Analysing Apple's iPod Mobile Phone Strategy Options

IanFogg | October 30, 2006, 03:50 PM

There's much discussion about mobile music phones and how they relate to the iPod. While I haven't had a complete road to Damascus moment since I last wrote about the subject, two years have passed and mobile music is much more credible now. Apple is clearly making plans for how to tackle mobile, how to enter the area, or how to compete with mobile music phones.... but what should Apple be planning, specifically?

I think the many fevered observers -- here, here, and most especially here -- have missed the target.

Apple has four main options, but only the first three have been seriously debated by Apple watchers:

1. Continue licensing software to established handset vendors similar to the Motorola relationship. Apple cedes some control, much upside margin, and weakens its superb end-to-end experience through working with such partners. The upside is that it enables Apple to enter a challenging value chain that is quite different to today's iPod market.

2. Create its own iPod mobile phone handset and sell via mobile operators. Apple has a deserved reputation for creating well-designed devices, that are compelling, and revive stalled markets in which previous companies have delivered so-so devices. The mobile operator subsidy would make Apple's phone extremely attractive on price. But Apple's challenge is that, unlike Nokia, Sony-Ericsson, Samsung and the rest, it lacks strong operator relationships to secure a good distribution deal. Additionally, the operators may insist on changes which compromise Apple's brand and the overall consumer experience, as well as cutting into Apple's margins.

3. Apple could chose to bypass current operators by launching one or more MVNOs. This strikes me as unlikely and a weak global strategy. MVNOs take time and effort to set up. Apple would have to work country by country that would cripple its global aspirations. Operators that face an Apple MVNO would be even more reluctant to stock and subsidise Apple's iPod phone than if Apple pursued just #2. Also, commentators speculating about MVNOs miss the big point: an MVNO is a virtual operator, Apple would still be reliant on an existing mobile operator for wholesale capacity. An MVNO would have little benefit for Apple, in my opinion.

4. Apple could sell its iPod mobile phone in retail: Consumers would just slot in an existing SIM and have a working combination device. This approach ignores the current mobile value chain (#2 above). Yet consumers have repeatedly proved that they are prepared to spend hundreds of Euros on iPods in retail, but they are reluctant to pay a similar amount for a mobile phone plus contract and subsidy. What's the downside? Not much: Apple would find it hard to sell over-the-air music downloads without an operator partner, but that is a nascent market, with little immediate profit potential. Apple could continue to to sell music via PCs and make its traditional retail margins. This approach doesn't even need an expensive 3G radio - which would help Apple keep handset cost, size and weight down and make the handset competitive with (relatively) bloated 3G handsets sold by operators.

Apple will most likely pursue a multi-track approach as it enters the mobile market. I'm sure retail sales of Apple's iPod mobile phone should, and will, be one part of that strategy, perhaps even the main one.