Did Apple's 'early mistakes' screw up the iPhone potential? Nonsense.

Thanks to reader Jeffrey who emailed me this piece from MacNN published earlier this month. Jeffrey’s writing a paper for his board and wanted to know what I thought of the issue. I knocked off some thoughts to him and then asked if he wouldn’t mind if I published a summary here.

The post reckons that Apple has committed ‘two meaningful errors’ and quotes Piper Jaffray analyst Gene Munster outlining them. Gene reckons the two screw-ups were thus:

1. Apple did not get subsidies for the iPhone
2. Apple signed an exclusive agreement with AT&T in the States

Surely Gene must have been in the room when the iPhone launched?

Getting a carrier to anything on your terms at this point was almost impossible at this point of time. Exclusivity built demand. It built demand and really, really wound up the carriers who didn’t get the iPhone — many of whom were severely pummelled by their shareholders for this ‘failure’. It also really annoyed consumers who were delighted (or, perhaps ‘content’) with their existing carrier and had to go through the rigmarole of swapping.

Apple had to get a top carrier on-side. They had to make sure they got complete control of the purchase experience, of the price plans and other features such as visual voicemail. Indeed, ‘inclusive data’ integrated into a price plan was nigh on invented by Apple as far as most people are concerned. It was certainly available beforehand but Apple were able to insist on a whole raft of requirements from their exclusive partner.

And if you think this is old hat, just remember how iPhone is priced today. Apple still maintain strict control over the amount of minutes, texts and so forth the carriers are allowed to include. The price plans need to be ‘Appleified’. That is, small, medium and large. And it has to cost money. Famously Apple never make a loss on anything they sell. There are (virtually) no loss leaders at Apple.

And let’s get to the nonsense of subsidy. Zero carrier subsidy was a masterstroke. Of course everyone-and-his-dog would have purchased a shiny iPhone if they’d got the opportunity to do so ‘free’ with a 2 or 3-year contract. Of course. Apple are masters of marketing. Not for nothing was the iPhone branded the ‘Jesus Phone’.

We had a good two or so years of only the rich elite being able to afford iPhones (though that has changed, see: Vicky Pollard has an iPhone 4; You are not cool anymore). In many markets, the operators were simply banned from selling them on a Pay As You Go basis. Why? Because Apple said so. Apple’s message? If you want an iPhone, you’ll need to pay for it. This helped Apple manage it’s back-end logistics (I doubt they could have coughed out 100m iPhones in the first year). Simultaneously Apple benefitted hugely from the fact that the devices were ‘valuable’.

Every player in the industry benefitted. If you’d like a super (and highly vexing) example, just look at the insurance premiums for the iPhone. Whilst I insured by Vodafone-supplied Nokia E90 (£700 value) for just £6 per month (for all my phones), when I went to buy an iPhone I was astonished to find a £570 iPhone requiring a ‘special’ £12/month insurance premium. That only covered that iPhone. No other phone on my account. You what? Push the sales person and they’ll explain that ‘it’s an expensive phone’.

What did we all do? Well most of us secretly felt a bit good and paid the extra cash. Just in case. Because the phone was only partly subsidised. You know, it was ‘valuable’. Whereas the £700 Nokia model … well, that was ‘free’ as part of the contract, right?

Even today, you can ONLY get a ‘free’ iPhone (i.e. completely subsidised) in the United Kingdom if you commit to the carrier’s largest £75/month price plan. Way out of the reach of the UK’s £30-35/month majority.

Exclusivity helped Apple guarantee the experience and it was instrumental in ensuring the carriers in other international markets played ball too.

Subsidy wasn’t a problem. If anything, it was a huge, huge benefit. Admit it, you rather enjoyed walking about with your ‘expensive’ iPhone whilst everyone else looked on in admiration.

Gene reckons that Apple was really hurt because they didn’t do a deal with Verizon. Like they could have just knocked out a CDMA version in twenty minutes. Apple had to focus on GSM in order to get the international footprint.

Are you ready for a final bit of JesusPhoneLovin’?

Here’s the last paragraph from MacNN’s post:

Exclusivity is the only reason Android phones are outselling the iPhone in the US, the analyst claims. “As an example, in countries where the iPhone is available on multiple carriers and competes with Android, we see the iPhone outselling Android,” he says. “The greatest factor in the success of Android has been Verizon. Customers are loyal to their carrier, and once Verizon gets the iPhone, we believe Android’s success in the US will be tested.”

Customers are loyal to whatever’s cheap and provided by the carrier. Can Apple’s Foxconn production centres knock out enough stock for them to supply all carriers? Nokia, they are not. Nokia and Samsung can turn out hundreds of millions of devices in a given year — but I really wonder if Apple is built, yet, for this kind of volume.

As for Android outselling iPhone. Get over it. Verizon is selling FREE Android devices. Take the Motorola Citrus, for example, a perfectly nice ‘entry level’ Android device. That’s free. You can pick up the rather fancy LG Vortex (in Violet colour, no less) for a measly $39. Or you can plonk down $179 for the sumptuous Motorola Droid Pro. All of these, obviously, need you to agree to all sorts of 2-year contracts, data packs, mail-in rebates and the like.

Android is going to continue to outsell iPhone for donkeys years.

Until, that is, Project Nano appears on the horizon. Whatever Steve tells you, their sales of iPhones are not in any-single-way stratospheric compared to Android, Nokia and RIM. There’s a reason RIM is the #1 smartphone in a bunch of countries around the world, not least the UK, most of Latin America and quite a bit of Asia. But when Apple decides to get real and introduce a $200 iPhone that it WILL allow carriers to subsidise, the market will get rather exciting.

It’ll get even more exciting if Apple decides to use a bit of it’s cash pile and put 300 million iPhone Nano $49 devices into the market in one year. That would set the market alight. And it would probably need another person as CEO who will apply old fashioned economics to the industry.

Until then, suck it up.

Update: I forgot to point out the Android price-point. In the UK, you can now pick-up a pretty good Android ‘smartphone’ for £70-80 or just over $100 — that’s for the handset itself, no service plan, no contracts, just ‘pay-as-you-go’. No wonder Android is outselling iPhone. As Martin points out in the comments below, it’s all about the price.