’s service revenues.

The other openness complaint this week comes with the release of the iPod Touch (the iPhone Lite). Beyond earlier complaints, there are additional complaints that Apple deliberately crippled the product to avoid cannibalization.

For example, the iPhone syncs calendar and contact information in both directions, but the iPT won’t allow you to create a calendar item on the device. A decade ago, a Palm Pilot would do this, and obviously this feature was in the iPhone. So what’s the point of taking it out of this PDA-MP3 player combo device? (Of course, since AT&T isn’t dictating terms for the iPT, it should be more open than the iPhone, not less.)

It’s not clear that potential buyers will notice these restrictions, or if they will hurt sales of the iPT. (Or if the people who care will find hacks to work around these restrictions). Apple has had some flops in the past, notable the Newton and the Cube. Usually these happen because it has overestimated either the market size or its ability to price gouge its loyal customers.

Apple gets one tiny bit of praise for openness from NYT columnist and Mac loyalist David Pogue. Pogue reports that Apple’s policy of $2 per cellphone ringtone is less exorbitant than other alternatives, and the prices seem to be set by the record companies. Like Pogue, I don’t see the reason to buy ringtones but obviously we’re both outside the target demographic.

Technorati Tags: AT&T, business models, iPhone, switching costs