Can Carriers Handle a Low-End iPhone?

Ben Bajarin / April 23rd, 2013

There is a good discussion happening online at the comment that I want to comment on. Horace Dediu has written several good pieces on the job the iPhone is hired to do. In his latest installment he looks at the average revenue per user in numerous countries and distills that data to browser share on iOS and Android.

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What the data highlights is the fact that right now the iPhone is the most valuable device for the networks that carry it. Carriers have been in a transition the last few years to move their value from voice to data. The key for carrier services going forward is to capitalize on the consumer consumption of their data services not their voice services. Therefore device which are excellent at consuming data services are highly valued. This, as Horace points out, is the reason the carriers are willing to pay the high price of the iPhone and subsidize it to their customers.

The key question remains to the other devices, like Android, which certainly don't generate the same ARPU as the iPhone (or specifically iOS). We know that Android devices are heavily skewed to the lower end of the market. This market certainly behaves differently and although they browse the web and consume data, the evidence shows the engagement is less than with iOS.

Android devices do not maintain the same ASP line as the iPhone and often drop in price and add promotions quickly, often within 3-6 months. The iPhone stands strong in its price and its value to the operators.

A key question here is that if the low-end of the market does indeed behave differently, and this part of the market is not as valuable to operators, then why should Apple cater to it? Either we believe that this market will always behave this way, or it is the device itself (meaning a lower-end, less capable device) that is causing them to behave this way. I've always found a fascinating question to be whether the low-end market behavior with engagement and data consumption would change if they used iOS.

Read:
The Job the iPhone is Hired to Do Part 1
The Job the iPhone is Hired to Do Part 2

Along these lines, Ben Thompson (@monkbent), on his site Stratechery, offered up more useful points to this discussion topic.

Ben brings out a point regarding the iPhone's role as a premium network device that I think is interesting.

"Take three quick examples: Verizon, NTT DoCoMo, and China Mobile. If the iPhone as “Premium Network Services Salesman” is the only explanatory factor,1 then all three should have been clamoring for the iPhone from Day One. Yet Verizon resisted for years, and NTT DoCoMo and China Mobile have yet to give in. In fact, the iPhone has generally launched on the 2nd or 3rd-place carrier in any given geography."

Read:
Why Do Carriers Subsidize the iPhone

This is true and a valid question. If the iPhone is a premium device driving ARPU and operator value/CapEx recoupment, then why are certain carriers holding out?

The answer, I believe, lies in the iPhones success being both a blessing and a curse. The device in its early days nearly took down AT&T regularly due to the network demands. Many of us remember how awful AT&T was here in the Silicon Valley for many years as a result of the network demands from the iPhone. Many networks, Verizon included, have quality of service demands in which I'm sure their concerns over their own network capacity are or were an issue. Verizon adopted the iPhone when they were ready and prepared (also after the AT&T exclusive was up obviously). I'm sure others will as well when they feel they are prepared.

There is no question that the iPhone drives value so I do not believe the lack of universal carrier support is completely or even largely a business model question. It is, in my opinion, an infrastructure question. The question is can the operator networks handle the iPhone?

In this theory and to my earlier question about the low-end. If Apple went low-cost and grew their market share substantially by catering to the low-end, bringing hundreds of millions of new iOS users onto the networks, I have a strong feeling it would put monumental stress on all current network infrastructure. Bottom line is, I’m not sure the carriers can handle a low-end iPhone.

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio
  • sparky3

    That makes a ton of sense. China Mobile system demands could go through the roof.

    • Hosni

      China Mobile hasn’t built out its 4G network yet and (from what I have read) it doesn’t have a nationwide 3G network. So it won’t be able to accommodate the iPhone 5 until the end of 2013 or early 2014.

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