Locked iPhones will cost Apple as global rollout continues
Constant rumors of Apple negotiations with cellular carriers in an ever-growing roster of nations – Spain and China being the most recent – indicate that the company is pushing forward rapidly toward realizing its dream of selling the iPhone worldwide. But its policy of tying the iPhone to one carrier per country has met with increasing resistance.
Yesterday the German unit of Vodafone Group obtained an injunction against Deutsche Telekom AG’s T-Mobile unit to try to force it to sell unlocked iPhones in Germany. Apparently T-Mobile could sell locked iPhones as well, but Vodafone claims German law says it must offer an unlocked version as well.
"We want it to be available to buyers without a mandatory calling plan," said Vodafone Germany chief executive Friedrich Joussen.
T-Mobile disagrees. Another hearing on the matter is scheduled to take place in two weeks in the same Hamburg court that issued the injunction. It could well result in the availability of legally unlocked iPhones in Germany.
If that does happen, it will mirror the situation in neighboring France. There the sale of mobile phones locked to a single carrier explicitly violates French law, which forced Apple and its French partner Orange to offer an unlocked version of the iPhone.
France and Germany are just the beginning. I suspect lots of other countries where Apple would like to sell iPhones have similar regulations against locking customers to a single carrier with long-term contracts.
Signs of trouble can already be seen in countries like China and India where Apple has yet to introduce the iPhone. The black market for unlocked iPhones is exploding.
Tim Bajarin, an analyst for Creative strategies witnessed this himself during a recent visit to China. “I saw unlocked iPhones everywhere – in cell phone stores and camera shops, all over the place,” Bajarin told Wired. “It was unusual even if one of the major Hong Kong stores didn’t have at least one or two [unlocked iPhone] advertisements outside the store. It was really blatant.”
Apple’s negotiations with China Mobile reportedly are sticking on Apple’s demand for 30 percent of the monthly fees, but that may be the least of its problems in its plans to break into the massive Chinese cellular market. Chinese customers accustomed to unlocked SIM cards in their cellphones may well prefer a black market iPhone to Apple’s locked, legal version.
With a the market for unauthorized unlocked iPhones thriving and a widespread distaste for locked mobile phones, Apple may soon find its “one country, one carrier” policy on very shaky ground.
Apple’s rationale for doing it that way – to lay claim to a hefty chunk of the monthly carrier fees, as well as to benefit its cellular partners – may have seemed like a good idea at the time but it is facing steeper challenges overseas than it did in the United States.
Even in the U.S. where customers are used cellphones locked to one carrier, many jumped at the opportunity to unlock their iPhones once a few enterprising individuals proved it was possible.
The growing international legal quagmires and widespread customer resistance will push Apple to reverse course on this issue. It wouldn’t be the first change in iPhone policy.
Apple has already altered its strategy on several aspects of the iPhone in response to various events. It dropped the price $200 to increase sales volume. It announced it would open up the platform to third party software next year. And in Europe, it made a deal with Wi-Fi hotspot providers so iPhone owners can use those networks for free.
I realize Apple would lose revenue from the shared fees, but the tangle of issues it faces calls for new tactics. Apple could still have a “preferred provider” in each country that could offer certain services that users of unlocked iPhones could not get (much as illegally unlocked iPhones now lose some functionality). That would preserve some the shared revenue.
And using the French model as a precedent, Apple could offer unlocked iPhones at a slightly higher price (we still don’t know how much higher the unlocked French iPhone will be) to try to push customers toward the “preferred provider.”
It may not be a perfect solution, but at least it would address most of the legal issues and present a viable option to customers uncomfortable with being locked to a single carrier. Apple can’t wait until its partners lose court battle after court battle and customers all over the planet choose to bypass Apple for the black market.
Steve Jobs, can you hear me now?
Comments
Apple spent almost $800 million this last year on research and development.
Why should they not be the beneficiary of the rewards of that investment?
The Vodafone attack on T-Mobile in Germany is evidence of how much it will hurt them. But then again, Vodafone declined the iPhone.
I hope Apple continues exactly as it is doing.
Posted by: Jon T | November 20, 2007 3:05 PM
Vodaphone has envy for T-Mobile signing with Apple, and now they want to kill the deal. Typical European mentality.
