iPhone wins access to more dumb pipes

The handset may not be God, but the JesusPhone has certainly won another zero-sum battle for customer loyalty over the owners of dumb pipes.

Today both Orange and the Vodafone announced they will carry the iPhone in the UK. Virgin Mobile is also said to be “desperate” to carry the phone, while the only uninterested carrier is 3 (the commodity 3G operator) uninterested.

This ends the two year exclusive of O2 in Great Britain and Ireland. Exclusives were the norm for the 2007 rollout and the original iPhone rev share model, but not for the 2008 rollout where multiple carriers rolled out the iPhone. This explains how Apple plans to grow its market share, and also points to non-exclusive sales in its home market — presumably with Verizon, the largest carrier. Presumably the rest of Europe and Japan will eventually follow.

It also marks a retrenchment of Vodafone from its policy of promoting commodity handsets. Perhaps it has something to do with the iPhone's new status as Britain’s “coolest brand” — well ahead of YouTube, BlackBerry and anything by Sir Richard Branson.

Oh oh it's Magic!

Leaving Hamburg after 4 days at the User and Open Innovation 2009 conference.

Here in Hamburg, I saw no sign of the iPhone (except in the hands of my well-educated professor friends). In fact, the only mobile device I saw promoted was the HTC Magic, aka the G2. Of course, Vodafone needs the G2 to counteract the Deutsche Telekom iPhone 2.0, and presumably DT (T-Mobile) will be promoting the iPhone 3.0 when it ships later this summer.

Still, there were more ads for the G2 than I recall for the G1 when it launched in the US. (In fact, I don’t recall seeing TV for print media ads for the T-Mobile USA G1 until it was getting stale — perhaps because the free Android publicity was enough to carry it the first few months.)

In the HVV subway system, there were both posters and a poster-sized video board extolling the G2’s praises on Vodafone’s dime. The ads were clearly branded as Vodafone, with its garish red (not to be confused with the orange of Orange).
Still, from the big print on the displays, I really only learned three things about the device. First, it has a big color screen. (Big compared to what? I dunno, but it was nearly 1 meter high).

The second thing was that it’s “Ab 1,€”. It doesn’t take my high school German to know that means “from $1.40”. The fine print on the paper poster notes the requirement of a 24 month contract with some sort of minimum subscription plan. The fine print also said the phone is exclusive to Vodafone until July 31.

The final point — more prominent in the video ad than the paper one — was that the phone is “mit Google”. All of the screenshots in the video have the Google G search bar—with “Google-suche” as the search text in case that’s too subtle. Two frames say “Das neue HTC Magic mit Google™.” One of these shows the back side of the phone “with Google” imprinted next to the camera lens.

As others have reported, the Google branded phone is only available on Android handsets that have the Google applications (such as search and mail) pre-installed as the default choice. It’s not quite the same as Microsoft’s bundling of Internet Explorer and Windows Media that brought antitrust lawsuits in the 1990s — but the principle is the same.

Of course, Android doesn’t have 90+% market share of Windows. Also, its lawyers noted that mollifying competition authorities merely required distributing the OS without the bundled applications. Still, I find it interesting that Europe’s largest mobile phone carrier found it necessary to promote/leverage the Google brand to sell a handset.Note to overseas readers: title is reference to a hit song by the Electric Light Orchestra.

Carrier app stores still alive and growing

The assumption was that the iPhone App Store harkened a tidal shift to phone (or operating system) centric app stores. Many assumed that this also rendered obsolete attempts by mobile network operators to create their own walled gardens.

Apparently two of the four major European operators, Orange and Vodafone, didn’t get the message. The Orange Application Shop (announced last month) and the unnamed Vodafone application store (announced Tuesday) are two examples. (Apparently the Vodafone store will also apply to Verizon Wireless in the US.) Both T-Mobile and Telefonica also have app store experiments.

Each of the app stores has its own APIs, own billing systems, own markets. Of course, this is in addition to the app stores from Apple, Google, Microsoft, Nokia, RIM, Samsung and others — each with its own APIs, devices, billing and so on.

The proliferation of app stores reminds me a lot of music stores: Apple created the iTunes Music Store and everyone wanted to have their own store. Now many of them are gone.

However, there’s actually a better argument for multiple music stores than multiple app stores. Once upon a time, we had thousands of LP (later CD) stores. If the online music stores were all distributing DRM-free MP3 files, then consumers could buy songs from different stores and different days and have them all work together.

However, a fragmentation of MP3 distribution would increase buyer power and thus increase competition (and price competition) between suppliers. This competition could commoditize MP3 distribution — putting the less efficient dealers out of business — or put pressure on music publishers to increase promotions or cut prices.

