Apple Is Playing Chicken With The Mobile Carriers
“The game of chicken, also known as the hawk-dove game or snow-drift game, is an influential model of conflict for two players in game theory. The principle of the game is that while each player prefers not to yield to the other, the worst possible outcome occurs when both players do not yield.” ~ Wikipedia
800 Android Carriers vs. 240 iPhone Carriers
“The narrative has been focused on the consumer demand, and the narrative needs to shift to the operator…” ~ Horace Dediu, former in-house analyst for Nokia
Android sells devices through almost all of the world’s 800 carriers while Apple sells the iPhone through only about 240. (Only about 500 of the world’s global operators have the network capabilities needed to handle the iPhone, but that number is quickly increasing.)
The reason for the discrepancy between the number of carriers supplying Android and the iPhone is that Apple prices their phones above $600 and places sales quotas and other requirements on the carriers before they are permitted to sell the iPhone. Potential partners must determine whether taking on these obligations is worth the benefit of offering the device.
Examples of holdouts are China Mobile Ltd., the world’s biggest phone company, and NTT DoCoMo Inc., Japan’s largest mobile carrier. On the other hand, other companies are succumbing to Apple’s demands. T-Mobile added the iPhone to its lineup in April and they announced that they have sold 500,000 iPhones in just under a month. And U.S. Cellular (USM), had long contended that the iPhone cost too much, yet last week they announced that they had agreed to sell $1.2 billion worth of handsets over three years, after conceding that their failure to carry the iPhone was costing them customers.
Are The Carriers In Control…
Adam Satariano of Bloomburg reviewed the current carrier impasse and concluded:
“Apple Inc. (AAPL) is missing out on a chance to court as many as 2.8 billion new smartphone customers, many of them in Asia, as wireless-service providers balk at conditions imposed by the iPhone maker and drag their heels in signing on as partners.”
“Carriers are starting to question Apple’s pricing strategy and are supporting multiple other platforms,” said Shah at Strategy Analytics. “They no longer need Apple.”
…Or Is Apple In Control?
The unasked question here is: If Apple is losing the opportunity to sell more iPhones because of their onerous conditions, then why does Apple continue to impose those conditions? The unstated answer should be – but apparently isn’t – obvious.
Clearly Apple – unlike the vast majority of tech pundits and Wall Street Analysts – does not see a pressing need to acquire additional operators at any cost. Of course Apple wants more customers, and that’s only going to happen if Apple expands its carrier base. However, unlike most of the rest of the world, Apple feels that they can patiently wait until the carriers come to them and meet their terms. Does that make Apple arrogant and out-of-touch with reality or does that make them master negotiators?
Four Realities That Favor Apple: Capacity, Real Growth, Retention and Profits
First, Apple was at their iPhone manufacturing capacity for much of the holiday quarter. It doesn’t make much sense for Apple to increase the number of addressable customers until and unless they have the capacity to provide those new customers with product.
Second, as you can see from the trajectory of the chart of the iPhone’s cumulative sales, above, Apple is still enjoying significant real growth in the sales of their phones. This truth is often obscured and overshadowed by market share numbers.
Third, as markets approach saturation in the U.S. and Europe, retention and churn become far bigger issues and when it comes to customer satisfaction and retention, Apple has it all over their competitors.
Notice how Apple started with only AT&T in the U.S., and then slowly and methodically ground down the opposition of the other carriers until Verizon, then Sprint, then T-Mobile, then U.S. Cellular and many other small carriers caved in as the churn caused by the iPhone crushed their sales and then caved in their profits.
Fourth, Apple takes in 57% of the profits in the mobile industry with only 8% of the sector’s market share. That is some serious leverage.
Apple is Enigmatic But Still Susceptible To Analysis
I contacted Apple to see what their actual negotiation strategy was but, oddly, they were not very forthcoming. Go figure. Tim Cook has failed to return my several calls (or even had the courtesy to lift the current restraining order against me) and my $605,000 attempt to have coffee with him failed when it was discovered that I had used a stolen credit card. C’est la vie.
So we’re going to have to use analysis (i.e., guesswork) instead. My best guess is that Apple’s strategy is to go after the whales and ignore the minnows. (The minnows will fall all over themselves to jump on board once the whales are lined up, anyway.) Apple only has so much capacity to manufacture phones as it is and they’d prefer to expand first in those markets that count and count the most.
Further, Apple is a damn patient negotiator. While the rest of the world is screaming at the top of their lungs that Apple has to “DO SOMETHING”, Apple is patiently waiting for the carriers to realize that they can’t compete without the iPhone in their mobile portfolio. And based upon the capitulation of Sprint, T-Mobile and U.S. Cellular, Apple may just be right.
So who will win this game of Chicken? Right now, Wall Street and a whole lot of investors are betting against Apple. But if you look at the history of Apple’s negotiations with the music labels, with AT&T and with all of Apple’s recent carrier acquisitions, you can see that Apple has played – and won – this game before.
Only time will tell us which side will blink first. But me – I’m not betting against Apple.