Monday Note

In the US, if Apple gave up on the AT&T exclusivity, the iPhone’s market share would double. So says Morgan Stanley’s anal-yst Kathryn Huberty. See this PC World piece here. And a CNN/Fortune Magazine piece here.

Let’s not throw stones at Ms. Huberty but, instead, question her bosses’ wisdom, work ethics or wakefulness. Is anyone editing the firm’s publications? Isn’t Morgan Stanley missing the real fight, the big struggle between Apple and carriers for mobile Internet content billions?’

First, Huberty’s thesis: If AT&T no longer had an exclusive distribution agreement for the iPhone, if, for example, Verizon also “offered” Apple’s smartphone, the device’s market share would more than double from about 4.9% to 12.2%. (In passing: what’s the last digit’s significance? Those are estimates, not measurements, good within a ± 10% margin of error, at the very best. Spreadsheet follies…)
Morgan Stanley’s seer bases her prophecy on French market share numbers after Orange lost its exclusivity and the other two carriers, SFR and Bouygues, gained access to the iPhone. The legend is the iPhone’s market share shot up by 136% as a result.

I’m sorry but that’s a lot of BS; there are no facts to substantiate such a claim.Readers probably know I’m a French-born Silicon Valley-based venture investor; I travel to the old country four or five times a year and keep reasonably close tabs on industry and political goings-on there.
Clouding the discussion with facts: The iPhone has been available from Orange since October 25th, 2007. The other carriers sued and local regulatory authorities subsequently nixed the Orange exclusivity. As a result, SFR started shipping iPhones in April of 2009, about six months ago. And Bouygues did the same about five months ago. Since 2007, Orange alone sold about 1.5 million iPhones. If Bouygues and SFR sold a generous 500,000 units since April 2009, how does this constitute a 136% market share increase?

But, wait, there is more. When it comes to carrier regulations, there are huge differences between Europe and the US. In Europe, carriers can’t play data communication games. They all have to let users connect to the Net and upload/download content just the way they do it with their PC. As a result, iPhones, their iTunes client, their App Store run on unlimited data plans offered by all carriers. We tend to forget Nokia, still the king of cell phones, has been selling smartphones in Europe years before the iPhone came up. European carriers aren’t in love with the idea of being “dumb data pipes” for these smartphones but, c’est la vie, they’ve learned to love the higher ARPU (Average Revenue Per User) provided by avid pocket computer users. Euro regulations are more protective of consumers’ interests than here, in the US, where our solons are carriers’ lap dogs.

Which brings us to Kathryn Huber’s main fallacy: she says nothing of the difference between AT&T and Verizon. She seems to believe Verizon is ready to let Steve Jobs “run the table”. The latter expression means: sell all sorts of content, music, videos, applications thru iTunes without giving the carrier a red cent. In old carrier’s culture, this is the exorbitant revenue Dear Leader hypnotized, to use a polite word, AT&T out of. AT&T professes to be happy with their plate of lentils: higher ARPU, about $100 vs. the $50+ industry average, and stealing subscribers from Verizon and Sprint, all verified facts.
Verizon, on the other hand, isn’t ready for Steve’s rule; the company made it clear they want to set up their own App Store for all mobile devices they’ll bless. Understandably, Verizon want to stay in control, they don’t want their well-regarded network to become dumb pipes, a wireless ISP. Here, control means taking their god-given piece of the action for content sold thru their network, as opposed to letting Apple and iTunes do the job and keep all the revenue.

Which is why I’m very skeptical of rumors regarding a deal between Apple and Verizon when the AT&T exclusivity expires. If we follow Verizon’s “in control” logic, they’ll bet on the advent of iPhone competitors attractive enough to avoid losing subscribers to the other three carriers. It could happen: Android keeps improving and could allow smartphone makers such as HTC to produce real iPhone killers. The Wall Street Journal’s high-tech guru, Walt Mossberg, just wrote a glowing review of Sprint’s HTC Hero.
This said, the question of catching up with the 85,000 apps on Apple’s App Store and its 2 billion downloads on 50 million of iPhone and iPod Touches is left unanswered. The iPhone started as a device, its is now an ecosystem. This is precisely what Verizon must be weighing: can they build one “just like Apple’s”, or should they ride it?

My own guess is Apple will encircle Verizon by making deals with T-Mobile (no hardware modification required) and Sprint (a simple change of baseband radio, different from the worldwide GSM radio on current iPhones, see my “Steve Cuckolds AT&T column here.). At first, it won’t double the number of units sold in the US, but Apple will stay in control of content revenue, a growing part of is future – I’ll explore that very topic in a future column.
Sprint has little choice if given the opportunity, it already agreed to let Palm sell content without restriction. T-Mobile is likely to be equally obliging. Which raises an alternate possibility: Verizon, reading the field, doesn’t like what they see and decides, instead, they will take the same $100/month plate of lentils AT&T learned to love.

Will Verizon take the iTunes pill? That would be an even better title for the Morgan Stanley “research” piece. —jlg@mondaynote.com

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