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How exclusivity distorted the US smartphone market

Here’s a wonderful chart from The New York Times:

Will Apple Put the iPhone on Other Carriers? – NYTimes.com.

Although the population of Android users is near in size to the population of iPhone users, the concentration in one carrier shows how distribution agreements hamstring platform choice.

The chart also shows how the iPhone had a huge effect on smartphone adoption at AT&T and how it sucked the oxygen out of the segment for competitors.

It is possible that we’ll see more Android at AT&T and a lot more iPhone everywhere else, but on balance, the chart shows how exclusivity distorted the market.

It sounded like Tim Cook was really relieved to announce in the earnings conference call that:

We are not under a contractual exclusivity now in any country in the world. The last one was the United States. We have moved away from those.

What I’ve said before and we have seen this in every case, literally, that we’ve done, is where we’ve moved from an exclusive carrier arrangement to a dual- or multi-carrier arrangement, our growth has changed significantly and our market share has increased.

  • Priit

    "We are not under a contractual exclusivity now in any country in the world"

    That's a lie as of today, but nevermind.

    • laserbeam1

      Key word is "contractual".

      • asymco

        That's correct. There are de-facto exclusive relationships in many countries including China and Japan. In some cases it's due to terms and conditions, in others due to network incompatibilities (TDSCDMA) or due to the usual cycle time to do deals.

    • Steven Noyes

      Nope. For all we know, the contractual obligation ended Jan 1.

    • Yowsers

      ???

      I think you have to judge it from the day or the moment that he said it.

      Also, without seeing the ATT-w-AAPL iPhone distribution contract and the specific date in it specifying when exclusivity ends, how can anyone make a statement he is lying or misinformed? I think Cook is among the select few who has seen that contract and knows the date. I never got the sense he is misinformed much or given to lying.

    • Famousringo

      Your abusive tone isn't going to convince anybody to take your word over Tim Cook's or win you any upvotes. Please grow up.

    • asymco

      One more point, and I really dislike having to repeat this. If management "lies" in an earnings conference call they are liable to shareholder lawsuits. If you have evidence of lying and it has a material effect (which is usually easy to prove) you can get very rich suing the officer in the company. So it behooves anyone making accusations to keep quiet and make their claims in court.

      If, on the other hand, you don't have a clear case, the accusation is not very believable in the first case so why make it?

      • HTG

        You've nailed it once again… Priit, unfortunately, seems to be a troll….

      • Priit

        "but nevermind" was intended to lighten up that remark, but it as I can see it did not. But as this turned into nitpicking, "contractual exclusivity" can be undestanded as: a) contract with exclusivity clause b) exclusive contract. I'm not aware that any of Baltic telcos are selling iPhones without contracts, I'm not aware of any conrtacts with other than one in every country.

      • HTG

        But you accused Apple of a bare face lie!!! How can that be a 'light' comment?

        It does not read as if it were made in jest…

        I suggest that you withdraw your remark and try again, this time saying what you really think….

        BTW it seems by your syntax that English is not your first language….

      • tfaulk

        No, I cannot interpret "contractual exclusivity" as having exclusively one contract. Contractual is the adjective circumscribing and defining the type of exclusivity, as in, the exclusivity is mandated by a contractual clause.

        Either way: "I think it may have two interpretations even though I may very well be wrong" is a lot different than "that's a lie!"

      • chano

        Bozoid.
        Multiple contracts in most European countries now. US now. Asia Pacific soon esp. China.
        You see the trees, not the forest.

    • Hamranhansenhansen

      If you put a "because …" in your post, it would be a lot easier to understand what your point is. Or maybe a Web link?

    • kevin

      "That's a lie as of today"

      Well, that's a lie, which is mostly what you do when you post around here. Apple has no contracts that guarantee exclusivity with any carrier in the world. Apple and its carrier partners know this – you clearly don't.

      Just because Apple only has a contract with one operator in a country doesn't mean its exclusive. It just means that Apple and the other operators in that country haven't come to agreement on a contract.

  • http://ARMdevices.net Charbax

    Most Android sales happened last year vs over 3 years for iphone.

    Carriers pay average below $400 per Android phone, while AT&T was paying highest price in the world for a phone for the iphone.

    Exclusivity gone, ATT will sell more Android than Verizon will sell iphone. And Verizon nor ATT have no reason to pay more than $400 per iphone.

    Ergo with exclusivity gone, Apple looses about half its profit margin per iphone, which represents more than 65% of apple’s profit margin and revenues.

