In defence of the Verizon iPhone

OS share

Baruch has already forgotten about the iPad. Whether chick magnet or large print e-Reader for the elderly, any ideas we have about its significance are speculation at this point, and will probably unravel in the face of reality.  The most tangible action at the moment is in the iPhone, and the most interesting thing that didn’t happen last month is that Verizon didn’t get their own CDMA iPhone announced alongside the iPad.

This was seized on last week by a number of Wall Street analysts who concluded that poor old Verizon won’t get an iPhone at all this year. Credit Suisse reckons there’s a “75%” chance the iPhone stays with AT&T in 2010. I read the research, which also suggested that AT&T might have made some interesting concessions in order to persuade Apple to play along. Barclays Capital (I haven’t read theirs) thinks the fact that Apple is sticking to AT&T for the iPad is a “vote of confidence” in the AT&T network; that, and the comments Apple have made to the effect that they think the AT&T network is very nice, thanks, and they are very happy with it. They don’t see a VZ iPhone in the works either.

Hey, sell side analysts! Are you totally, like, stupid!? There is no way you can make that conclusion on the facts we have so far. The rudest understanding of what Apple is trying to do here and the opportunity set it faces would tell you that the most mind-bogglingly idiotic thing Apple could do would be to keep the iPhone as an AT&T exclusive a moment longer than it has to. And I am not alone assuming that Apple is not mind-bogglingly idiotic.

Why would an iPhone Verizon be so important? Well, lots of Americans are surprised when they come to Europe, and they see just how many people have iPhones here versus back home. Apples’ dominance of the high end market here is quite astonishing. Well over 1 in 4 adults in my office have one in, and I, Baruch, reckon that may be the rate across the tonier parts of the continent. We know that 75% of contract sales in France are iPhones, and in the UK the handset has topped the best-seller lists wherever it is on sale, be it Amazon.de, Phones4U, wherever. Not bad for a $700 handset.

The indispensable Admob gives us the terrifying statistic that fully 78% of all browsing on mobile phones in western Europe takes place on iPhones or iPod Touches. In the US, its home market, Apple’s share of mobile browsing is a “measly” 54%.

 Why the difference? Easy. In Europe all the operators can sell iPhones. Apple has gone non-exclusive in France, Germany, and was always non-exclusive in Italy. Hell, in the UK you can get it at sodding Tesco’s. In the US it can only be sold on the AT&T network. Which everyone knows is shit. BTW I have no idea what the setup is in Oceania, wherever that is, but I bet it’s non-exclusive there as well.

Now, when an operator has the iPhone and it’s making up 70% plus of their contract sales, it looks like most of them don’t really see the need to push anything else in smartphones, whether RIM Blackberries, high end Nokias, certainly nothing on a Palm OS. The central purchasing office might flirt with Android vendors for the sake of dual-sourcing, but their hearts aren’t in it, and more importantly the reps in the shops aren’t going to push the more difficult sale of Android handsets unless you bribe them. No; when an operator gets iPhone, it effectively closes that channel until further notice to any other smartphone vendor who wants to sell in decent volume.

This, I think, is why Android share in Europe is so weak at 8% versus the US at 27%; shut out of the amazing success of iPhone so far, Verizon has had to push something, and for better or worse Android is it, together with RIM. European operators have carried as many Android models as their US counterparts, if not more, but they also all have iPhones to sell. Android is actually more available in the EU than the US, and has been for longer. But no-one buys them.

We’ve talked about the opportunity Apple has created for itself with the iPhone on this site already. It’s nothing less than the dominance of the mobile internet – in the same way that Google has over the “fixed”, PC-based internet, but better. Google doesn’t make a 50% gross margin on the equipment, and it doesn’t get a 30% cut of each and every sale of software and content. Staggering, unbelieveable riches await Apple if events continue in their favour (as well as, I am sure, a date with the DoJ and the European Commission, but that will likely be well in the future, after most of the staggering riches have already accrued). Steve Jobs must be pinching himself every morning.

