July 26, 2007

iPhone: the end of the beginning?

While America went bonkers over the launch of the iPhone, I was in Europe watching what can only be described as rampant “iPhone envy.” Every day the media carried iPhone stories: the lead up to the launch; early sales reports; followed by frenzied speculation as to which European carriers would get the device and when.

This is a new phenomenon in the wireless world—the device is more important than the network. There was a hint of this potential with the RAZR, but the exclusivity AT&T Wireless (then Cingular) enjoyed on the RAZR was fleeting, and soon every carrier was offering the device. AT&T apparently learned from that experience because they entered in a deal where the iPhone is exclusively theirs for five years.

Reportedly, a high percentage of iPhone purchasers are bringing their business to AT&T from other carriers. The fact that consumers are leaving their old service provider in pursuit of a new piece of hardware lends more credibility to the decline in the importance of the networks themselves. The billions of ad dollars spent to proclaim, “My network is better,” may soon be a relic of bygone days. All the major carriers have been spending heavily on network quality. The day when networks are nearly equivalent is in sight.

When all networks are effectively similar, how will the service providers distinguish themselves (other than suicidal pricing)? Through devices and services.

Helio, the mobile virtual network operator (MVNO) created by South Korea Telecom and EarthLink, has been one of the few bright spots in this space precisely because it focuses on devices and what they enable. The company’s ad campaign says, “Don’t call it a phone,” and focuses instead on special devices enabling non-voice apps. Helio’s new dual-slider Ocean device has even been described (in an article about the iPhone no less) as “pretty cool – and maybe even more functional” than the iPhone.

If AT&T is poaching subscribers from others because of a device, and Helio is growing while other common device-based MVNOs have cratered, are we seeing the future? The giants and the startups have almost nothing in common—except that a unique, device-based strategy is working for both of them. Could it be the beginning of a new wireless world?

One other aspect of the iPhone phenomenon might also be painting a picture of the future: consumers paying full price for the device. Buying down the price of a phone in order to entice consumers to become subscribers made sense in the early days of wireless, but it is pretty ridiculous today. Wireless carriers run a perverse business where the more their subscribers grow, the worse their cash flow (because each new subscriber requires a handset subsidy). An early ploy to prime market development has become a bad dream. Now competition has carriers trapped into subsidies and afraid to break the model.

The full-price iPhone not only sold so well, but also poached other carriers’ subscribers—without AT&T having to pay a subsidy to buy down the handset price. That is a pretty powerful signal that in a device-driven world the old subsidy model could be a relic. Even before the iPhone, Barry West, who is leading Sprint’s 4G WiMax initiative, distanced himself from subsidies for those devices.

If handset subsidies fade into the sunset, consumers will be the beneficiaries because the albatross will be removed from around the carriers’ necks. Not having to bribe folks to subscribe will open capital for new services. Just look at the world’s most advanced wireless nation, South Korea; it is against the law to pay a handset subsidy in Korea yet everyone has a mobile device and the services available there we can only hope to see some day.

With the iPhone phenomenon, Steve Jobs just may have helped the wireless industry discover its future. To paraphrase Churchill, it just may be the beginning of the end of the business model we’ve known for the last 20 years.