Thursday, 24 April 2008

The reason behind Apple Iphone shortages & the business model

There have been numerous reports of iphone shortages in Apple stores in the US. Check out news24 for the latest article on this or this article which speculated the shortages were due the launch of a 3G version. The main reason seems to be unexpected demand from the grey market (Imported via improper channels) and a large portion of these phones are displayed in stores here in Dubai.

The owner in this store even put a little sticker on the boxes with contact details and 'distributed by'. I asked him if he could get me 100, he said he would need two weeks. I wonder if Apple stores in the US can match that?

Suddenly everyone seems to have an Iphone, everyone seems to be walking around with those signature white buds in their ears.

This though does come with its problems other then Apple stores with out stock. Take into consideration that most people are buying the phone on the grey market knowing the following:

- There is no support or warranty
- The battery cannot be changed and has to be sent back to Apple, without it being bought via the official channels this could possibly mean the phone cannot be used if the battery is faulty in the phone or recharge cycles being used up
- You have to 'unlock' / 'hack' the software everytime a new update is released
- Uncertainty if a particular update will brick your phone

Yet people are still buying the phone. Apple has created such a brilliant phone that even people who dont own Macs, ipods and are not Apple fanatics are jumping at the chance to pick one up. Even with no advertising or marketing.

When you consider the business model used in the US / UK, exclusivity and the operator paying Apple for each new customer, you realise this model may not work everywhere. Lets take a look at some of the reasons:

- AT&T pays Apple for customer acquisition. Now consider a case like the UAE, where mobile penetration is in excess of 110% (People have more then one phone) there is no reason to use the phone to drive customer acquisition. Also in most other parts of the world there are a few operators with significant market shares who do not need exclusivity with a particular handset to drive market share like AT&T did.

- Operators tend to subsididze mobile phones, even offering them practically at no charge. With the additional costs, the model of subsidizing the handset fully by operators is unlikely.

- With the demand for grey market iphones, operators are receiving the benefit of increased data usage without any payout to Apple. They could also capitalize on this market by offering a flat fee on data usage without ever signing up for a deal with Apple.

- The mobile market has been plagued for years with unlocking, operators subsidize handsets the customer signs up for the contract, unlocks the phone and stays on his original network. Also to date there has never been phone that was not successfully unlocked within a short space of time. The battle against the unlockers is a loosing one.

- Every manufacturer out there is planning an Iphone Killer, and if the handset is just as good without the Apple business model who do you think operators will choose?

All of this makes a deal with Apple very unattractive, hence my statement in this post about Apple needing a more attractive business model. They need to rethink their business model in the rest of the world. Especially if they want to achieve a healthy market share in the mobile market and knock the likes of Nokia out.


They could drop the entire business model of the operator paying them back for each acquisition as this does not make sense for an operator who already dominates the market. They concentrate on offering consumer services such as ITunes (Music,Applications & Conent). They should also integrate the phone more with the network, as they did with visual voicemail which is unusable in other parts of the world, an example would be location based services and content delivery.

With the release of the 3G iphone, they could offer Youtube / ITunes over 3G, making the deal more attractive and with this a revenue sharing agreement based on data usage of iphone users. Operators would also benefit as they could finally start seeing some ROI on their 3G roll out & licensing costs.

Now.... that would be a winning formula and when ill be investing in Apple stock.

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