Finally, a worthy iPhone challenger

In response to T-Mobile’s gPhone and AT&T’s iPhone, Verizon Wireless is getting a bPhone — the new BlackBerry Storm, which was leaked last week and officially announced this morning.

The new BlackBerry 9530 appears to be the flagship smartphone of the world’s largest cellphone carrier, Vodafone, and is being first released by its partly-owned US subsidiary, Verizon Wireless. It melds the traditional BlackBerry features with an iPhone-inspired touch screen interface, showing that Research in Motion is interested in more than just CrackBerry keyboards.

The announcement is interesting on many levels.

First, reviewers are generally calling it the strongest iPhone challenger yet, certainly better than the gPhone (aka T-Mobile G1). As Wired wrote:

To put it mildly, we’ve seen a butt-load of handset makers jump on the iClone bandwagon since Apple’s device was announced in 2007. Without exception, every attempt has failed to come close to matching the iPhone’s nearly mythic combination of intuitive UI, responsive touchscreen, and gorgeous hardware. The Storm, though, gets closer than any device we’ve ever laid hands on.

And in one critical area — you might want to sit down for this — The Storm actually beats the iPhone.

The main improvement is ClickThrough, which provides the best tactile feedback yet of any touchscreen phone. The consensus is that this is the one area where it’s clearly better than the iPhone.

Not surprisingly, the Canadian systems innovator is also planning an application store to compete with the iPhone App Store. RIM has had a wide range of 3rd party Java-based applications for years, but is now making these available to users in a more convenient and integrated fashion. The key difference is that the content will be controlled not by RIM, but by the carriers. (No mention of the store is made in the official announcement).

This says some interesting things about competencies. In 2007, Apple releases its first mobile phone and an important new smartphone platform. Through a combination of software, industrial design and PR flair, Apple redefines the mobile phone experience for American cellphone buyers and, to a lesser extent, those in the rest of the world. How do firms respond?

• Motorola (#1 in the US, #3 in the world) continues to dabble in smartphones with halfhearted efforts using Windows Mobile and Symbian UIQ, but doesn’t aggressively promote any of them. Despite the smartphone challenge, the cellphone division is distracted by its much larger problems, including plummeting market share and a desire of Motorola corporate to jettison the division before it sinks the parent company.
• Samsung (#2 in the US and the world) and LG (#3 in the US, #5 in the world) — the major suppliers to Verizon Wireless in recent years — have a typical Japanese/Korean response: phones with great hardware, lots of features, and uninspiring software.
• Nokia (#4 in the US, #1 in the world) add an application (and everything else) store to strengthen its dominance of the European smartphone market, but fails to find a carrier that wants to push its phones in the US. It’s reportedly waiting until next year for a full-on iPhone challenger.
• RIM (#5 in the US) leverages its handset software, dominant back-office technology and loyal customer base to make the most effective iPhone challenger yet.
• Google enters the US smartphone market not with a branded cellphone maker, but with HTC, the #1 ODM: its G1 falls somewhat shy of the mark.

In other words, it’s not surprising that RIM has a strong product and Motorola, Samsung, LG and newcomer Google do not. The only surprise here is that Nokia has been unable (or uninterested) in making a compelling product for the US. Given its weak CDMA products — foreclosing a deal with the #2 or #3 carriers — perhaps the key obstacle is that it has no channel to US consumers other than iPhone dealer AT&T.

The “Storm” actually appears to refer to the BlackBerry 9500 family (cf. Nokia N95?), which includes Vodafone’s BlackBerry 9500 and Verizon’s BlackBerry 9530. I’m guessing that Vodafone will be selling different models. Vodafone was once interested in commoditizing handsets to avoid commoditizing its pipes. The announcement suggests Vodafone’s tacit admission that handsets are not going to be commodities any time soon.

Other things don’t change. While it has a brand new phone, Verizon Wireless continues its policy of tightly controlling subscriber access to 3rd party applications — either you’re “on deck” or not at all — a control ceded by AT&T to Apple (with the iPhone App Store) and abandoned by T-Mobile USA. The 9530 is also one of the few smartphones in years to come without Wi-Fi support, allowing bypass of the CDMA network at Starbucks or the office.

The 9530 is a fully dual-mode 3G phone that works on Verizon’s EV-DO network and in the W-CDMA technology used in Europe and elsewhere in the world. Is it that Verizon is tired of AT&T’s obnoxious ads about implausibly globe-trotting teens with no bars? Is it that the high-end BlackBerry users fit the actual profile of a globe-trotting executive? Or is it that BlackBerrry has a long relationship with Qualcomm (supplier of the chips for Verizon’s previous dual-mode BlackBerry)?

