The iPhone business model killer

Apple's grand entry into the mobile phone market last summer came as no surprise to most industry watchers - rumors of an Apple handset had been floating around for years. The company no doubt had spent much time studying how mobile phones have evolved from a simple voice device into a multi-feature terminal supporting cameras, music players, email, navigation and much more.

Apple probably realized years ago that the mobile phone industry would emerge as its biggest competitive threat. It didn't take Nokia any more than a year to become the world's largest manufacturer of digital cameras, and Kodak and many others in the camera industry know all about the consequences of mobile terminal makers' crusade into that market.

But Apple's entry into the mobile universe with the iPhone must have created wet dreams for every handset manufacturer and not the nightmare scenario many had thought. Apple skilfully negotiated an airtime share deal, so that Apple receives a percentage of the revenue generated from each handset. In return for this share, the mobile network operators that partner with Apple can offer the iPhone at a subsidized price, in addition to having the honour of being associated with the Apple brand.

Now it can come as no surprise that the leading manufacturer, Nokia, loves Apple's iPhone business model of receiving a share of the revenue generated per handset.

With an installed base of more than one billion handsets, on average Nokia handsets generate 40% to 50% of the traffic on a mobile operator' network. Nokia stands to receive a huge amount of revenue from operators if it could get the operators to sign up to a similar partnership. If Nokia could be persuaded to sell the handsets at a lower price to operators in return for a percentage of revenue, the economies of scale for the operator would be a very interesting.

Apple's brand is strong, but its target for the first 18 months is 10 million shipped handsets. Compare this to Nokia's expected shipments of 400+ million handsets for 2008 alone. For an operator it would make a lot more sense to partner with Nokia or any of the major manufacturers over Apple. Here size really matters.

Apple's initial launch in the US, followed now by a much more modest reception in Europe, must bring frowns on the faces of Apple stockholders. For now Apple has not revealed any plans for a launch in Asia, however, gadget happy Japan and Korea with high ARPU figures must be like looking evermore tempting, as the European fairytale goes cold.

We seriously doubt that the Apple iPhone will make a big impression on the experienced mobile users found in Asia.

So where should Apple focus and make its money in the mobile universe‾ The company has a unique opportunity to make money off iTunes, much like Nokia will make money off its many new services platforms (LBS, Ovi, Mosh, Medeo and music store). But even here, Nokia has a much broader distribution of devices than Apple and could easily take Apple on and win.

Nokia's latest comments point to the fact that the company is already taking all these steps and moving to kill off Apple before it gains a wide footprint in the mobile world.

The big question is if the operators and Nokia can reach an agreement and Nokia is able to take on some of the operators' risk by subsidizing the terminals for a share of the airtime revenue.

Nikolaj Grubert is a VP at Strand Consult

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