Android and Google are one of the few things left in the way to getting these riches. “We did not enter the search business”, Real Steve Jobs told the faithful recently, talking about Google. “They entered the phone business. Make no mistake they want to kill the iPhone. We won’t let them.” The marketplace they’re engaged in is a “Highlander” market — there can be only one*; the benefits of being first will be grossly assymetric to the gains of the one in second. It is an unforgiving market; you can lose everything in an instant if you screw up, if you lose your edge –look at Motorola. Apple (and Google) knows it is all about the apps, about persuading others to devote their efforts to making product for your platform. Developers, as much as customers, are going to determine final victory. It’s still Apple’s game to lose, but if a killer app emerges on the Android platform tomorrow it could all change. If Android is out to get them, the only right thing to do is mercilessly crush them; in the words of Fake Steve Jobs, “knock them out and take a dump on their chest”.

Right now the one thing sustaining Android adoption in the developed world is Apple’s exclusivity with AT&T, and the concomitant support of Verizon. These incredibly well paid geniuses at CS and Barcap think there is a chance Apple will keep the iPhone monopoly with AT&T a moment longer than they have to? There’s no doubt in my mind that AT&T’s network problems are causing Apple to lose sales. What could AT&T possibly give to Apple that would compensate for this, and the huge strategic risks they’re running by giving Android breathing space? Assuming the AT&T contract has expired and the CDMA-EVDO hardware is ready, Apple’s going to go for Verizon like a dog gobbles a sausage.

There are two ostensibly reasonable objections to this that Baruch can think of. The first would come from Barcap: if you’re so clever, Baruch, BarCap dude could say, tell me why Apple went with AT&T for the iPad?

Well that would be because GSM-WCDMA is the dominant wireless standard in the world, BarCap dude. You need to think outside the US. The first iPad generation should address as many markets as possible, and there’s just no way you’re going to do that with an iPad on the CDMA-EVDO standard. That means the first iPads in the US are going to be sold through AT&T or T-Mobile USA. Which one would you choose? Given its huge edge in distribution, even if AT&T are the irresponsible fucktards who starved their network of capex, it’s a no-brainer. Apple could have made the first iPads “worldphones” running on both GSM and CDMA, but that would have added to the price and just drained battery life. And as for the fact Apple said they’re happy with the AT&T network, well, I hate to break it to you but they probably lied. What do you think they’d say when asked? No, we think AT&T are fucktards and we can’t wait to get rid of them? So that’s not a good objection.

The second ostensible objection would come from the Credit Suisse analyst: Baruch! he would bark; how do you know AT&T’s exclusivity contract with Apple ends this year at all? What if it doesn’t? Wouldn’t that make everything you just wrote a pointless exercise in wibbling?

Well, yes, actually, you would be right. But, CS analyst, most of the exclusivity deals Apple signed with operators outside the US have indeed recently expired. Why should AT&T’s be any different? Apple signed these other deals, with Telefonica, Deutsche Telekom, France Telecom etc, around the same time as it modified the original iPhone deal with AT&T, which saw AT&T agree to subsidise the 3G iPhone in return for no longer having to pay Apple a share of the revenue generated from the old 2.5G original. The gossip at the time (mid-2007) was that the deal would last 3 years — which would take us to mid 2010. In fact the main reason why we haven’t seen a Verizon iPhone yet may not be because the contract with AT&T is still valid, but simply be because it probably takes time to build one. Whatever. The chances of the deal expiring this year strike me as much higher than the 50% you put in your research report, anyway, Credit Suisse.

I don’t know, analyst dudes; you may still be right, and Verizon gets no iPhone this year. Stranger things have happened. But it just seems the more unlikely outcome.

*also known as one of “increasing returns to scale”, or an “ABBA market” — where the winner takes it all.

13 responses to “In defence of the Verizon iPhone

  1. Baruch,

    I think you are underestimating Android’s share to some degree. The Admob site itself says:
    “Remember AdMob data is based on the usage of mobile sites and apps…” Even with my G1, now a somewhat obsolete ugly prototype, I generally look at the normal net sites rather than the dumbed-down mobile versions. Also, I generally avoid apps using AdMob. Anyone with habits like mine doesn’t register in the statistic you quote.

    The AdMob people themselves reference a different metric, http://metrics.admob.com/2010/01/mobile-browsing-trends-from-quantcast/ ,according to which Android has a quite respectable 12.4% North America market-share. About this metric, they say “the data is based on mobile devices browsing the same Internet sites as those browsed by a computer, while AdMob data is based on traffic from mobile specific sites and applications.” So it looks like a lot of Android users are also looking at the full version of websites.
    AdMob goes on to make a very strong Android case here: http://metrics.admob.com/2010/01/metrics-update-android/
    and I will be shocked! shocked! if you impute that their ownership by Google could factor into their analysis. Their first point is “Rapid growth: Worldwide requests from Android devices increased 97% from October to December. AdMob received over 1 billion ad requests from Android devices in Dec 09.”