Another mobile carrier's CFIT plans

Earlier this year, I referred to T-Mobile’s denial of the inevitable commoditization of mobile phone network operators. It's happened to everything else in telecom. Now even international long distance is effectively free, thanks to VoIP carriers like Skype and my new favorite Lingo (which includes unlimited long distance to 23 countries for $22/month).

Sometimes I want to say it's a train wreck waiting to happen. But after reading the weekend transcript of the Financial Times interview with Vodafone's CEO, I think the more accurate metaphor comes from aviation crashes: CFIT, controlled flight into terrain.

The CEO is Arun Sarin, a former Pac Bell executive who (only about 100 km from here) designed the technology for its industry-leading cellphone services in California during the 1980s including the 1984 LA Olympics. Sarin then helped Sam Ginn spin off PacTel Cellular to form AirTouch, which later got bought by Vodafone and then merged with Verizon's US properties to form Verizon Wireless.

The FT news article (full text here) highlights' Sarin's atypical opinion of the iPhone, but he's certainly right that 2.5G is a lousy way to watch YouTube. More seriously, The Register notes his excess optimism about his long-term pricing power due to inexorable increases in competition.

Sarin admits that the mobile phone service will be a flat monthly fee within 5-10 years, although he still hopes to exercise price discrimination with multiple minute bundles. Presumably he's not worried about existing flat-rate mobile phone services.

He also expresses the heartfelt desire that his pipes won't become commodities, and that his walled gardens will somehow compete with the likes of Google and Nokia. Vodafone will triumph because it owns the billing relationship and because no one can build LBS without paying it a toll:

"Most importantly, we have 240m customers. We have the relationship with the customer, they are either buying top-up cards from Vodafone, or we are billing them on a monthly basis. Just the simple fact we have the customer and billing relationship is a hugely powerful thing that nobody can take away from us. We could lose our customers and then, yes, they could be gone.

“The second thing is we know where the customers are, in terms of location. We know precisely where you are. Frankly only we know where you are. The handset manufacturer that sold you the handset does not know where you are. But we know where you are.

“So if you say at the most basic level say we have got a customer relationship, we have got billing and we know where you are, these are hugely important things. So whoever comes into the marketplace is going to have to work through us."

So no one will get on the Vodafone network without paying Sarin's toll — faithfully recreating the AOL/BOL/CompuServe/NiftyServe walled garden model of the 1980s. Meanwhile, industry upstarts will be building a 21st century mobile version of the Internet with as much free (or cheap) third party content as possible. I guess it will be up to the next Vodafone CEO to deal with the consequences.

[Mixed metaphor alert] Sarin notes he still comes back to California (and Hawaii) to surf with his son, so he knows what a wipeout is. I guess he's trying to ride the wave as long as he can, but at 53 the eventual crash is going to come long before he reaches retirement age.

Annual Verizon divorce story

The radio this morning made passing reference to Verizon stock gaining on takeover rumors.

I looked quickly at the original report (in the FT blog on Monday) and assumed it was the same story about unwinding the unstable Verizon/Vodafone 55/45 partnership that is Verizon Wireless. The company is doing OK — narrowly 2nd in the US market — but each of the partners have wanted to take full control almost since the company was created by a merger of the CDMA properties from four former Baby Bells — AirTouch (the wireless arm of Pacific Bell and US West) and Verizon (NYNEX and Bell Atlantic, combined with GTE).

Looking at my hard disk, there have been stories about such a divorce every 6-12 months for the last four years. Several reports in early 2006 said that Verizon made an offer, but later reports said that it was rejected by Vodafone as too low.

But looking closer tonight, this week’s story was that Vodafone (market cap $177b) is thinking about a $160b offer to buy all of Vodafone. The NYT says

Chatter about whether Vodafone might bid for Verizon is a fairly regular occurrence, in part because of a put option that allows Vodafone to require Verizon to buy its share in their wireless joint venture, Verizon Wireless. Such talk frequently circulates among bankers rather than the companies themselves, however.

I can’t say I ever heard before today a proposal that VOD buy all of VZ, only speculation that it would buy the missing shares of VZW (or sell those shares to VZ).

The Vodafone PR department was pretty unequivocal

Re: Press Speculation
16 July 2007
Vodafone notes press speculation that it is considering a possible offer for Verizon Communications. Vodafone wishes to make it clear that it has no plans to make such an offer.

(If it later turns out they were lying, I’m not sure there would be real consequences.)

Larry Dignan of ZDNet offers three interesting comments based on the original FT posting:

• The deal would only work if Vodafone sold off all of Verizon except wireless for about $90b (i.e. wireline and presumably the phone books).
• The dollar is weak and the pound is strong and so this is good time to do it.
• The PR denials mean that it’s a trial balloon, with Vodafone waiting to see how the markets react.

The FT article says that Vodafone’s put option expires this month, so if Arun Sarin wants to use it to extract leverage, the clock is ticking.

