Regarding the Verizon and ‘iPhone Lite’ Rumors

Friday, 1 May 2009

There’s been much speculation this week regarding reports in BusinessWeek and The Wall Street Journal of talks between Apple and Verizon. To wit: that Apple is considering Verizon for a future iPhone and/or its mythical forthcoming tablet. This is not too complicated. Let’s just play “What’s in it for them?”

Verizon — Would they want to sell some sort of iPhone model? Yes, of course. The iPhone has undeniably turned into a big deal. Verizon has nothing to do with it, and it is the single best competitive advantage held by AT&T, Verizon’s biggest rival. None of the iPhone rival devices Verizon has offered so far is any good or very popular (cf. the BlackBerry Storm), and the Palm Pre is exclusive to Sprint.

AT&T — The iPhone means more to AT&T than any other phone it carries. Most people decide which carrier to buy a phone from, go there, then pick a phone. With the iPhone, people decide they want to buy one, and then they go to AT&T. Some number of iPhone owners switched to AT&T specifically and only because of the iPhone. In fact, there are some who switched to AT&T to get the iPhone despite the fact that, all things considered, they’d prefer to buy a phone from another carrier — often Verizon, which is widely regarded as having the best overall U.S. network coverage. It is very much in AT&T’s interests to keep the iPhone as an exclusive AT&T device for as long as it can.

Apple — The iPhone matters to AT&T, but AT&T doesn’t really matter much to Apple. The U.S. is Apple’s (and the iPhone’s) biggest market, but it’s still just one country in a big world. In the just reported quarter, AT&T reported activating 1.6 million iPhones. But Apple reported selling just under 3.8 million total iPhones — so 58 percent were sold outside the U.S. AT&T isn’t Apple’s iPhone partner. They’re just Apple’s iPhone partner in the U.S. I think the U.S. tech press often overlooks this, hence some of the knee-jerk skepticism that Apple would even talk to Verizon.

Apple wants profit and they want market share. The trick is balancing the two. Surely Apple makes more money per iPhone with an exclusive deal, but they would sell more total devices if iPhones were available on both AT&T and Verizon. Yes, Verizon’s network is CDMA, not GSM, and so it would require Apple to produce different hardware. But there are some number of Verizon customers who won’t switch to AT&T but who would buy an iPhone from Verizon, and my guess is that that number is high enough for Apple to at least consider producing Verizon-compatible hardware.

So, even if Apple would prefer to stick with AT&T exclusively, at least for another year, I’d find it surprising if they didn’t at least talk to Verizon just to hear an offer, and perhaps more importantly, to leak the flirtation to the press so as to keep the pressure on AT&T to offer Apple the best possible terms.

But as for whether I think an iPhone on Verizon is actually imminent — as in “coming in the next few months” imminent — I doubt it. During Apple’s quarterly finance call last week, analyst Gene Munster asked why Apple has maintained its exclusive agreement with AT&T. COO Tim Cook said:

On AT&T, Gene, we view AT&T as a very good partner. We believe that they’re the best wireless provider in the U.S. and we are very happy to be doing business with them. They have done a very good job with iPhone, they’ve put the full force and weight of their company behind it, it’s a major strategic thrust for them and so we’re very happy with the relationship that we have and do not have a plan to change it.

And then Cook again, responding to a follow-up question regarding any “technical hurdles”:

Well from a technology point of view as you know, Verizon is on CDMA and we’ve shown from the beginning of the iPhone to focus on one phone for the whole of the world and when you do that, you really go down the GSM route, because CDMA doesn’t really have a life to it after a point in time.

Steve Jobs, famously, is known for pooh-poohing ideas or features only to turn around months or years later and declare them to be the best ideas or features ever, now that Apple has embraced them. Apple doesn’t announce big changes until it is ready to announce them, direct questions be damned. And so I wouldn’t count on Apple’s “not having a plan to change” the AT&T exclusivity lasting forever.¹

But the CDMA comment does not sound like misdirection from a company planning to unveil CDMA phones this summer. That comment was specific, and it wasn’t something along the lines of we’re not going to do CDMA, but rather more along the lines of CDMA is on its way out industry-wide. That’s just not something Cook would say if Apple were planning to announce a CDMA phone in June — and without a CDMA iPhone, there’s no iPhone for Verizon.² Ask again when Verizon’s next-generation LTE network is running, though.