    • TomCF

      You could compare iPhone 4 sales against Android sales (just AT&T) to see if you're correct.

      • http://ARMdevices.net Charbax

        AT&T will only now start promoting Android. That was part of the exclusivity deal with Apple, that AT&T would not promote competing platforms.

      • http://twitter.com/sandro1981 @sandro1981

        That's preposterous. The reason they were not promoting Android is because they simply didn't have any devices for a long time. When they got the monstrosity that was the Backflip, they advertised that but it never got much traction. They've also always advertised their Blackberry options.

      • kevin

        What evidence do you have of that? Absolutely none, because AT&T was promoting Android in all the flyers I received last year. Their CEO, Stephenson, mentioned in speeches and to journalists that AT&T was carrying Android phones several times back in Feb 2010 and through the spring of 2010.

        You just keep making it up as you go. Making it up = lie.

      • Steven Noyes

        But AT&T did promote their Android platforms. In billboards and print many times.

    • asymco

      The price AT&T paid for the iPhone is the same as every operator (exclusive or not) has paid for the iPhone. This information has been widely available for a long time and comes from both the ASP data that's published by Apple and AT&T and statements by management beginning in October 2009.

      There is only one wholesale price for the iPhone.

      See more here:
      http://www.asymco.com/2010/10/21/att-does-not-pay

      • http://ARMdevices.net Charbax

        Just check back in one quarter and see if Apple has not been forced to lower their profit margins on the iPhone in the USA.

        Either Verizon/AT&T will increase purchase cost for iPhone on contract from $199 to $399, or Apple will have to lower their profit margins drastically.

      • FalKirk

        Unlikely. Did you see Horace's latest post? http://www.asymco.com/2011/01/21/the-end-of-exclu

      • KenC

        Reasoning with someone whose sole intent is to spread FUD is hopeless.

      • chano

        No need to do that bozoid. Apple has a history of either holding prices while greatly improving specs or gradually reducing prices after a few years post-intro. The hidden advantage is Apple's ability to introduce an almost smartphone as an iPhone Nano at a very very low price while also dropping prices on the last iPhone model superseded in the annual cycle.
        Can you see anyone wanting to buy a superseded Android phone?

    • http://twitter.com/sandro1981 @sandro1981

      Given AT&T's track record on bungling their Android devices (locking out the app marketplace, loading bloat-ware, switching the default search to Yahoo!, etc…), T-Mobil and Sprint's 4G marketing successes, as well as the fact that the iPhone is still the undisputed single device in the smartphone market – I would say that you would be hard pressed to prove that AT&T will sell more Android than iPhones.

      Also, what if the next iPhone come ready to handle HSPA 7.2 or HSPA+? That would give AT&T and T-Mobil a huge speed edge over Verizon and Sprint. It may not be out-and-out exclusivity, but is it enough of a differentiator to skew the carrier distribution graph?

      • http://twitter.com/aegisdesign @aegisdesign

        They need to add support for T-mobile's 3G frequency also. The only phones that support both AT&T and T-Mobile so far are Nokia's new handsets….which aren't available in the USA due to AT&T being arses.

      • asymco

        This is exactly why we will have to wait for a T-Mobile deal. I suspect it may happen when 5 launches, but no earlier.

      • barryotoole

        I have a suspicion that the iPhone 5 will have a combined GSM/CMDA radio, including T-Mo band.

        I believe that the only reason there are no deals with the remaining US carriers is because of supply constraints. The ramp up in production has just begun to meet demand of AT&T users; Apple now has to make another 9-11 million for Verizon in 2011.

    • asymco

      The third statement regarding pricing comes from Tim Cook this week in response to a question:

      Toni Sacconaghi – Bernstein Research:
      You've said on previous earnings calls that the move to iPhone non-exclusivity in regions of the world has had no impact on your ASPs. Can you comment on whether that is it still the case today and whether we should expect any impact in the migration away from U.S. exclusivity?

      Timothy Cook:
      I don't envision the overall iPhone ASP decreasing from the December quarter that we just completed to the March quarter that we're currently in.

      • davel

        yes. as they state i believe the avg phone price is over 600. so if non exclusivity means lower price and more phones are sold outside of usa then how can it be that high if there is a 30% haircut in price?

        so they have reiterated this point more than once over the past year.

      • barryotoole

        Agree.

        Why should Apple decrease the ASP? They are selling them as fast as they can make it.

