Disclaimer: I’m an Apple fanatic. I love its hardware, I love its software. I’ve evangelized the Mac platform to my friends, family and coworkers and I’m directly responsible for “switching” at least a dozen of them since becoming a believer myself in 2002. So, after you read this post, don’t try to claim I’m an Apple hater, because nothing could be further from the truth.
So, yesterday the iPhone 2.0 software and iPhone 3G were announced at Apple’s World Wide Developer Conference, and both will hit the streets sometime in early July. Both software and hardware get some significant upgrades: faster connectivity, more services to connect to, 3rd party applications, true geolocation with A-GPS, etc. These upgrades come at a significantly lower upfront cost to consumers: $199 and $299 for the different memory capacities, 8GB and 16GB respectively.
New Hardware Business Models
That upfront price drop comes from a change in business models—the shell game of who pays for what part of the razor, all to make the costs look more palatable. In the US, the privilege of accessing the 3G network will require a $10 premium paid to AT&T—for a total cost of $30 a month [UPDATE: I just read on GigaOM that the $30/month data plan no longer includes bundled SMS messages, so subscribers will also have to pay for that—let the nickel-and-dime-ing begin]. Apple has also ended it’s monthly kickback from the AT&T subscriber’s monthly phone bill.
What’s also changed is a consumer’s choice of buying the phone without signing up for a two-year contract. Yeah, Apple claimed that you used to have to do that with the original iPhone, but there were ways to pay-as-you-go each month, and even easy software hacks to unlock the phone before activating it, so it could be used on a competing wireless carrier, like T-Mobile in the US. Now, according to reports, iPhone 3G purchasers must lock in their contract at the point of purchase. This is all done to make sure subsidies are paid in the name of dropping the upfront cost to consumers, getting more people to purchase the phone, and increasing iPhone market share.
Personally, I don’t have a problem with that business model. My question is, why is that the only way to buy an iPhone? If Apple’s goal is to increase market share for the iPhone, the first generation of the iPhone proves that there’s demand around the world for it, even people who are willing to pay a premium for it and purchase it on the gray market. And you have idiots like me who are willing to stand in line all day and pay the original full price—three times what today’s intro cost is, on top of the monthly service. Clearly people are willing to pay for the freedom, why not sell the iPhone 3G like Macs or any other computer without subsidies? At least provide the option of buying an iPhone 3G like any other multipurpose computer, with no strings attached? Just like in today’s competitive GSM market, a few will choose to buy a phone separately (and pay a premium for it) while others will go with a subsidy.
If Apple were to sell the iPhone 3G like that, chances are, I’m going to subscribe to AT&T anyways, because for me AT&T works well in Washington, DC and the places to which I travel. But some people prefer another service provider for different competitive reasons. Some may object to AT&T’s business practices and take their iPhone elsewhere. For others, like a Vermonter who is not able to receive AT&T service, they may have to use T-Mobile.
If customers are willing to pay full price for the device (and increase Apple’s market share in the process), why deny those potential customers?
New Software Business Models
I’ve been installing applications on my iPhone for much of the time I’ve owned one, but not via Apple’s blessed App Store, but via the “jailbreak” method. Recent hacks of this sort literally take less than a minute and put a nice App-Store-like app, aptly named “Installer,” on your iPhone home screen. From there, you scroll through what seems to be hundreds of independently created programs that let you do all sorts of things with your iPhone. It’s really amazing to see an iPhone stretch its legs with these no holds barred apps—you really witness what the iPhone revolution is (or could be) all about.
My complaint with the App Store, again, is not that Apple is providing an easy way for indy iPhone app development and distribution—no, that’s competition and that’s great! My complaint is that the App Store is the only sanctioned method to get apps on the iPhone, that only “blessed” apps get in the door, and all of those apps are essentially crippled apps, as compared to the full functionality of the “jailbreaked” apps. App Store apps can’t run in the background, access all the resources of the iPhone’s file system, or execute code. So what? Well, it means that App Store apps might act more like every other lame application for other phones, as compared to the full featured apps we have on our computers (and iPhones) today.
For instance, today on my iPhone, I use an IM application (actually, I have a pick of two—Mobile Chat and Apollo) that, mid-chat, lets me switch to a different application or even turn the display off while the IM app still runs. I have an app that switches my iPhone’s music library, so I can synchronize podcasts from my home computer or work computer without having to rewrite the entire music library. I have an app on here that directly syncs my Gcal to the iPhone’s calendar. Lastly, I have a VoIP client called Fring, that let’s me call and receive calls via Skype. None of those will be possible with an App Store application.
