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iOS distribution: do operators hold the keys?

As iPad shipment volumes increase and as the iPod touch becomes the de-facto iPod, it’s time to look at the overall split between iOS devices.

I will focus the discussion between iPhone and iOS “others” because I believe the two categories differ greatly in terms of their positioning and market strategy due to the different channels.

The company does not provide iPod touch units shipment data but it can be estimated that, based on overall iOS numbers released in September, iPod touch represents approximately 50% of iPod units sold.

If we put all we know together about volumes, we have the following chart:

Note that iPod touch has, occasionally outsold the iPhone. The pattern of approximately equal volumes for the two types of products is likely to continue depending greatly on the growth rates.

Next, I turn the spotlight on revenues.

 

Over $10 billion flowed in from Operators, and a bit under $8 billion from other channels.

Note that I labeled the iPod touch and iPad as non-operator channel (Consumer electronics) distribution. Although this is not entirely true (and conversely iPhones are often sold through Apple stores) this gives a rough indication of split.

The iPhone business is staying ahead of the other iOS businesses but the gap is narrowing.

As previously noted, the iPhone is a unique product in Apple’s portfolio. It depends on a distribution channel that no other product was designed around. This has advantages and disadvantages. The advantage is a high margin due to service revenue sharing but the disadvantage of network incompatibilities, politics and a range of telecom-related regulations.

What I believe is that the non-operator channel will grow as a proportion of iOS revenues. This is both as iPad grows to disrupt personal computing and as the iPad emerges as a communications tool.

As time passes, I believe Apple is motivated to also move revenues to its traditional channels. Whether, or to what extent, cellular phones will move in that direction remains to be estimated.

  • rattyuk

    By the end of the year we should have a better grasp of Apple's iOS strategy in that all the interested parties (competitors) are claiming a tablet "rout" to Android. These are the same people who don't see the difference between a carrier controlled market and an open one. I fear that they are going to be surprised. The tablet market is going to be closer to the iPod market than the iPhone market.

    • Hamranhansenhansen

      It makes the criticism of iPad as "just a big iPod touch" totally hilarious. If iPad is a type of iPod (which I think it is, it is an "iPod PC") then best of luck to the competitors who couldn't even make a competitive iPod when the "apps" were just totally open ISO MPEG-4 audio video. Now, you have to manage a native app platform as well? Apple crawled, then walked, then jogged, then ran, and many others are standing around saying "we're going to start running later this year."

      I don't see how iPad market share ever falls below 75%.

    • FalKirk

      "The tablet market is going to be closer to the iPod market than the iPhone market."

      Agreed. It's going to be closer, but not exactly like the iPod market.

      Apple has a significant advantage with the WiFi only models because they can distribute them through their own retail stores. Carriers have no incentive to carry a WiFi only tablet thus limiting the distribution opportunities of many of Apple's competitors.

      As far as WiFi + 3G goes, month by month pricing was a real coup for Apple. It provides a level of flexibility that their competitors have been unable to match. When coupled with a phone, a two-year contract may be viewed by most as a necessary evil. When coupled with a tablet, I suspect that most will view a two-year contract as a very unnecessary evil. This is especially true when they have the option of buying a contract-less iPad instead.

      Another difference between the iPad and the iPod is price. The iPod was always the higher price, higher value product. Pundits and competitors were always baffled that the iPod could survive let alone thrive. While the competition tried to bludgeon the iPod to death with a laundry list of features and lower prices, Apple employed more subtle, but more effective tactics like simplicity, ease of use, intuitiveness, integration, seamlessness, etc. The awesome power of these "soft" psychological factors are always undervalued when compared with the hard and measurable appeal of specifications and prices.

      Today, the iPad is the value AND the market AND the price leader. To my recollection, never before has Apple had been so far ahead and so far ahead on so many fronts. This has serious ramifications for their competitors. It may have been a short term solution – a "race to the bottom" – but Apple's competitors have always had the the option of competing with Apple on price. Now the iPad has all the subtle psychological advantages that the iPod had AND Apple can drop the hammer on price too. The iPad's competitors are legion, but so far as I can tell, their only weapon now – their only significant points of differentiation – are operating systems and a willingness to provide a smorgasbord of features that Apple is unwilling to provide. The twin strategies of increased feature sets and decreased prices did not go well for Apple's iPod competitors. We'll have to wait and see whether the twin threats of alternative operating systems and feature diversification bodes well for Apple's iPad competitors.