      • alcatholic

        Do you see any chance that AT&T is getting some break from Apple in exchange for the loss of exclusivity? Maybe the 3GS price drop on AT&T indicates a price break on that model? There was talk that Verizon would pay extra for a partial exclusivity. Do you see that as unlikely?

        My pet theory is that Apple got extra money from Verizon and provided a break to AT&T on the 4 such that the two different prices would roughly cancel out and ASP would not change this quarter. Pricing would again equalize with the coming 5.

        Just a theory :)

        And congratulations on all your success and well deserved recognition. It has been fun seeing your trajectory over the past year.

      • alcatholic

        OK, I just read your latest post. Just ignore my question. Of course exact prices may reflect slight variations due to volume discounts and the like.

      • KenC

        These analysts usually get one question, and if they're nice two. Why does Sacconaghi waste his one question, when all he needs to do is study the data? Why would he expect the US market to be different than the other 90 countries around the world, regarding non-exclusivity? He's embarrassing. Thank god he didn't ask Tim about a dividend or whether Apple had hidden or lost 2M iPhones.

    • Hamranhansenhansen

      You are way off. There have been many, many surveys of Verizon users that found that more of them are waiting for iPhones than already have smartphones. That is why Verizon had to do this deal, even going so far as to give up control of the handset for the first time. The block of AT&T iPhones is going to be duplicated on Verizon, because they have a similar number of subscribers and sales of iPhone 4 continue to go up every quarter, and iPhone 5 is only 6 months away. Sales of smartphones on Verizon are down even just since the credible rumors that iPhone 4 was coming. Further, there are many carriers with both iPhone and Android (not just AT&T) and Android does not do well there. It replaces feature phones well (and that is where most of its sales are) but absolutely does not replace iPhones.

      • http://twitter.com/aegisdesign @aegisdesign

        Wasn't there a survey a while claiming that about 25% of AT&T iPhone users were planning to switch to Verizon? That would seem to indicate there's going to be a downward pressure on AT&T and correspondingly upward on Verizon at least for iPhones. I wonder if there won't also be a downward trend for Android on Verizon now that you can get an iPhone on Verizon.

      • asymco

        Take these surveys (Changewave) with a huge grain of salt. They have always reaffirmed whatever is a trending topic among technology early adopters (the subjects they survey). They were predicting 40% adoption of Macs in next 90 days or some such hyperbole.

        What people say they intend to do is rarely what they actually do. Just go to a gym in January and then in March to see it in action.

      • http://twitter.com/sandro1981 @sandro1981

        Particularly when the average consumer probably is more aware of the of the fact that there will be a Verizon iPhone than they are aware of Early Termination Fees. How many consumers will look at a $325 fee PLUS $200 for a new iPhone and decide that hurdle is low enough to switch?

        Probably at most a couple of million given AT&T's PR shortcomings, but not 4-5 million as some predict.

    • Hamranhansenhansen

      Most iPhone sales also happened last year, because demand has gone up so much.

      Android and iPhone 3G/3GS/4 have been selling for almost the same time: July 2008 for iPhone and November 2008 for Android. The original iPhone was US-only, no 3G or GPS or apps, 6 million sales only from July 2007 to July 2008, that is a very small headstart. When you consider Android has been both GSM and CDMA the whole time, there are no justifications for making excuses for the lack of Android sales. Especially with free Android phones replacing free feature phones, they should be able to outsell the highest of high end iPhone.

      Consumers want iPhones like they wanted iPods. They don't want clones of either.

    • FalKirk

      @Charbax, your argument is very poorly constructed:

      "Most Android sales happened last year vs over 3 years for iphone."

      For the sake of argument, agreed.

      "Carriers pay average below $400 per Android phone, while AT&T was paying highest price in the world for a phone for the iphone."

      Incorrect. All iPhone carriers pay the same average selling price of $625.

      "Exclusivity gone, ATT will sell more Android than Verizon will sell iphone."

      That's a non-sequitar. What does iPhone exclusivity have to do with AT&T selling Android phones?

      "And Verizon nor ATT have no reason to pay more than $400 per iphone."

      Well they damn well do have a reason to pay more than $400 per phone if they want to get access to the best selling phone on the planet.

      "Ergo with exclusivity gone, Apple looses about half its profit margin per iphone, which represents more than 65% of apple's profit margin and revenues."

      I like your use of the word "Ergo". After that, the rest of your argument goes straight to hell in a hand-basket. Nothing you've said justifies your conclusion that Apple is going to lose half of its profit. Or any of its profit. Or any sleep thinking about how they're going to spend all that profit. Ipso facto, I will bring this argumendo to an endo*.

