This is the iPhone’s Business Model on Crack
Recently, the Wall Street Journal reported that AT&T is looking to extend its exclusive deal with Apple to sell in the United States until 2011. This news is not particularly surprising considering the company’s business model for the popular handset. AT&T’s iPhone business model is like a crack addiction. It delivers a short term high, then sinks into an addiction and ends badly.
The High:Selling iPhones for less certainly helps increase Apple’s sales volume and AT&T’s short term bottom line. There were 1.6 million new iPhone subscribers on AT&T’s network in Q1 2009, with 40% of those customers new to AT&T. According to the New York Times, iPhone customers are particularly valuable because their average bill is 60 percent higher than the company’s overall customer base. The Times estimates that iPhone exclusivity generates $700 million per year in operating profits.
The Addiction: Where’s the problem in millions of profitable new customers? As I discussed in AT&T’s Value to iPhone Users: Negative $400/phone?!, these customers are really Apple’s with little loyalty to AT&T. AT&T’s business model is based on subsidizing the cost of the iPhone and making its profits from high monthly fees over the life of a 2 year contract. The Wall Street Journal estimates that it has spent upwards of $1.3 billion to discount the iPhone. So the company relies on higher service fees that is supported through exclusivity.
Given this business model, you would expect that AT&T would make its customers feel like they get great value and service from the carrier to mitigate the effects on the eventual loss of exclusivity. Unfortunately, they do exactly the opposite. Despite claims of the fastest 3G network, a Gartner research study found that AT&T customers often receive half the advertised data rate. Contact from AT&T is pretty much limited to the bill and text messages upselling higher priced services. The popular applications come from Apple and not AT&T. So customers get cheap phones and applications from Apple, and poor service and high fees from AT&T. Not surprisingly, iPhone customers love Apple. AT&T? Not so much.
It Ends Badly: So, what happens when the exclusivity ends? On this issue, iPhone customers fall with three categories: customers who will leave AT&T as soon as they have an alternative, customers who might stay with enough incentives, and AT&T employees. Without customer loyalty, the company will take a significant revenue hit both from lost customers and additional subsidies and lower monthly frees that will be required to keep existing customers.
So AT&T is left with two expensive choices. To feed the addiction caused by its business model, it can pay Apple dearly to extend the exclusivity. Also, Apple will likely hold AT&T’s feet to the fire regarding expensive service upgrades to its 3G network. Still, this only staves off the inevitable. Eventually, exclusivity will end. At that time, profits will drop through defections to other providers and lower monthly fees. Cutting corners on communications combined with a poor business model always is very expensive.
Written by Rob AdlerLast 3 posts by Radler
- 3 Defining Quotes From GreenBeat 2009 - December 9th, 2009
- A Social Media Fractured Fairy Tale - July 9th, 2009
- Live from the Archives - July 2nd, 2009
Tags: Apple, Apple App Store, AT&T, iPhone, iPhone 3G, Skype, Vantage Communications, wireless
May 5th, 2009 at 1:13 pm
[...] But, I suspect that its real ace in the hole is the fact that even after the expiration of the exclusivity period, customers will only have a limited number of choices for wireless service providers. Moreover, the other three 3G service providers are likely to follow a similar short-term business model when they sell the iPhone. As typically happens when marketing and customer service are ignored, it won’t end well, as we will see my next post: This is the iPhone’s Business Model on Crack. [...]
May 6th, 2009 at 6:16 am
AT&T does have a window of opportunity to capitalize on their exclusivity. The question is… can AT&T develop unique and sticky functionality linking the iPhone to their U-verse service? Can they then extend these services beyond the U-verse territory leading to a geographically un-bounded superior video and interactive content offering? If I were looking into the future, this is where I would see opportunity.
May 10th, 2009 at 9:30 am
If and when iPhone is offered on other networks, defections are almost certain, and even AT&T will have to drop service prices. Now, could AT&T retain exclusivity based on an iPhone model? If yes, then AT&T might keep exclusivity on the latest model and thus charge premium. That does not mean whole host of customers will not defect. They will. Price is a big driver.
May 10th, 2009 at 5:55 pm
It would be interesting to see if AT&T can tie the U-verse and wireless together. Right now they operate as separate entities in different locations.
As to pricing, there have been rumors that they are going to lower the base price when Version 3.0 comes out. I am dubious unles it is a part of a rearrangement of the economic deal with Apple.
May 12th, 2009 at 8:21 am
Two points of view. (1) If AT&T continues to be the exclusive provider of iPhones, this is a genius way of getting the most $$ for the iPhone, because AT&T does not need a contract if iPhone users have no where else to go. (2) If you buy an iPhone with no contract, you can leave AT&T anytime you chose (if they were not the only provider). This should force AT&T to become service oriented and to offer lower cost plans and fees. And, when the iPhone exclusivity ends, iPhone users may not feel like they have been cut free if they were never under contract to begin with.
So, we have to wait and see if AT&T keeps exclusivity of the iPhone. This may depend on the other providers improving on the speed of their networks.
May 12th, 2009 at 12:29 pm
Interesting concept. Right now, it is sort of like the Hotel California. AT&T and Apple will sell you an iPhone without a contract from AT&T for an additional $400. http://blog.pr-vantage.com/?p=1339. Unfortunately, you check out form AT&T at any time. But can’t use your iPhone anywhere other than AT&T.
I agree that just giving consumers a choice would force AT&T to lower prices. All that requires is a few keystrokes. Becoming more service oriented will be harder. It requries a fundemental change in how they do business.
July 3rd, 2009 at 12:44 pm
Thoughtful post and well written. Please write more on this if you have time.
September 23rd, 2009 at 4:19 am
great article thank you.