    Given that Android is coming from zero and competing with the iFad, growth is what matters at this point.

    Also, while this does not yet apply to the normal Android user (if there is such a thing), ultra-early-adopting geeks like myself are now running something like the same software on our old G1s as the Nexus is running. I have live wallpapers. I can have a realtime image of the world, spinning, with clouds and terminator and all, as my wallpaper. I haven’t heard of that happening on an iPhone.

    • Cash, I think Android has much more than 12.4% N. American share — the AdMob dudes think it’s more like THIRTY percent. Up from 14% in Q3, while Apple stayed flat at 54%. So Android isn’t taking share from iPhone OS but is certainly growing faster, and is finally becoming comparable to iPhone, which must make Apple very very worried.

      Most of that growth seems to be coming from MOTO Droid, ie at Verizon, the only developed world bigtime operator not within Apple’s “family circle”, as it were, and therefore capable of taking share in the handset market if it makes a big push.

      Again, in Europe, where no “Android friendly” operator exists any more, Android’s q-q share gain is a pimpsqueasly TWO percent, from 6% to 8%, while Apple gained EIGHT points, to 78%.

      You see the difference, I hope. I am not underestimating Android’s share, and I am saying they will likely gain more share relative to Apple in N. America, especially as AT&T’s network branding problems seem to be getting worse. But I am also saying that Apple has a rather good opportunity to clap a stopper over Android’s growth by co-opting Verizon, and reach a similar level of dominance as they have in Europe.

      As for Admob, my heart sank when I saw that GOOG had bought them; they are an excellent and free resource. I wonder how long that will last under the new ownership, especially if, as I fully expect, their free data only shows how the mobile strategy of their corporate overlords is going very very badly, and their arch rivals bound from triumph to triumph.

  2. Comrade de Chaos

    when it comes to sell side analysis, well I couldn’t agree more; when it comes to apple, well the minute they will switch to some other but google search engine, it will be the first nail in their coffin of its long term profitability & margins. The reason being, GOOGLE is the best search engine out there & in addition will absolutely dominate online storage and computing.

  3. The venture capitalist William Gurley wrote an article in January suggesting that Google can win by bribery (ie, sharing ad revenues with carriers). Personally, I’m skeptical — consumer pull is more likely to drive smartphone demand than carrier push — but it’s food for thought.

  4. I forgot to add:
    He emphasizes that Android’s target market is not current smartphone adopters, who will undoubtedly continue to favor iPhone, but the vastly larger installed base of “dumber” mobile phones. He also claims that Google can win with such a strategy even if Android is an inferior product to iPhone. Anyways, do read the article itself, he makes his contrarian points more effectively himself than I am capable of paraphrasing.

  5. Wow, thanks for the link, Anon., very interesting.

    I still think I disagree with it. Again, this US-based guy isn’t reckoning with the failure of Android outside the US.

    And so far, there haven’t been any successful mid end smartphones. So far the market Android would be aiming at on Herrn. Gurley’s reading does not yet exist.

  6. Baruch,

    Thanks for correcting me on the statistic. I think I initially read the post on my phone and got the colors wrong or something.

    Reading a Clusterstock article about India today, I read that in the year to March 2009, India added 125 million mobile phone subscribers. Looking back at the admob chart, it looks like Asia is still 69% Symbian. Europe may be owned by the iFad for the relevant future, but if Android can do well in markets with large populations which are adding subscribers, that should matter in the longer term. The Gurley article, which is indeed interesting, seems to be looking in this direction also.
    A few other things should be kept in mind. First of all, as always with Apple, there is only one hardware vendor, take it or leave it. While the iFad fanbois seem to have some kind of Stockholm Syndrome thing going with Apple, other people might like to be able to choose from what is already quite a few offerings from quite a few vendors running Android.
    Also, the development of Android is rapid. I am well-positioned to see this, as I have even taken to building the software for my phone myself. It’s a beastly huge amount of code that takes forever to build, but the changes are impressive.
    Since I got my ugly prototype, the G1, I have added an on-screen keyboard, live wallpapers, and GPS-driven turn-by-turn navigation (which works quite well), just by installing non-stock software. Android 2.1, the same version which is in the Nexus One, is now running on my G1, providing the same bells and whistles (more slowly, of course).