      *See, I can use Latiny sounding phrases to buttress my arguments too.

      • Joe_Winfield_IL

        LOVE the Latin barbs in the last paragraph!

      • FalKirk

        Thanks. That means a lot coming from you. I love the thought you put into your posts – and the thoughts I take away from your posts.

      • Joe_Winfield_IL

        I appreciate the kind words. The respect is mutual. You are among the few commenters I look forward to reading. Asymco has attracted a very thoughtful group of readers, without the shouting that is all too common throughout the blogosphere.

      • chano

        And Android is not a phone. It's an OS.
        Can I say QED at this point?

  • http://twitter.com/sandro1981 @sandro1981

    that previous post should state that the iPhone is the undisputed LEADER AS COMPARED TO OTHER SINGLE DEVICES in the smartphone market.

  • Danthemason

    It's not what you pay. It's what you get. And according to the user satisfaction ratings, iPhone holds a lead against ALL rivals. It is what it is. Whining about it makes one look small.

    Congratulations to our host on his growing following.

  • Steven Noyes

    What matters is the price the end consumer pays and what the consumer wants. All you have to do is look at how the iPhone 4 did against Android on AT&T to see how it will fare against Android on Verizon.

    My prediction: 750,000 to 1,000,000 iphone device sales in the first 3 days on Verizon alone. 5 million the first quater on Verizon and AT&T will see about a 1 million drop in iPhone sales for a net increase of about 4,000,000 iOS units. Android will see about a 50% drop in sales rates on Verizon. (this will net iOS an additional 44,000 activations per day and hurt Android -30,000 activations per day) By the end of the year 2011, iPhones will outnumber Android phones on Verizon and AT&T.

    Sprint will not get the iPhone since they went WiMax.

    T-Mobile will get the iPhone within 6 months.

  • Will

    Generally speaking, expanding to more carriers means more distribution channels means more phones of a brand sold. This is nothing new. It has been happening in the mobile telephone industry since the late 1980s.

    The US market was not only distorted by device exclusivity, but by network technology lock-in, subscriber contract lock-in, and lack of calling party pays regulations. It was not too long a go when the carriers fought to prevent number portability.

  • FalKirk

    I'm sorry, Horace. Your words are as poignant and prescient as ever. But that graph says it all.

  • http://twitter.com/aegisdesign @aegisdesign

    What can GOOG do? Lower their prices? Er…

    • Yowsers

      LOL!

      I'm seeing comments in the blogosphere that GOOG may try to get licensors to commit to an update schedule, or somehow try to get more control over keeping the user experience competitive. It strikes me as an incomplete solution, and one not likely to "take" without GOOG threatening some hardball plays. Their current licensing model does them no favors here.

      What else? I'm with you — very glad it's not my problem.

      • http://twitter.com/aegisdesign @aegisdesign

        That's what I'm hearing too. Less reason to add their own UI such as Sense. Google, historically hasn't been that great at design although they've hired in talent recently.

        For the handset makers this then becomes 'Who can make the cheapest handset with exactly the same software'.

      • kevin

        If that's what it becomes, then Samsung and the no-name Chinese brands like ZTE and Huawei, (and Nokia, not a current Android vendor) will clobber the rest in the race to the bottom. Motorola is dead meat.

        And if Google blocks vendor differentiation, I'm not sure that the vendors shifting more of their efforts to Windows Phone 7 or WebOS (if HP is open to licensing) will really help much.

  • http://twitter.com/sandro1981 @sandro1981

    I have a hard time believing that this is all Google v Apple. It may be that way domestically, but it seems to be that the stroy changes with a broader scope. The model Google has chosen has made two things possible: companies with resources can invest in making Android a would-be contender against iOS OR provide a smartphone OS to companies without resources.

    As has been discussed on this very blog, Google is interested in driving searches and Android (should be) another avenue to increase them. As time goes on, I think Google has a lot of potential in being the "free" low-end guys – which has the potential to be HUGE in the developing world. Why buy a laptop for every child if you can give every child an Android phone?

    It remains to be seen if this is Google's strategy, but they've always been a "volume" company and not a "quality" company.

    • http://twitter.com/aegisdesign @aegisdesign

      The default search on nearly every phone on the planet is Google, be it an iPhone, Nokia smartphone, dumbphone, Samsung Bada or whatever. If their strategy was advertising revenue from search then they already won.