      • r00tabega

        Feature sets are the only thing Android and the other competitors have against iOS.
        Hardly anyone cares about the OS – they care about features like notifications management, bluetooth, etc.
        They also care about applications, but iOS is far ahead of everyone there also.

        The only place where WebOS and Android can play is to provide a better UI or features. Apple has everything in their favor.

    • CndnRschr

      Ars Technica has just reviewed the Xoom (in typical detail) and come at the review in a fairly objective manner: http://arstechnica.com/gadgets/reviews/2011/03/ar

      The bottom line is that this is a flawed, rushed to market tablet with what look like impressive specs but replete with unfinished software (and hardware). This is after the iPad was release 9 months ago. It underscores the inherent difficulty of matching hardware and software. Of course, it'll get updates and improve, but aside from promises and beta-quality shipping examples, Apple's jump on the rest is hard to diminish. The only compelling Android tablet software to date was ported from the iPad.

  • newtonrj

    "As time passes, I believe Apple is motivated to also move revenues to its traditional channels. Whether, or to what extent, cellular phones will move in that direction remains to be estimated."

    Is this view held because of iPhone competition & lack of substative iPad/iPod compeition or by other factors of supply channel, cost/margin, or consumer groups? -RJ

    • asymco

      I think the motivation is that Apple needs to control the roadmap and there is a constant irritation with having to work with the telecom channel. In a way I see it as an unavoidable cost for Apple.

      The other source of pressure will be eroding margins due to saturation of data service penetration. As data plans become ubiquitous the market will change (as it did for voice) making the value of smartphones in general less.

      I don't see competition as a source of pressure.

      • kevin

        I can imagine that, in the future, Apple will be pitching some sort of a no-voice-plan, global-data-plan only (possibly via MVNO), lower-cost LTE-iPhone model that uses FaceTime (or VoIP) for "phone" calls.

        We'll have to see how the economics modify the specifics of that, but I think Apple will just keep pushing to make the telecom channel look like the broadband/ISP channel.

      • Sam Penrose

        So we have two values currently high and declining: the value of a data plan and the value of an integrated smart phone. I suppose the next question to ask is: which will decline faster? Both are motivations for the carriers to stop subsidizing the iPhone, but if the data plan premium declines faster, Apple can still charge a premium.

      • r00tabega

        Witness the 2009 Apple WWDC when they announced the iPhone 3 and tethering to many cheers and then said it was dependent on carrier (with boos due to the AT&T exclusivity… since everyone knows AT&T was not interested in delivering). AT&T was booed more than once during that keynote.

        It took another year to see tethering support from AT&T while other operators across the world had it in weeks.

        Yes, gargantuan operators like AT&T and Verizon are definitely a necessary evil for Apple.

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

    I think it is getting harder to generalize when it comes to mobile phone distribution. While some markets remain entirely operator-dominated in the classical sense, with phone purchases being tied to post-paid contracts and contract renewals, in other markets even the operators are moving away from this model.
    Here in Germany one of the operators offers a financing plan for phones in connection with a contract, but no longer subsidizes the phones in any way. And with an abundance of post-paid options and contracts where no monthly base fee is charged, more and more people consider phone purchases and phone contracts as wholly disjunct.

  • Luis Masanti

    I think that Apple learned from its past, wanting to control all of the operations, including the sales channel.
    That's the reason (I beleive) of the iPod touch. And the new way of selling the iPad 3G (without contract).

    This is what it tryed with the iPhone: it has full control "except" for the part that it is impossible by the carriers to give up. (I mean, full control of the device, the iOS, the apps…)

    “If” Apple could deliver a "virtual SIM/carrier bidding" device, it could retake the control of the main part of the sales channel. The cellphone become a truly "consumer device."

    It would be like a DVD player: you buy one brand and then uses it to see movies from ahy studio. Even your own! (In Apple's parlance, it would be using FaceTime.)

    But, the telcos will fight hard against becoming "just tubes."

  • OpenMind

    If operator can still sell a contracted or non-contracted phone with the same service plan, then no matter whatever phone manufacturers do, operator still retain the control. No consumer is going to buy $600 phone and pay same monthly fee with the same phone but at $200 a piece. Unless Apple or someone are willing to sell $200 phone to consumer directly yet they can fetch $600 from operator. No technology, whether virtual SIM, super SIM, wacky SIM, whatever can change this business model. To destruct a existing business model, you need another business model. Technology alone is not enough.

    • Lee

      I'd guess that Apple offering a $200 phone when they're selling their own "Virtual SIM" and selling repackaged Apple-owned spectrum…wouldn't that be the same business model that the telcos currently use? Subsidize the phone cost and make it back in the service price (or am I missing something)? Then Apple can not only control the experience of using the hardware and software, but also the experience of contracting with a carrier.

