I'm a partner in the advanced analytics group at Bain & Company, the global management consulting firm. My primary focus is on marketing analytics (bio). I've been writing here (views my own) about marketing, technology, e-business, and analytics since 2003 (blog name explained).

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October 26, 2007

Pricing iPhone Freedom

It's fashionable among the digerati to complain about how Apple forces you to use AT&T's network.  It's even more fashionable to unlock the phone so you can add third-party apps and decide what carrier to use.  Folks then howl when Apple "bricks" their phones with firmware upgrades, and they lose wonderful third party apps they've grown fond of.  When they get the chance, they lecture the carriers directly.

I see both sides of this argument.  Apple's not interested in open standards here, they're interested in control and profit of their (you read it here first) "i*" franchise.  Control means minimizing the damage that the tasteless hordes can do to their wonderful products, and the associated premiums Apple can command in the market.  Profit means the estimated $18/month/phone that Apple gets from AT&T.  Hey, it's a capitalist system, they're entitled.  So what if by virtue of running a closed system they miss the chance to learn from outsiders innovating on their system?  It's not clear to them how opening up today would be any smaller a mistake than it was for IBM to outsource its PC's OS to a startup called Microsoft a few years back ;-)

I'm more interested in deals that get both sides what they want.  Some ideas:

1. Apple could give users a choice:  "Either you pay us and we unlock, or AT&T pays us and we lock."

2. Apple could offer an "ad-supported" unlocked version of the phone ("This phone call brought to you by..."  Maybe a deal with Google to personalize the ads based on the subject of the conversation?  They already do this with Gmail after all, and the privacy complaints seem to have diminished.  Crazy I know, but...)

3. Apple could get affiliate commissions from the third-party developers who make money (however) by running their apps on iPhones.

4. Since many of these developers are too poor, maybe an infrastructure player who benefits from development and usage of such apps might kick in a fund to subsidize unlocking, directly or indirectly.

5. A direct-to-consumer play might involve a loyalty program -- "Buy $x with us each month and we'll pay this nasty fee for you." 

The first of these is likely to happen only in cases where businesspeople can write off $18 a month justifiably, to use some network or app that's pretty important if not mission-critical.

The second would take lots of ads.  if we make a really simple assumption of an $18 CPM for the iPhone (which assumes a nefarious degree of personalization and contextualization to get a rate this high), that's a thousand impressions a month or roughly 30-35/day, or ~50 during waking hours, or hundreds during the time the iPhone's actually used.  If we assume a lower CPM, the number of impressions skyrockets accordingly.  All in a form factor where advertising is still swimming against the current, on a number of dimensions.  So, not much joy here.

The third... maybe, for select developers, like maybe Amazon, which might want to deploy an app that works better than the browser would for the mobile context.  But it would take *a lot* of purchasing volume for this to work.

In the fourth case, certain infrastructure providers would certainly have a "geek credibility"/ goodwill-building reason to do this, though they'd have to swallow their pride to pay to reach Apple's customers.  On the other hand, these arrangements are not unprecedented in tech-land -- they're called "partner programs".

I think the fifth case, maybe in combination with the fourth, holds the most promise.  Partner X says to iPhone Geek Y, "Buy my Product Z and as part of the bargain I'll pay your Apple Unlocked fee, or even toss in an unlocked iPhone into the bargain."   I can even see Apple signing up for this, via iTunes maybe?  Buy $x worth of songs each month, we waive your fee (of course there's the question here of simply compensating folks for purchases they would have made anyway, but that elasticity study is for someone else to do, if it's not happening already).

Hope to see you at Mobile Internet World on November 13 (click the "Mobile Internet World Executive Summit" tab for info on our 4p session) to debate it further!

Postscript:  Via my colleague Simon Neale, Apple's addressing some of the complaints (SDK for third-party apps, though not yet network choice AFAIK).


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