Technology

iPhone 2.0 Takes on the World


Apple could launch its new iPhone in 64 more countries by yearend, deepening the electronics giant's reach in international markets

As Apple prepares to unveil the next version of its iPhone on June 9, fans will be focused on how much better the new device is than its predecessor. It will likely be able to run on speedier wireless networks, it may boast improved navigation services, and it's expected to support a batch of new software tools and features made by third-party developers.

But amid the speculation around what the new device may or may not do, it's easy to lose sight of a theme central to Apple's larger strategic objectives. The new version of the iPhone will do more than perhaps any other device in history to fuel Apple's ability to reach international markets.

Bigger Seller than BlackBerry?

Until now, Apple (AAPL) has officially launched the iPhone in only six countries: the U.S., Britain, France, Germany, Austria, and Ireland. But Apple's recent agreements with wireless carriers around the globe will bring the iPhone into an additional 64 countries by the end of the year. The two latest deals, announced June 4, are with Telefónica (TEF) in Spain and Softbank in Japan (BusinessWeek.com, 6/5/08).

The first iPhone has catapulted Apple into the lucrative U.S. market for so-called smartphones, which handle an array of advanced services including Web surfing and e-mail. Market research firm IDC pegs Apple's share of the U.S. market for smart wireless phones at 19%, behind Research In Motion's (RIMM) BlackBerry, which has a 44% share, and ahead of Palm's (PALM) 13% share. When it last disclosed sales, Apple had sold 4 million iPhones globally, and analysts expect the company will report sales of about 1.5 million to 1.7 million iPhones in the quarter that ends on June 30. Apple's goal is to have sold 10 million units by the end of 2008.

By enabling the iPhone to run on so-called third-generation, or 3G, networks, Apple makes the device more appealing to a global wireless customer. Within months, the phone will be officially available in key European markets like Italy, Spain, and the Scandinavian countries. Countries as varied as Australia and Uruguay are also on the docket.

Some analysts say Apple may sell 40 million or more iPhones by the end of 2009. If that prediction pans out, iPhones will outnumber BlackBerry devices, even if RIM sells the handsets at an accelerated pace. RIM had 14 million subscribers at last count and added 6 million in fiscal 2008. That track record would make the iPhone the most successful single product in Apple's history, based on adoption rates. It took the vaunted iPod four years to break the 20-million-unit mark.

Ready Market Worldwide

The iPhone stands to make Apple a more global player. In each of its last three fiscal years, sales to the Americas accounted for about 48% of the total, while Europe accounted for about 22%. "Apple must do three things if it is to be successful internationally," says Neil Mawston, an analyst with Strategy Analytics in Britain. "Expand its brand, expand its product portfolio, and broaden its international footprint."

Of course, Apple needs to do more than just make the iPhone available in more places. The iPod is still bought mainly in the U.S. According to Mawston, 60% to 70% of iPods have been sold through Apple-owned retail stores, and 70% to 80% of those are in the U.S.

The good news for Apple is that there's already demand for the iPhone in countries where it's not yet officially available. Unlocked iPhones have been spotted in nearly every country in the world, according to research firm Net Applications, which tracks data from Web servers around the world. While hard numbers of unlocked iPhones are hard to come by—Apple Chief Operating Officer Tim Cook once characterized the number as "significant"—estimates suggest that gray market dealers in China may have sold as many as half a million iPhones there.

More Flexibility with Carriers

There's more reason for confidence in Apple's ability to infiltrate new markets. The company has shown itself willing to break with established practice of signing up only one wireless carrier per country, as it did in the U.S. with AT&T (T), with O2 in Britain, France Telecom's Orange in France, and Deutsche Telekom (DT) in Germany.

In some cases, Apple has inked agreements with two carriers in a country. In Italy, both Telecom Italia and Vodafone (VOD) carry the iPhone, while in Egypt it will also have two carriers, Vodafone and Orange. In Switzerland, consumers will be able to choose between iPhone plans from Orange and Swisscom. Moreover, many newly signed carriers won't have the iPhone exclusively. "We believe Apple's recently announced carrier agreements are not exclusive," wrote Piper Jaffray (PJC) analyst Gene Munster in a May 23 research note.

Apple is also showing itself more flexible on revenue sharing with the wireless carriers it chooses. In exchange for exclusivity, Apple has taken a cut of the revenue that wireless operators collect for voice and data services each month, something few if any other phone makers get. Apple has never disclosed the terms of these arrangements, but estimates put Apple's share of service revenues as high as 40%.

The problem is, consumers often don't want to use Apple's chosen carrier partner, and resort to "unlocking" the phone so it can work on the networks of other carriers, thus costing Apple its share of service revenue. Apple has lately been willing to take a smaller share in order to penetrate international markets, Mawston says. That's making some carriers look smart for having waited a year before taking the iPhone. Case in point: Vodafone. Having come under fire for first turning down the iPhone when Apple offered it on an exclusive basis in 2007, on May 6 Vodafone announced rollout plans for 10 countries including India, Turkey, South Africa, and Australia. "It's unlikely we'll ever know the commercial terms of Apple's agreement," says Ben Wood of CCS Insight, a British wireless consultancy. "But I bet Vodafone's getting a much better deal than it was offered 12 months ago." A Vodafone spokesperson said Apple will not permit it to comment on the deal.

China Toehold

Phone exclusivity will in time have to give way to multicarrier agreements all over the world if Apple is to boost its sales volume, Strategy Analytics' Mawston says. As Apple looks for ways to keep sales growing, it will also eventually have to embrace prepaid subscriptions. "The vast majority of the world is prepaid, and if Apple wants to be a mass-market player with the iPhone it will have to be in the prepaid market," he says.

Flexibility may be key to penetrating the world's largest cellular market, China. Apple is expected to open its first Chinese retail store in Beijing this year in time for the Olympics, though it has yet to land a carrier deal with China Mobile, which boasts a 400-million-strong subscriber base, the world's largest. "China Mobile is the Big Kahuna," says Needham & Co. analyst Charles Wolf.

Talks between Apple and China Mobile collapsed in January over Apple's share of service revenue. Mawston says China Mobile, and others like Japan's flagship carrier, NTT DoCoMo (DCM), are accustomed to sharing less than 10% of their service revenue with handset makers. "For Apple to have come in demanding 30% or more is just a nonstarter," he says.

Apple could get a leg up in negotiations from a recent move by China's government to make the country's market more competitive. Once Apple gets a toehold in China, there's no stopping the iPhone engine. "We think the iPhone is an open-ended growth story," Shaw Wu of American Technology Research in San Francisco wrote in a June 5 research note. "We envision iPhone one day becoming as big as the current Mac business."


Steve Ballmer, Power Forward
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