    • Hamranhansenhansen

      You are thinking too small. A major disruption is what a virtual SIM with carrier bidding would be. Otherwise, why even do it?

      Compare these 2 options:

      • AT&T iPhone 5 16GB with 450 minutes, 200 texts, 2GB data per month $199 plus $80 per month, 2 year contract: $2119 total over 2 years (plus additional long distance, overage, and other fees)

      • Apple iPod touch 5 3G 16GB with unlimited FaceTime, unlimited texts, unlimited data per month, $229 plus $1 per day a la carte 3G, no contract, no activation fees, no overages, no other fees apply: $959 total over 2 years

      If the device is only $229, why do you need a subsidy? Consumers also consider no contract to be valuable, to be a great feature. If FaceTime is VoIP, why do you need voice minutes? If texts are just tiny bits of data, why do you have to charge me for that data again? And since most of the cost of the device is monthly service, you offer users a flat $1 per day instead of an open-ended $80 per month. That leaves more money to upgrade to a higher-end device, adding storage, or going up to a $600 device if the user likes, and they still save money compared to AT&T.

      AT&T says 95% of their iPhone users use less than 2GB per month, and 75% use less than 0.5GB, so even when you add FaceTime, Apple shops that around between multiple carriers bidding against each other, and you can likely turn a small profit on the data, even with unlimited. Plus, you sell that same user an iPad with $1/day data, and they are still paying less per month than with AT&T. Or sell the tethering for a Mac for an extra $1/day more. And you sell them more apps and other services because they have unlimited data. Nice and simple.

      • OpenMind

        That is right, if device is only $229, then subsidiary is not requirement. But again, what Apple gain from this? Market share vs. profit? Remember business is in for profit by providing consumer what they need or want.

      • handleym

        "But again, what Apple gain from this?"

        As I have said many times before, I believe the future consists of us all owning many cheap devices in multiple physical form factors (an iPod nano AND an iPhone AND an iPad AND a MacBook Air) rather than single device (in a single physical form factor) which tries to do everything but which cannot succeed. I think Apple also believes in that future.

        BUT there is a major roadblock between now and that future being delightful, which is carrier stupidity, in particular their unwillingness to allow the creation of a single "user account for data" against which can be charged ALL my cell data interactions. Compare Apple's vision with the Mac/iTunes/App stores — one userID, used in multiple places, the ability to and expectation that you will download what you have bought once to multiple devices — and Apple is trying to replicate that with music and video. Data is just more of the same. NO customer is happy that they have to maintain and pay for a cell account and a separate iPad 3G account and then a separate extra payment to get data into their MacBook Air via tethering. They'd all be much happier with a SINGLE payment system, tied to their iTunes account, that covered everything. This is not just a question of cost (though that is part of it), it is, as I said, a question of delight. Your experience with your beautiful shiny Apple products is reduced by the fact that they don't just all work seamlessly as well as they could, or they don't walk seamlessly across borders (carrier locking).

        If Apple can work around these issues
        – in the short run, they have happier customers
        – in the long run they are ever better poised (more than anyone else) to be the ONLY vendor of a constellation of variably sized hardware that ALL actually works well together.

      • Abhi Beckert

        "As I have said many times before, I believe the future consists of us all owning many cheap devices in multiple physical form factors (an iPod nano AND an iPhone AND an iPad AND a MacBook Air) rather than single device (in a single physical form factor) which tries to do everything but which cannot succeed. I think Apple also believes in that future."

        Apple has never sold "cheap" products. The iPod Nano for example is triple the price of other small mp3 players. The iPhone is never going to be as cheap as the low end android options.

        But i do agree that they need multiple iPhone models at different price points.

      • handleym

        I don't mean "cheap" as in "low-quality". I mean cheap as in "large numbers of consumers can afford them". Buying an iPod Touch AND an iPod nano AND an iPad is perfectly feasible for vast numbers of human beings. Even many who claim they "cannot afford it" have simply chosen to spend their dollars otherwise — on restaurants or alcohol or whatever.

        This is what cheap means — computers are no longer devices like cars where for most people their purchase is something that is carefully thought about and carefully financed.

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

    Horace, do you expect iOS5 to be the beginning of Apple's big push into cloud computing? Will iOS5 obviate the need to have a PC to manage your iPad/iPhone/iPod? Would less Flash ram on the device make them cheaper and would cloud storage offset the need to have many GB of flash on devices?

