3G iPhone Shuns SaaS for Longer-Term Opportunity?
Posted by Bob Warfield on June 10, 2008
Of course the Apple 3G iPhone announcements dominate the blogosphere and other news channels. As I read the various accounts, I am struck by one message writ huge by Apple’s actions:
They are stepping back from the SaaS subscription model
The deal is you get the iPhone more cheaply, $199, but you have to sign up for a 2 year contract at $30/month for individuals and $45/month for businesses to use it. Apple gets a decent sized one shot payment on that, but no revenue share with the telcos. We’re back to the future with a totally conventional deal between the handset provider and the telcos.
Huh? Well lookit. They’re changing the model from a long-term revenue share with the telcos to a big up-front payment from the telcos. Add to that the requirement that you do an in-store activation. I remember how delighted I was with my original recipe iPhone to be able to activate it from iTunes in the comfort of my home. How in the world can stepping back from that very cool approach to a requirement that I actually go visit a (gasp!) bricks and mortar establishment be a good thing?
What’s up with this? I can’t seem to find a definitive analysis yet, although the stock market is definitely not impressed with it, or perhaps they’re not impressed with the delay in availability until July. StartUp Meme calls this normal for any Apple conference. However, we can speculate:
1. The telcos forced them to do it. They made it clear they would not continue to put up with a revenue share and Apple accepted that in the interest of continuing to grow the franchise. With iPod sales basically plateaued, they had little choice.
2. They want to do it for some reason. Perhaps they fear the legion of iPhone clones that are coming and want to take money off the table ASAP. Perhaps they sensed that now was the time to really corner the smart phone market if only they would give a little to the telco’s wishes. Perhaps international adoption was severely hampered by the deal structure they were trying for. Or perhaps they did the math and figured out they were losing so much money to illegally unlocked iPhones that the original model was not a money maker in the long run.
Whichever model holds true, it is a bizarre and unusual event in this day and age for a company to get so far down the SaaS/Subscription path and suddenly convert back to the all-up-front on-premise mode of thinking.
I guess it sheds light on why AT&T would pre-announce the 3G and potentially freeze sales. They like this new deal better and preferred to see Apple sell as few revenue sharing phones as possible. Apple, for its part, seems to have cooperated by having a well-publicized shortage of the regular iPhone to flush the channel fo the offending devices and their attendant subscription-based contracts.
My money is on option #2, that Apple wants to do this. They’re still in a strong enough bargaining position I have a hard time believing the telcos forced the issue. Moreover, I think what was messing with Apple was their lack of control over those pesky unlockers. It is interesting that Gizmodo reports there will actually be a penalty of some kind if you don’t get you phone registered and on a “legal” 2 year contract within a short 30 day grace period. Wow!
Apple will keep its hand in the game in a different way. By tightening their absolute control over iPhone activation, stopping the jailbreakers, they ensure control over the software that goes on the phone. The iPhone Applications Store can be the long-term money maker. That makes the iPhone the razor, and the apps the razor blades. The video game console market has been run this way for decades, so maybe Apple isn’t so crazy after all. If they can get revenue sharing off every piece of software that goes on the platform, that ain’t all bad. According to the SDK press release copied in the Gizmodo article, the app developer sets the price and keep 70% of revenue. Apple gets the other 30%. In this model, Apple trades a long tail of SaaS revenue on the phone itself for a big up-front payment and tighter control over the likelihood you’ll pay them some of that 30%. Jobs is thinking big as usual.
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