Robin on Tech

It’s a fairly banal truism that when Apple launches a new gadget, a lot of people get very excited.

Most of the news coverage of Apple’s iPhone dealt with the somewhat underwhelming technical specs and the innovative interface. However, the really interesting part was barely covered until a few weeks later: the backstory of how Cingular ended up inking a deal with Steve Jobs to become the exclusive carrier for Apple’s new gadget. And why Verizon – Apple’s first-choice carrier – turned it down.

Jim Gerace, a Verizon VP was quoted as saying “We said no. We have nothing bad to say about the Apple iPhone. We just couldn’t reach a deal that was mutually beneficial”. Apparently, the major sticking points were that Apple wanted a cut of each subscriber’s monthly bill while retaining control over how and where the phones could be sold.

It is understandable that Verizon would find these conditions problematic. No other cellphone manufacturer is allowed to take a direct cut of subscriber revenues, nor to dictate how their phones should be sold. Verizon may have felt that it would be setting a terrible precedent if it capitulated to Apple’s demands.

However, there is a lot more to this than might be initially apparent. Significantly, handset manufacturers do already take a cut of subscriber revenues – but they do so indirectly – via handset subsidies. Many consumers demand a new handset every year. All operators heavily subsidise handsets (or even give them away free) as a way of reducing churn and enticing new customers. While the size of the subsidy varies depending on the price of the handset and the monthly spend of the customer, it still constitutes a significant chunk of revenues. If the networks didn’t subsidise the handsets, the manufacturers’ sales figures would go through the floor. Thus the network operators are already (in effect) giving a big chunk of each subscriber’ tariff to the handset manufacturer.

Apple’s plan is to sell the handsets with little or no subsidy (at $599, the 8gb iPhone would be the most wallet-busting mainstream handset available) and to take a cut of operator revenues instead. Of course, one of the most salient points in this discussion is how much of a cut Apple have managed to wangle from Cingular’s grasp. That information is presently a secret. But it means that Cingular avoids taking a hit when the handset is purchased because it is no longer subsidised. Instead, Cingular ends up sending a portion of its revenue to Apple, depending on how much the customer spends on voice and data.

This leads on directly to a broader point: the real significance of the iPhone’s new interface.

It is always risky to comment on the details of a device which one hasn’t used, isn’t yet available and for which few hands-on reviews exist. Nevertheless, from the demonstrations and information Apple has made available, it is apparent that the iPhone has an innovative and easy-to-use interface.

In addition to voice calling, the iPhone puts useful data services front-and-centre in a way which other manufacturers and network operators have previously failed to do on consumer devices. As a case-study of how not to do it, there is no better example than the disasterous campaign launched by British network operator Three - which heavily promoted its video-calling service as a USP. By heavily pushing a consumer service that consumers really weren’t interested in (and were even less interested in paying for) Three failed to attract subscribers and simultaneously tarnished their brand. Of course, this is just one example, but there are countless others. Having paid through the nose for their 3G licenses, the UK operators have conspicuously failed to monetise them by failing to realise their own projections of vast consumer data revenues.

The iPhone could allow them to buck the trend. Examine the picture below.

There are 15 buttons on the screen, of which 5 are data services (Stocks, Maps, Weather, Mail, Web). Crucially, the icons and choice of nomenclature accurately ‘describe’ the services they link to. This compares well with many other handsets, which routinely describe web/wap access as ‘Services’ and use low-resolution, poorly defined iconography. The weak iconography is often compounded by the operators’ ham-fisted attempts to plaster their own branding – or worse – their own interface on top (check out the awful Orange Homescreen for another example). Apple’s insistence on maintaining control over the handset should prevent the operators from destroying the iPhone’s elegant navigation and look-and-feel.

Everything that has been seen so far suggests that uniquely, Apple has produced a very data-centric handset aimed at the consumer market. The quality of the interface is significant because it can affect how much consumers use their handsets each month, and with it how much they spend each month (the ‘Average Revenue Per User’ or ARPU). By providing an elegant interface and a simplified setup, Apple is indirectly encouraging users to spend more by using data services more frequently. This is likely to see more customers signing up for ‘unlimited’ data plans (e.g. T-Mobile’s Web ‘n’ Walk) or using more pay-as-you-go data on existing tariffs.

The idea that if you make something easier to use, people will use if more frequently is rooted in both common sense and empirical evidence. Nokia is a good example of this, as their handsets are frequently perceived as being easier to use than many of their competitors and they usually lead ARPU research findings.

• In their 2002 mobile report, Continental Research showed the average Nokia user spends £22.06 per month; making 15 voice calls and sending 18 text messages each week. This contrasts with an average of all the other handsets manufacturers, whose users spend a mean of £15.14 per month; making 11 voice calls and sending 10 text messages each week.

• Nokia’s own 2006 study had 30,000 respondents across 6 European countries. The three highest ARPU generating 3G handsets were all from Nokia.

Of course, correlation does not equal causation. There are potentially other signficant variables such as age. It would be difficult to prove definitively that Nokia’s ARPU advantage is derived solely from its superior user interface. However, the Director of Continental Research suggests usability may be significant – “handset functionality may also encourage greater usage. If it is easier to use a phone it may stimulate calling and usage of text messages.”

So, Apple is launching a device which should significantly raise the consumption of mobile data amongst those who own the iPhone. This should raise ARPUs, and benefit the network operators. This brings us back to Verizon. Should Verizon have embraced Steve Jobs’ offer? Did they screw up by saying ‘no’? It all depends on the cut the man from Cupertino was asking for. And that it is likely to remain a secret for the forseeable future.

In the mean time, we can only wait to see if the iPhone fulfills its promise to the operators as well as to consumers.