Posted by: John hope | November 20, 2007 6:34 PM
I must say that this article is the first complete and accurate American source I had read about the iPhone legal quagmire outside United States.
It describes exactly the dilemma of Apple. Make money selling hardware and software or making more money with some kind of scam to access royalties. It seem that Apple is in danger of losing control of what its real business is supposed to be: making hardwares and softwares for use them well.
I think that in a few months, many lawyers working for Apple will be fired for not knowing what about thoses consumer protection law codes outside USA...
It is ironic that when at last Apple could have a real marketing success with the iPhone in a very big and difficult market like China, they snob it just because Apple didn't find yet the exclusive unique Chinese carrier they hope.
IPhones unlocked are the real future of this machine. Let iPhones owners - not Apple - making freely their choice of carriers. With those exclusive contract with AT&T, Orange, etc, Apple is going in the dark side from competitive/innovative market versus the oligolopolistic market.
Welcome to a world where Ayn Rand is absolutely unknown...
Posted by: Papyboomer | November 20, 2007 8:30 PM
If you recall Apple when through similiar legal battles in France and the Netherlands with the iPod. The laws there prevented a music device from being 'locked' into one music format. Apple worked this issue through the courts and successfully acheived a compromise.
Don't be so naive as to think that business and law are separate things. Today they are one and the same and smart companies use it to their advantage. Business deals are worked out in courtrooms. Litigation is another word for negotiation.
Apple is smart and does its homework before it invests time and money in any venture. I'm sure it has weighed the risks of offering locked phones in countries where the laws are different. But if it hopes to regain control over its hardware, then it has to risk challenging the law. Nothing ventured, nothing gained and I'm sure these legal battles are part of its strategy.
Posted by: Michael | November 21, 2007 8:47 AM
@ John
It's not a matter of mentality but of free trade and free circulation, which are the bases of Europe !
Anyway, the open iPhone will cost 1'000€ (!)
Posted by: Thierry | November 21, 2007 10:57 AM
Do you think Apple is run by a bunch of fools? Or do you think Apple is taking advantage of whatever they can for as long as they can?
Apple knows that iPhone is special (for now). So they will use it to change the cellular industry, not forcibly, but with benefits to both the carrier and itself - thus the lock-in and premium. Carrier gets new customers and 2-year contracts, and Apple gets a share of the revenue. But when that has played itself out in the market, then the carrier loses that benefit, and Apple loses the extra revenue (est $400+) per customer. But Apple still has gained some fundamental changes in activation, branding, etc, and still makes its margin on the iPhone hardware sale.
So what is this "cost" to Apple? Simply a drying up of the deferred revenue stream that has barely shown up on its quarterly profit statement. Not that big a deal.
Posted by: mark | November 21, 2007 4:55 PM
Actually, if Apple succeeds in achieving its goal of selling at least 10 million iPhones annually, losing the shared carrier revenue will cost it $400 per phone. That would be $4 billion less profit, an amount AAPL shareholders would be likely to miss. You haven't seen it showing up on the balance sheet yet because Apple is recording the shared revenue from the carriers as it comes in. The profit from each $400 cut will be spread over the 8 quarters of the two-year contract. Trust me, it will make an impact on future earnings reports.
Posted by: David Zeiler | November 21, 2007 5:25 PM
Here in Germany there has been a wide commerce with unlocked iPhones, including the one I have been using now for 3 months. I got it from the US, and there was no problem at all with customs. I just paid my 19% VAT on top of the eBay price. Now this is what I call free trade.
On the general Apple issue, I feel that in the past 4 / 5 years my favorite company has made incredible profits while loosing a lot of the almost proverbial quality it once had. My old Powerbook 165 (Made in Cork, Ireland, Europe!!!) is still perfectly in shape, after 12 (?) years all plastic parts still work and I still use it as a typewriter. My son's new MacBook will never get older than 4 to 5 years, as most Apple products it has been "Made in China", and boy, you can feel the difference.
What I am saying is, Apple should not grow too much. I don't want it to become a moloch, a company very similar to Google or Micro$oft. But if it continues with actions like the iPhone "one-country-one-carrier" policy, which is profit-driven ONLY, Apple will become the new monopolist. And I do not want this. Let Apple loose some money (some, not all) and get back to the reality of what it was and what we want it to be.
Posted by: Dirk | November 21, 2007 6:39 PM