IPhone may boost revenue for carriers

Times Staff Writer

Cellphone carriers have long sought the next big thing to produce the sort of revenue they now collect from customers who use their handsets simply for talking.

But ring tones, Internet browsing, streaming video, e-mail and a host of other services have failed to take off as expected. All data offerings accounted for less than 11% of the industry’s total service revenue in the first half of last year.

That’s part of the reason even big mobile phone companies that won’t be selling Apple Inc.'s iPhone are focused on its June debut. It may turn out that the so-called killer app isn’t the ring tone, the TV short or the music download, but the system that makes it easy to get all those things.

“The iPhone is definitely poised to tackle this problem, and Apple has certainly delivered a compelling product,” analyst Linda Barrabee of research firm Yankee Group said. But for the iPhone to move the revenue needle up for carriers, “it needs to be a blockbuster.”


The accolades that greeted last week’s introduction and demonstration of the iPhone by Apple Chief Executive Steve Jobs were a sign that many believe that the device will revolutionize the handset industry.

“It’s hard for a single phone to change the market overnight,” said Miro Kazakoff, senior associate at consulting firm Compete Inc. “But long term, the iPhone has a chance to change the market substantially.”

Such a change wouldn’t be a first for Apple. The company’s iPod wasn’t the first MP3 player, but it dominates the market and pushes other vendors into creating user-friendly designs and interfaces. So, too, analysts said, will the iPhone force the cellphone industry to rethink design and come up with better handsets that, in turn, will generate more revenue for carriers.

The U.S. has long lagged behind Asia and Europe in adopting the technologies to make handsets more than just mobile phones. More than 80% of cellphone customers in major European countries, for instance, sent text messages on their cellphones in November, compared with 38% in the U.S., according to market research firm M:Metrics Inc.


“The mobile phone today has been pretty ineffective as a mechanism for perusing content and applications,” M:Metrics analyst Seamus McAteer said. “The marriage of mobile phone and computer has resulted in an intimidating interface and crippled user experience.”

Slower networks and charges for functions also have helped to stifle widespread adoption.

The sleek iPhone -- a combination iPod, phone and Internet browser -- will work exclusively on the Cingular Wireless network for an unspecified number of years. The device is mostly a high-resolution screen, no keypad. All functions, including making calls, are operated by users’ touching the screen.

“This is the first cellphone that I could imagine using to watch a movie on an airplane,” consultant Greg Sterling of Sterling Market Intelligence said.


With a price tag of $500 and $600, depending on internal storage, the iPhone is aimed at the high-end market dominated by the likes of Research in Motion Ltd.'s BlackBerry, Palm Inc.'s Treo and a number of well-regarded multifunction phones from makers such as Nokia Corp., Motorola Inc. and Samsung Electronics Co.

Samsung said last week that the iPhone would create an opportunity for the world’s third-largest handset maker to develop competing high-end handsets.

Still, iPhone’s steep price -- which may not be offered at a discount by Cingular -- and the fact that the iPhone won’t operate on Cingular’s fast third-generation network, at least initially, are big drawbacks, Sterling said. The iPhone will run on a somewhat slower network.

Cingular and Apple have kept mum on details about rates, discounts and other operating matters. They also haven’t revealed much about their own relationship, except to say that each decided to let the other have the freedom to do what each does best.


“We wanted Apple to continue to innovate,” said Glenn Lurie, Cingular’s president of national distribution, who headed the project for the largest U.S. cellphone carrier. So trusted was Apple that Cingular’s board approved the proposed venture two years ago without ever seeing a prototype or plans.

U.S. carriers typically control what functions are on cellphones and how much customers must pay to enable them. Two years ago, Motorola’s short-range wireless capability, called Bluetooth, was disabled by Verizon Wireless. Customers filed a class-action lawsuit, and the carrier settled the case.

More carriers, with Sprint Nextel Corp. and T-Mobile USA Inc. in the forefront, are opening up some features to enable customers to do such things as transfer photos directly to computers without using their airtime minutes, thus avoiding carrier fees.

The iPhone will be able to operate over high-speed Wi-Fi networks, which will enable customers to surf the Internet, manage e-mail and shop online without paying Cingular a penny.


“We’re very confident that with all the innovative things Apple brought to this phone that our customers will use our network as well as the free Wi-Fi hot spots,” Lurie said. “We believe the iPhone will generate much higher-than-average revenue per user.”

The companies’ relationship will be key to the success of the iPhone, said James P. Andrew of Boston Consulting Group. “The problem is not innovation, but whether people are going to make money out of it,” he said.

Andrew, coauthor of a new book, “Payback: Reaping the Rewards of Innovation,” said the cellphone industry has needed carriers and manufacturers to make commitments to each other to let that innovation surface.

“That’s something Apple and Cingular are breaking some ground on with the iPhone,” he said. “They have to work together in a different way than carriers and vendors have had to before.”


Michael McGuire, an analyst at research firm Gartner Inc., said the arrangement would force the industry to discuss the relationship among carriers, handset makers and content distributors, “and who controls what.”

“The smart ones figure out that consumers are at the center of who controls what,” McGuire said. “And more consumers are demanding control of their own communications experience.”




Talk only


British cellphone users are more likely than their U.S. counterparts to use some of the most common mobile feautures.



Percent of customers who used each application in November

Sent text message: U.S. 38.4% | Britain: 86.3%

Sent photo message: U.S. 14.9% | Britain: 30.0%


Browsed news | information: U.S. 10.7% | Britain: 14.4%

Purchased ringtone: U.S. 8.9% | Britain: 5.1%

Used personal e-mail: U.S. 8.4% | Britain: 7.0%

Used instant messaging: U.S. 6.4% | Britain: 4.2%


Used work e-mail: U.S. 5.0% | Britain: 3.7%


Source: M:Metrics