    In considering the possible spread of Android, one needs to consider both the rapid advance of the software, and the effect competition from many vendors will have on hardware pricing. Apple’s software (other than the apps in the marketplace) doesn’t seem to be advancing rapidly (and they only have one team of engineers to work on it, not an official team and a cast of thousands outside it), and there will be no competition with their hardware base. This I think means Gurley is right: even if Android can’t make a dent in the iFad, it can compete effectively in taking market share from other devices.

  7. Intel, Nokia join Linux efforts for ‘smart’ devices
    Intel and Nokia are combining their respective Linux operating environments to power future smartphones and tablets, another step in a technology tie-up launched last year.

    The technology merger will fuse Intel’s Moblin and Nokia’s Maemo software to form a new operating environment dubbed MeeGo, which is expected to power a range of devices, including pocketable mobile computers, Netbooks, tablets, connected TVs, and in-vehicle infotainment systems.
    http://reviews.cnet.com/8301-13970_7-10453293-78.html?tag=newsLeadStoriesArea.1

    The plot thickens…

  8. Voda goes ultra-cheap with handsets for the developing world
    In rich countries, the consumer buzz around mobile phones is all about iPhones and data and internet. But for cellcos, rich countries equal saturated markets, fierce competition and stand-still sales. They rely on the developing world for just about all their growth.
    http://www.reghardware.co.uk/2010/02/15/vodafone_cheap_handsets_for_emerging_markets/

  9. It’s important to note that starting in 2011, Verizon, AT&T, and about 40 other mobile organizations will be pushing LTE as a common platform for 4G.

    There may be a CDMA iPhone beforehand, but I suspect Apple will introduce an LTE iPhone once there is sufficient network coverage.

    http://www.pcmag.com/article2/0,2817,2359385,00.asp

  10. This conversation and today’s announcement by RIM’s co-CEO that “We must conserve bandwidth” reminds me of AT&T and Fake Steve Job’s post, copied below.

    http://www.fakesteve.net/2009/12/a-not-so-brief-chat-with-randall-stephenson-of-att.html

    Now I would never go so far as to say that Apple is the kind of company that would let people dictate terms to them – but somewhere, I bet, is an agreement for continued exclusivity on the AT&T network to get the iPad network deal inked.

  11. Baruch,

    This is just a quick note with a personal observation. For reasons having to do with prevailing winds, bus routes and avoiding bike-riding into a headwind, I have been more in contact with the local ispanoparlante immigrants than previously, and noticed a number of Android phones (mostly old G1s, which are cheap now), and no iPhones. Today I noticed that the South Asian busboy at the cheap Japanese restaurant I lunch at was using one.

    I can say from my personal South America experiences that folks down there think nothing of buying a phone and slapping a sim-card into it. Vendors hawk sim-cards on the trains, usually for next to nothing and with some minutes already credited. The model Google is clearly furthering, wherein the cell companies are essentially just ISPs, was already quite normal in Buenos Aires years ago.

    I expect to see cheap or used Android devices becoming the “poor man’s iPhone”, and spreading widely among all classes except those who wouldn’t be seen without their iFad logos regardless of the price and technical merits.

    Myself, I’m more interested in Openmoko or Meego. Android has what for me (as a long-time Free Software user and advocate) is a sort of grubby and unseemly closed-source marketplace glued onto a vast body of (uncompensated) Free Software. People are charging for apps that do the most trivial and basic things, which are of course standard tools in any GNU/Linux or *BSD distribution. I want to run a Debian-based distro on my hand-thing, and buy nothing but bandwidth from cell companies, and expect I will be able to before long.

    In case you missed it, Chinese Poet-Statisticians:

    http://ftalphaville.ft.com/blog/2009/08/13/66901/because-of-statistics-i-am-not-alone-any-more-i-can-play-in-the-numbers/

    Buen provecho!

    Cash

    • Muchos gracias por el linko, Cash.

      As for the meat of your comment, I have been doing lots of work on EM smartphones recently. You are right I think, that’s a game that is still wide open it seems to me.