Making money from iOS 4.0

With the new iPhone 4, Apple also launched a new operating system - iOS 4.0 - for its 85 million existing mobile devices: iPhones, iPods and iPads. At the launch event, Apple CEO Steve Jobs presented the different features that are available to developers, and demonstrated some key applications. Although these new features and applications add value for the user, they can be quite challenging for most mobile operators.

The first feature to be announced was multitasking - the ability to run many programs simultaneously. For example, Pandora, a personalized online music streaming service, showed how it was able to stream its personalized audio content to an iPhone while running in the background and using the 3G connection. As effortless and comfortable as that might be for the user, it creates high network load for mobile operators to provide streaming of high quality audio/video content, especially with an increasing number of people using it.

Later, Skype, one of the largest VoIP service providers, showed its application to the audience and presented its ease of use and level of integration into iOS 4.0. It was stunning how easy and effortless users could use Skype, just as they would use the normal phone service that the mobile operators provide. Even when quitting the Skype application, users would still be able to receive calls and other messages.

This proves to be an imminent threat to mobile operators, not only due to the increased network load they need to handle but also because this attacks their main business model: voice services. Up until now, Apple has forbidden these applications to run on 3G networks, but with iOS 4.0 this will no longer be the case. That will increase competition, since mobile operators are online in direct competition for customers with VoIP service providers such as Skype.

Another interesting but very subtle new feature was the possibility of having several exchange servers configured on your iPhone along with other enterprise integration services. As Apple is moving towards the business segment, more users will have iPhones and will be using them for constant online synchronization. Some business services that telcos offer, e.g. push email, might be hurt by this and could die out. Hence operators need new strategies for leveraging the integration of more exchange accounts.

The last, but most important, new feature is iAd. This new feature, which telcos should not underestimate, allows developers to use their applications as an advertising platform. This means that instead of letting users pay for their apps, developers could use in-app mobile advertising to refinance their investment in the application.

Developers are better off, since more people download their apps and users are better off, since they do not need to pay for these apps. Eventually, Apple benefits, since it makes 40% on the deal. This is novel to the advertising industry since Apple acts as an intermediary, selling ad space in applications to companies and creating a platform for in-app advertisement delivery.

The only problem: cellcos do not profit at all from this new development, since the revenue generated all goes to Apple and the developers. If this new development is successful, operators will even have more trouble on their hands - not only in terms of lost revenues, but also building their own mobile ad strategy.

Strategy options

So what can operators do? Here is a list of several services that they need to implement:

VoIP: Although painful for mobile operators, they need to either lower their prices for voice services or build their own VoIP service to compete against Skype and similar services. With enough market power and some other features, like cheap calling rates to mobile phones, mobile operators can make a difference and eventually push out some of the fierce competition that is entering the market. Moreover, the success of their VoIP service can also be transferred to a VoIP strategy, leveraging the telcos' brands and gaining important market share both locally and internationally.

Audio/video streaming: Some of the audio/video-services that some telcos are offering can be leveraged and delivered to the iOS 4.0 devices without great effort. This will increase the number of triple-play subscribers, especially when using "freemium" business models and trial offers. Some operators already pursue such a strategy and have great success with it. Mobile operators still need to take care of the network load that they generate by offering these services. Still, it is better to have their networks stream content that they can make money from instead of letting other players such as Pandora or Hulu rule the game.

Enterprise integration/exchange Server: This is one of the most interesting features that operators can offer to their customers. Telcos can offer a new "cloud-based" address book service that will allow customers to upload their address book to a secure and trusted server, and directly link this to their iPhone address book. Contacts get immediately updated as soon as they are modified on the iPhone. Later, telcos can offer calendar support or other services. As a free service, this will create switching costs since transferring the "cloud-based" address book to another provider might not be too easy. Hence with the "cloud-based" address book, telcos have an additional service they can offer to customers, generating switching costs and decreasing churn.

Mobile ads: With "iAd" being one of the new cornerstones of Jobs' iOS 4.0 strategy, telcos need to build their way into or around this new system. One way is to start being an intermediary, building a partnership with Apple to provide them with local companies that need advertising space for their marketing communications. Since most telcos have contacts with local companies, they need to act as broker between them and Apple, which will be beneficial for all involved parties. Still, this strategy is not without risk, and sooner or later Apple might have enough local knowledge to possibly circumvent the telcos.

Another option for telcos is to partner with other platform providers, such as Google with its Android system or Samsung with Bada, and try to preempt a mobile advertising strategy that circumvents the telco. Google's Android OS is especially attractive due to its high growth rates. But it might be complicated to ally with Google since it follows its own strategy with AdMob and is expected to roll out its own mobile in-app advertising strategy soon. Nevertheless, handset manufacturers installing Android on their devices need the telcos as their main distribution channel, creating an important bargaining position for the operators.

No dumb pipes

All in all, what mobile operators need to do is focus on how to leverage most of the new features that Apple has implemented and try using these to their own advantage in order to not become a so-called "dumb pipe."

Operators have three alternatives: (1) Ignore this development and become a bit-pipe, (2) create their own services, such as VoIP and audio/streaming, and sell these to their customers, and (3) partner with companies such as Google or content providers and offer a wide range of services to their users without the effort required to create and maintain these services.

Dr. Clemens Kohler is a consultant in the Business Innovation Group, and Bernd Ettelbruck leader of the Business Innovation Group, at Detecon International