Vodafone Deal Signals Change in Apple's iPhone Strategy

Posted by: Jennifer L. Schenker on May 06

On May 6, Vodafone announced that it will offer the iPhone in 10 new countries, including Italy, Turkey, Greece, Portugal, Egypt, South Africa, India, New Zealand and Australia, a boost for Apple at a time when its international iPhone strategy is under fire. But as Ben Wood, director of research at CCS Insight, points out, the four line press release from Vodafone is missing a key word: “exclusive.”

Up to now Apple has insisted on exclusive agreements with carriers, striking deals with AT&T in the U.S., O2 in Britain, Orange in France, and Deutsche Telekom in Germany. In exchange for exclusivity Apple takes a cut of the revenue that wireless operators collect for voice and data services each month, something no other phone maker is believed to get. But analysts have been raising concerns that the iPhone may not translate as well overseas, with sales sluggish in Europe because of the device’s high price and strong competition from Nokia and others. With the May 5 announcement Apple seems to have acknowledged that it needs to change its strategy.

Italy’s TIM recently announced that it will offer the iPhone, so the news that Vodafone also will offer the iPhone there means Apple is finally allowing network operators in the same country to offer the device side by side. The problem with Apple’s single operator per country strategy is that it pushed lots of people to unlock iPhones and transport them abroad, creating a gray market. Apple still gets revenue from the hardware but it loses out on service revenue under that scenario, as do the operators who signed exclusive deals.

That's why Vodafone, which came under fire for its initial reluctance to take the iPhone when it was first announced, now looks so smart. “It’s unlikely we’ll ever know the commercial terms of Apple’s agreement, but I bet Vodafone’s getting a much better deal than it was offered 12 months ago,” says Wood. A Vodafone spokesman said Apple will not permit it to comment at all on the deal.

The question now being raised by analysts is whether Italy is an anomaly. Some 88% of the market there is pre-paid, making it difficult for Apple to ask for the same type of revenue sharing deal, points out Neil Mawston, director of global wireless practice at Strategy Analytics. He and other analysts believe Apple eventually will have to allow multiple carrier deals in other countries, but no one is sure how quickly this will happen. Another key question is whether Apple will renegotiate its exclusive deals with the four carriers who signed up first. Untangling those agreements won’t be easy but if Apple doesn’t it will limit the availability of a third generation iPhone in three of Europe’s four biggest markets.

Although the announcement with Vodafone now gives Apple a nice mix of countries one big remaining hole is Spain. In February, O2 said the iPhone had helped attract customers in the fourth quarter and declared it “the fastest-selling device that we have ever had in the U.K.” Steve Alder, O2’s iPhone director in Britain, says the device has helped the carrier gain ground against competitors, with 60% of iPhone customers new to O2. If that is true why hasn’t parent Telefonica struck a deal with Apple to distribute the iPhone in Spain and in Latin America?