But that’s just the iPhone. If Apple is preparing to soon announce its supposed tablet / mediapad / whatever, and if said tablet / mediapad / whatever is going to support mobile broadband, it could well use EVDO from Verizon without contradicting anything Cook said about CDMA or the iPhone remaining exclusively on AT&T.

(Brief Interpolation Regarding the Proper Perspective Regarding Any Rumored New Devices: Keep in mind that these tablet / mediapad / whatever rumors are growing to the point where if the WWDC keynote comes and goes without any mention of this device, the jackass contingent is going to blame Apple for not releasing it rather than blame the rumor reporters for being wrong. BusinessWeek’s report had the most details about purported new devices, but in terms of timing, only said “One of these devices may be introduced as early as this summer.” Point of this interpolation being that if — and it very much remains an if — this really is a device that Apple is preparing to release, fever-pitched rumors won’t make it appear any sooner than when Apple deems it ready.)

Erring on the Side of Increased Market Share

It’s my assumption that Apple’s long-term plan for the iPhone platform is patterned after Apple’s long-term plan for the iPod. Apple’s iPod strategy has been phenomenally successful, and there are many obvious parallels. The biggest difference is that the iPhone has succeeded far faster than the iPod did — Apple didn’t release the Windows version of iTunes until two years after the original iPod was released as a Mac-only peripheral.

One of the key points in the history of the iPod was the release of the iPod Mini in January 2004. That’s when Apple expanded the iPod from a single product to a family of products, and the Mini proved to be a smash hit. The formula behind the iPod Mini was simple: Apple made a smaller, cheaper device with more or less the same technical specs as the original iPod from October 2001.

Apple went on to repeatedly improve upon the iPod in two ways: on the high end by producing new devices with the same shape and price but with new features (additional storage, color screens, larger screens, video, etc.); on the low end by taking the existing features and making them smaller and cheaper.

So here’s how I see Apple applying its iPod strategy to the iPhone. At some point the iPhone will expand to two form factors:

1. A high-end iPhone with the same basic size and price as previous iPhones, but with significant new features. Obvious potential new features would be things like more storage space, more RAM, a faster CPU, an improved (and eventually video-capable) camera, 802.11n Wi-Fi, and superior battery technology.

2. A new, lower-priced, smaller, and more adorable iPhone, with more or less the same technical specs as the original iPhone. Given that those specs include the 320 × 480 display, I wouldn’t expect something tiny, but remember that the original iPod Mini was “just” 35 percent smaller by volume than the then-current full-sized iPod. Shrink the iPhone’s forehead and chin and make it thinner — maybe a lot thinner — is what I’m thinking. Existing iPhone apps would run just fine on the new device, as it’d have similar, if not identical, CPU performance and RAM to previous full-sized iPhones. Such an iPhone sounds much like the “iPhone Lite” that BusinessWeek reported its source saw.

The only question is when. Could be this year. Could be next year. But put me on the record for predicting it’ll happen before the end of 2010.

The reason why Apple did this with the iPod, and why I’m convinced they’ll do it again with the iPhone, is that when it comes to managing the balance between per-unit profit and overall market share, Apple is determined to err on the side of market share. (Not as much with the Mac, however — the difference being that PCs are now a firmly established market.) Most gadget companies, when they have a smash hit on their hands, try to milk it. A typical company that found itself selling millions of $400 hard-drive-based digital music players would try its best to continue selling the same $400 hard-drive-based digital music players for as long as it could. Apple, despite an overwhelming 70 percent market share, aggressively added features and drove down its own prices, year after year after year.

I’ve previously quoted the following passage from Steven Levy’s 2004 Newsweek interview with Steve Jobs, but it’s worth repeating here. The topic was the Mac’s long-stagnant (at the time) market share.

If that’s so, then why is the Mac market share, even after Apple’s recent revival, sputtering at a measly 5 percent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. “The Mac user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

In the near term, Apple could fuel explosive iPhone unit sales growth just by reducing the entry price. But at some point, looking a handful of years down the line, expanding the iPhone’s U.S. market share is going to require going beyond AT&T. The only question is when.