Apple has said that the reason some of the functionality of official App Store apps are limited is because, if left on, they can eat up the battery life of the iPhone. I’m not going to dispute that, in the way I wouldn’t dispute that leaving on a VoIP app on my laptop could eat up its battery life. Apple announced yesterday it had a solution to no-background-app issue. The solution isn’t one that creatively allocates power and resources only to applications that would need them. No, instead Apple plans to solve it with it’s own specialized messaging gateway called a push notification service. The idea is that if there’s a message from an Internet resource that needs to be sent to your iPhone, don’t worry, Apple’s service will make sure that it gets passed along—well, at least a limited version of it. Apple says you’ll be able to push badges to icons, notification sounds, or pop-up text alerts to the iPhone. To make any of those notifications useful, you’ll still have to relaunch a program to view or respond to them. I’m betting that wouldn’t be quick enough to launch a VoIP app to respond to an incoming call.
I can’t dispute the solution Apple is trying to provide here, except to highlight that its claim is that battery life is going to be harmed by leaving resources on in the background, while at the same time, it is proposing a solution that sits in the background and uses up resources by constantly being connected to the Internet. While this may or may not be as resource intensive as running a bunch of apps all connecting to the Internet (I’m speaking above my level of expertise here), from a competitive viewpoint, Apple has created and will be maintaing the only gateway by which independent iPhone applications can constantly and persistently receive updates. This smells a lot like a general purpose SMS gateway, and without having seen any terms of use yet, I suggest that there may be a reason for concern.
Why Not Openly Compete?
The point of this post is to ask why Apple seems to be afraid of competition? It has produced a revolutionary new device, putting computing power and Internet access in the palm of anyone’s hand, but then holds it (and the applications on it) back from competing in the full market place. Apple’s rhetoric is that the iPhone is the über-phone, and evangelists like me are spreading the word, and the 6 million iPhones sold so far are evidence of that. Apple says it has the best solution for creating and distributing applications for the iPhone. If those statements are true, why not instead of locking the iPhone and its apps down, let them stand on their own merit and compete against other offerings in the open market?
The pricing subsidy, the crippling of official SDK applications, and the limitations of who can sell what in the official App Store each hold the iPhone back from reaching its potential. It’s already amazing, but the competition would make wireless carriers’ services better, it would make the applications better, and it would competitively lower the iPhone’s price instead of artificially relying on this subsidy-model shell game. Why not open up a little, Apple?
From a business strategy
From a business strategy standpoint, I agree with everything you said. Just because Apple is not implementing what we see as the optimal business model, however, this does not mean they aren’t competing in the free market. In the free market, customers are perfectly free to purchase the iPhone (and endorse Apple’s strategy), or purchase an alternate device (and reject Apple’s strategy). Ultimately, Apple will adjust its model to respond to these market forces.
The market ceases to be free when the government forcibly replaces a company’s business strategy with its own. Since this is a policy blog, I am curious if you support this approach.
Should the FCC forbid Apple from receiving subsidies on the iPhone, tying it exclusively to a single network, or controlling applications?
I don’t think I suggested
I don’t think I suggested that the government should step in and tell Apple how to run their business. If that’s the way it read, I didn’t mean for that.
However, I will say that in the 700MHz auction debate, yes, PK has promoted the “no blocking, no locking” conditions on the spectrum, but those were from a licensee perspective, not per se the handset manufacturers. The idea there is that the public airwaves dedicated to wireless data and telephony are already tied up in too few hands (and those hands are becoming fewer by the day) and that we need more competition in that market; if the same hands end up winning, they should have some pro-competition rules placed on them to make sure their monopoly doesn’t extend to the devices that attach to the network.
I think my rant above complains of the problems in the wireless market. It’s not as open and competitive as the market for devices and services that connect to the Internet. I think subsidies can be problematic as they can hide the real costs of a device and service. Not sure if the proposed 700MHz rules would have prevented against subsidies or contracts, but I am sure that they would have preventing the phone from technologically being locked to the network, they would have promoted bringing your own phone to a network, and they would have prevented a licensee from blocking applications from being installed on a device.
Could a licensee maintain an exclusive handset agreement under those conditions? Maybe, but the licensee wouldn’t have been able to legally prevent a consumer from disconnecting that handset from the licensee’s network and taking it to another, because the handset couldn’t be technologically locked. Now, of course, early termination fees (ETFs) could apply in that scenario, because of breach of contract.
Is there something wrong with the concept of buying a device from a non-carrier related business, taking that device to a carrier and paying for their service? The concept seems so foreign in the US, but I would suggest that’s because no one guarantees that a device will work with a network—especially the CDMA networks of Verizon and Sprint—and because the subsidies are enough initial incentive for users to buy into and stick with a network. ETFs act as a competitive barrier, but I think those are decreasing as carriers are pro-rating them.
I was just suggesting that the goal of increasing market share would likely be better served by ending exclusive wireless carrier agreements and selling the device in as many ways possible. Clearly there is a lot of demand at the current price, and a lot of people would have been willing to pay without subsidy. The way Apple and AT&T are doing it in the US might be good for lowering the price in the short term, but I question whether the subsidies and increased monthly costs are actually better in the long term—for consumers and Apple.