Sarin — former COO of AirTouch and before that CFO of Pacific Bell — has been in trouble with shareholders for a while. Most analysts think that Vodafone’s current problems are the direct result of the overly aggressive acquisition strategy by Sarin’s predecessor, Sir Christopher Gent. So even if Sarin has a way to dump half of Verizon’s assets, this acquisition still would be a huge risk for the company and Sarin’s career.

Troubles at Verizon Wireless

This morning brings news of the Chapter 11 filing by one of the largest US MVNOs, the youth-oriented Amp’d Mobile. Why? They have high churn, high customer acquisition costs, and a high rate of deadbeats. Not a great formula. Some wonder whether the failure of a prominent MVNO will hurt the planned IPO of the most successful US MVNO, Virgin Mobile.

News reports suggest that Amp’s bankruptcy came as its network carrier, Verizon Wireless, was no longer willing to extend credit — thus forcing it into bankruptcy.

But Verizon Wireless has much more serious problems. As the Wall Street Journal reported this morning, the stock has run up due to speculation it might be broken up:

Vodafone's shares also have enjoyed a bounce in recent weeks amid speculation that AT&T Inc. could be considering a bid for the company, a move that would likely mean at least some breakup of Vodafone, particularly a sale of its stake in Verizon Wireless. AT&T has said it may pursue smaller, strategic acquisitions abroad, but a person familiar with its thinking says the company isn't likely to make a major move so soon after its purchase of BellSouth Corp. at the end of last year.

Some analysts think Vodafone could have a higher valuation if sold or split up. Vodafone's shares currently trade at about six times earnings before interest, taxes, depreciation and amortization for the fiscal year ended March 2007. But recent sales of some telecom companies — such as Alltel Corp.'s agreement to be taken over by private-equity firms — have fetched as much as nine times.

The company’s $170 billion market cap makes it a difficult takeover target. AT&T is one of the few possibilities, with a $250 billion market cap.

Such a merger would reunite (however temporarily) Vodafone CEO Arun Sarin with some former Pac Bell colleagues. In 1995, Sarin helped organize the spinoff of the cellphone assets of Pacific Telesis to form AirTouch, which was acquired by Vodafone in 2000. (Meanwhile, Baby Bell SBC bought Pacific Telesis, Ameritech, Bell South and then AT&T).

However, any AT&T acquisition of Vodafone would require dumping its US affiliate, Verizon Wireless. Combining the Cingular 27.1% market share with Verizon Wireless’ 26.3% would not pass antitrust scrutiny. (Ignoring the GSM-CDMA incompatibility).

Last year, Verizon bid $38 billion for Vodafone’s 45% share of the joint venture. This morning, the Breakingviews column of the WSJ estimated that the going price would be closer to $66 billion — up by 65% over the $40b estimated value. The Verizon’s shares are up 48%, so the shares have inflated almost as much.

Technorati Tags: mobile phones, MVNO, Vodafone, Verizon

Apples and Oranges

As the US rollout of the iPhone approaches, Apple still has not announced its overseas strategy — whether the planned December intro in Europe, or any release elsewhere in the world.

Apple is notoriously secretive, but the (plausible) rumors are that Apple will choose a single pan-European carrier and thus (as in the US) a phone locked to one carrier. Bloggers on April 21 and May 6 have claimed Vodafone is a “lock” (all pun intended).

I find more plausible the recent posts that suggest that Apple is debating between Vodafone and Orange. This is consistent with Apple’s US strategy, where it got the two leading carriers to bid against each other. Maybe Vodafone has the broadest reach, but they are also the global carrier most trying to commoditize handsets. No single Vodafone action would undercut its strategy more than carrying the Apple-branded iPhone with some subset of Apple restrictions, while Apple is not going to let any carrier dictate terms without getting a competing proposal.

Most plausible is the speculation that the iEuroPhone (EuroIPhone?) will support 3G. Still, the best (if least substantive) commentary was last week on Wired:

Has anyone else noticed the amount of insane speculation over this product? All over the web we hear every day that people won't buy it because of battery life issues, a poor touch screen experience or any other manner of nonsense.

You can't buy one. It doesn't exist yet. Why on Earth are people debating non existent problems with a non existent device?

Let's just wait and see, shall we? It's only six weeks more.

On a related note, UBS is predicting 850,000 iPhones will be sold in the first 4 months, 2.1 million total in calendar 2007, and (if you extrapolate) more than 8 million iPhones in 2008. Given there were only about 145 million handsets sold last year in the US, those numbers confirm to me that Apple expects significant overseas sales in 2008. But then, any predictions of iPhone sales prior to its launch are merely speculation.

Technorati Tags: Apple, iPhone, mobile phones, Orange, Verizon