      • Joe_Winfield_IL

        Yes and no. They are winning the search market share. But their interest is in massively expanding the market size. There are now, or will soon be, $100 or less (unsubsidized) Android handsets. By enforcing a model based on free (to the user) services, paired with very cheap hardware, Google's OEMs are uniquely positioned to dethrone Nokia in the developing world.

        Apple will continue to thrive; the ceiling is very high for iPhone, but there is limited potential in Sub-Saharan Africa, for example. Google wants this business, because they can monetize search anywhere. They want to be the Coca Cola of the 21st century, establishing a branded presence on all corners of the earth before competitors even think to do initial market research.

      • Rob Scott

        I know a little bit about Sub Saharan Africa, so here we go:

        1). At least in one network iOS outsells all Android phones, by a factor plus one. In another I heard that iPhone had over 300K users a number Android is still to break.
        2). Where Nokia dropped share it went directly to ZTE (Low), RIM (Mid) or Apple(High End). But Nokia is still doing great.
        3. Android OEMs as a group have lost share. Yes, believe it or not that is true.
        4. Lastly the OS to beat in Sub Saharan Africa is Blackberry then Symbian in that order.

        I hope that helps.

      • Joe_Winfield_IL

        Rob, thanks for the info. Other than what I can read on a map, I know little of Sub Saharan Africa. However, the region was meant to be illustrative of my broader point. I could have just as easily chosen rural India or Mongolia.

        I don't doubt that your statistics are accurate. However, my contention is that Android will eventually do a better job of winning non-smartphone conversion at the low end than the integrated competitors such as iPhone and Blackberry. In places like Sub Saharan Africa, low income households greatly outnumber wealthy ones; thusly the total volume should favor the OS targeting the low end. This may not manifest itself for a while, especially as the early adopters are typically high-end consumers. My guess is that early adoption is reflected in your figures, but not the widespread use that will exist in relatively short time.

        Also, while Apple will take any sale they can get, the "halo" and "network" effects will be much less in poorer areas of the globe. FaceTime and Words With Friends are less appealing without scale.

      • asymco

        Thanks for the info. Always welcome to hear anecdotal data.

    • Splashman

      @Sandro, I agree with most of your comment — obviously, Google is giving away an OS to drive ad revenue. And it's obvious they intend to dominate the low end of the market. And it's obvious that the phone market in the developing world is dominated by low-end phones.

      But OAPPC (one Android phone per child) is an even sillier notion than OLPC, for one simple reason: monthly fees.

      What the developing world really needs is CWPC (clean water per citizen), RGPC (responsible government per citizen), and LAPBP (less acronyms per blog post).

      • http://twitter.com/sandro1981 @sandro1981

        Absolutely agree – but don't you think the pre-paid minute plan model of today will cede a pre-paid data plan of tomorrow?

  • Alex

    I'm disappointed the chart doesn't show iPhones on TMobile. There are a lot of unlocked iPhones out there.

    • OpenMind

      Unlocked, yet cripple iPhone. It can only do EDGE, no 3G. T-Mobile use AWS band for UMTS, which none other operator do.

  • CndnRschr

    Also worth remembering that Apple has no track record in 2007 which is why it needed to cede exclusivity to Cingular/AT&T in order to get carrier buy-in to a total newcomer that was also dictating other terms (no carrier branding, pre-installed crapware, etc.). It was a pill that Apple swallowed in order to get traction. The tables have turned and its remarkable to me that other handset makers have NOT managed to strong-arm such concessions from carriers – in particular in terms of OS updates.

    • FalKirk

      Agreed. I often see people criticizing Apple for entering into an exclusive deal with AT&T. They forget that Apple was a supplicant with almost no leverage. To me the surprise wasn't how long AT&T got exclusivity but how much power and control AT&T ceded to Apple in return.

  • davel

    as pointed out below google doesnt necessarily have to respond. it depends on where their energy is. they make money on ads and search. all mobile platforms offer that.

    they dont make money on android.

    the android vs ios battle is something google started, but not necessarily something they are wedded to.

    i am very interested in how the management changes at google manifests itself in strategy.

  • Martin

    Hmm. So where is the loyalty – with the carrier or the handset? If it's with the handset, then Apple will get switcher sales, but those won't be new customers. If it's with the carrier, then I think Android is in trouble in the US (they're doing better internationally). It certainly sounds like TMobile is getting the iPhone this year as well.

  • DJ King

    Horace, I'm curious to see, and I'm sorry if you've posted them, if you have any estimates regarding how many iphones Verizon will sell in 2011? You've been doing a bang up job lately with your estimates……a job well done!