The iPhone cracking and its business model

There are lost of articles these days about the iPhone cracking, how Apple and AT&T are going to react and what that means for the iPhone business model.

One that I read that did not make any sense to me is this one on Cnet. The whole article reads like a big conspiracy theory about the real intentions of Apple with the iPhone. The author claims that since Apple is basically a hardware manufacturer (true to some extent), they are more than happy with the IPhone being cracked since that will allow them to sell more iPhone. His argument is that the iPhone business model is basically like the iPod where the money is made on selling iPods and not on selling music in iTunes, the fact that you can buy music so easily and cheap on iTunes is just a feature that allows Apple to sell more iPods and according to him. So similarly, according to the aurthor, the revenue deals that Apple has cut with the carries (only AT&T available at the moment but we will see the first european ones before year end) are just a nominal amount compared with the revenue made selling the phone itself. Therefore, following this line of though, Apple will be motivated to leave the iPhone unprotected even if then the carriers will be less motivated to given Apple a piece of the revenue since it will allow Apple to sell more iPhones. I do not agree with this. The music revenue that Apple gets from iTunes is certainly nominal for Apple, not just the revenue but most importantly, the profits it makes selling songs. First, most iPod users never buy any music in iTunes (just do the math on how many iPods are out there and how many songs are sold in iTunes). Second, the margins that Apple must be getting selling music in ITunes are probably very low, better than what other companies make selling music online due to their weight but still low, I guess on the 5% or less when you take into account all the royalties and distributions costs). On the other hand, everytime Apple is selling an iPhone, is going to get some extra revenue out of that user since the iPhone user will certainly have to get a contract with a carrier and if that is the carrier that Apple has negotiated with, then a piece of that revenue will go to Apple (note here that if someone buys the iPhone, cracks it and use it with a carrier that does not have a deal with Apple, Apple gets no money). Second, the revenue that Apple gets from the carrier has 100% margin, it is basically all profits since it carriers no cost for Apple to generate that revenue, only the carrier has the cost of the network, support, etc. So in my view, Apple should be motivated to continue doing for as long as it cans (won't last forever though), deals like the one it has made with AT&T and get a piece of the carrier revenue. Now the other interesting question is, why the carriers will give revenue to Apple and not to, let´s say, Nokia? Well, it is all about the fuss around iPhone, Apple has made the phone so attractive (and I had one in my hands so I can certify that it is amazing) that end users pay for the device so the carrier saves the subsidy on the phone (the largest user acquisition cost) at the expense of giving a a piece of the revenue to Apple. Now if the iPhone can be easily cracked and freely used with any carrier, I wonder what will be the carriers motivation to give Apple a share of their revenue. So in my opinion, Apple will try to keep the iPhone secure as long as it has these deals with the carriers. It is important to notice as well that even though Apple (or AT&T) cannot do anything legally to stop people cracking the iPhone, they can try to avoid it by updating the iPhone software remotly every time they sync with iTunes or connect to the Internet (something that every iPhone user is going to be doing frequently).

 

CD