O2’s exclusivity agreement with Apple in the UK for the iPhone is coming to an end, as the device is to be available from rivals Orange and Vodafone. O2 and the UK’s two non-iPhone mobile network operators will undoubtedly need to find a response. However, the shift in Apple’s strategy highlighted by the announcement means that other markets are likely to follow suit.
Apple needs as many distributors as possible to generate maximum sales. We questioned Apple’s ability to hit its sales projections when the first 2G iPhone launched in 2007 with such a limited, painstakingly negotiated deployment. However, Apple has become increasingly open in its distribution strategy and the result is availability today in 85 markets around the world.
Orange and Vodafone will also undoubtedly benefit from the hype generated by all things iPhone. However, the degree to which they benefit depends on the tariff plans associated with the device. We do not believe that they will be able to differ dramatically from O2 on the device costs (Apple’s sales terms will dictate that). However, they could exploit differences in their tariff plans.
A three-way battle will result in cheaper tariffs, as the research for our iPhone tariff strategies report concluded. Vodafone and Orange will aggressively target O2’s iPhone customers. Those signing up for the 3G iPhone at launch will be coming to the end of their 18-month tariff in January 2010, including those customers that upgraded from the 2G version.
For O2, the lapse signifies the end of the party. It now has to meet the new challenge and has two key advantages over Orange and Vodafone. Firstly, it has 100% UK iPhone market share. Anyone desperate to get the iPhone will already have one and be locked into a contract. High subscriber acquisition costs are therefore less relevant than generally lower retention costs. Secondly, this was always inevitable so O2 has had time to plan a response. The first example of this is its exclusive deal for the Palm Pre, which will be used to attract those seeking an alternative to the iPhone.
As for T-Mobile and 3, this is another example of them slipping behind in the mobile data space. 3 was founded on mobile data services, but is now seen more as a purveyor of cheap minutes and texts. T-Mobile proudly went to market with the first Android handset, only to be beaten by Vodafone to the second.
But the iPhone deal is more of an irritation than a crisis. T-Mobile at least carries the iPhone in Germany and at the current rate there is every reason to suspect that it could also have it in the UK at some point. For 3 the issue of being sub-scale is far more pressing than not having a device on its portfolio. Both will benefit from the halo effect from the renewed iPhone hype.