Apple takes a bite out of O2


How much is too much? That's the question facing O2 after The Guardian reported the British operator has agreed to give Apple as much as 40 percent of all revenues from calls and services originated via the iPhone in exchange for exclusive U.K. rights to the device. Yes, 40 percent--one rival called the deal "madly money-losing," which is a dramatic way of saying O2 got screwed. Especially given that the operator must also hand over a commission and future revenue share to Carphone Warehouse, which is reported to be the sole independent U.K. iPhone retailer--The Guardian says the Carphone deal is due to Apple's concerns that O2 lacks a sufficient retail presence to properly support the iPhone. And with the economics of the iPhone deal affording O2 no realistic hope of seeing any return on its investment, that retail profile is unlikely to expand in the future.

Never before has the balance of mobile power shifted so far away from operators--according to The Guardian report, Apple played O2 against rivals Orange, T-Mobile and Vodafone throughout the negotiation process, and at various points each carrier believed it was The One, with an iPhone exclusive as good as signed. O2 won out because its last-minute offer transcended all boundaries of financial logic. In an interview with the Times UK last week, O2 CEO Peter Erskine defended Apple's hardball tactics: "If sharing revenue brings a bigger pie to the table, then we'll be happy to share that pie," Erskine said. "The revenue-sharing model will play an increasingly important role in the future of converged communications."

Revenue-sharing may represent the future, but Apple doesn't share--it just takes what it wants. Perhaps the most remarkable detail about the British operator negotiations is that none of the four U.K. carriers had even the slightest idea Apple was poised to debut the new iPod Touch, essentially an iPhone sans voice services but with twice the capacity and Apple's Safari web browser. No less intriguing, BusinessWeek reports that Apple is mulling an entrance into the FCC's January 16 wireless spectrum auction: While I don't believe Apple truly wishes to tackle the network operations business--consider the fates of MVNOs like ESPN Mobile and Amp'd, as well as the struggles of Helio--even the remote chance the company could offer both mobile devices and services should be enough to send chills down the spines of carriers, hardware makers and developers alike. If it's Apple's world, can you still live in it? -Jason