    • handleym

      This is an exceptionally silly world view — trading off a commodity that is growing cheaper and ever more plentiful (flash) for one that is expensive and growing ever rarer (cell-phone bandwidth).
      Apple will never go such a nakedly foolish route.

      The closest I think we will see to this is my ruminations (elsewhere, don't have time to repeat them here) on Apple's future possible competition to Pandora and Spotify, which I see as having a large component of "transparent caching" so that, in essence, large amounts of your future Pandora-style playlist are silently downloaded to your device when you are connected to iTunes via USB, or on a WiFi network.
      This is a technique that uses MORE flash,not less — but economizes on the thing that actually should be economized on, the cell bandwidth.

      • Abhi Beckert

        "This is a technique that uses MORE flash,not less — but economizes on the thing that actually should be economized on, the cell bandwidth."

        Don't forget battery life. You can't do wireless sync while the device is in use, that will impact performance by consuming precious ram/CPU/bandwidth. That means you have to sync while it's turned off, which requires turning on a bunch of power hungry hardware that is currently off 99% of the time.

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

        > This is an exceptionally silly world view

        I think your whole post is silly! How's that in the battle of idiotic ad hominem attacks?

        BTW, do you even use Internet? Haven't you noticed that people stream whole movies and TV shows (not to mention radio) to their mobile devices?

        And now you're telling me that storing music and photos and other docs in the cloud and not on the phone is somehow silly?

        The only thing that's silly are your silly assumptions and close-mindedness. OPEN UP YOUR EYES!

    • Abhi Beckert

      Apple did just do that with the Apple TV, but I don't think it works well for a 3G device.

      I think Apple's motivation for cloud storage is to eliminate the need to sync data between devices, not to reduce costs. In otherwprds it's purely a user experience thing. So don't expect to see it on iPhones until mobile data is faster and cheaper, and it won't come out for iPod Touch until every model has mobile data.

      Flash memory doesn't seem to be a big price factor. In the Australian apple store (where you can buy iPhones without any SIM/carrier), the 32GB iPod Touch is $378, compared to the 16GB iPhone at $859. Half the flash memory but still double the price.

      The price difference between iPod Touch and iPhone seems to be the battery and the quality of some components (especially the display). A cheaper iPhone will come out when battery life improves, which could be this year based on the iPhone 4's excellent battery life.

    • asymco

      In the long term cloud storage and services will become more common but I cannot say that it will happen by iOS5. Infrastructure takes a long time.

  • gctwnl

    Telco's make an enormous amount of money for transporting very little data when they sell voice and SMS. If connection oriented (voice and video calls) and connectionless (messages, like e-mail and SMS) move to a generic IP data level, it is impossible to charge for those separately. The telco's have a lot to lose from stuff like Skype and Facetime.

    Which makes me wonder: whatever happened with Apple 'opening up' Facetime? They have been rather tight lipped about that one since announcing it in summer 2010.

    • OpenMind

      Yes, that is the biggest worry of telco, the diminish of voice/text revenues. Just like telco more or less compensate the loss of landline with mobile. What can they use to compensate if loss of voice/text revenues actually happens? I believe this will keep CEOs of telco wake up at night.

  • vinner57

    I'm sure Apple have been thinking about how to remove the Telco's from the equation for about, oh, six years? It will and must come at some point but its going to be a mighty effort and a mighty fight. There will be a ferocious pushback from the telco's, phone manufacturing rivals, vested interest politicians etc. but it is the logical conclusion to the whole journey. Can't wait.

    • Synth

      I believe the next step will be to offer a, contract-free dual band CDMA/GSM iPhone which will be iPhoneGS-level technology. Since the current iPod has a much better screen and CPU and cost $229, I think they could easily come up with a contract-free GS-level phone for around $200 – $300.

  • r00tabega

    The iPhone was an innovation simply because, for the first time, a non-telco company had a benchmark they could use for telco's around the world.

    Apple's vision is exactly what we see in the iPad, and it's exciting: 3G as a non-contractual on/off utility, and their device(s) as the gateway. Now for the unrealized part: being able to switch carriers dynamically on a month-month or even day-day basis.

    A bold step, and one that will improve the lives of everyone while profiting Apple immensely.

    • CndnRschr

      Absolutely. I have bought two months of 3G service in the last 8 months. I can activate and inactivate on-device when and if I need it. I even use a telco I've never used before (my phone is Rogers, iPad microSIM is Bell (plus I have a Rogers microSIM in case I ever have a coverage problem).