AT&T lays down the law for Apple

Apple, welcome to the handset business. Apple's sweetheart deal with AT&T, which grossed Apple an extra $360 for every iPhone sold, is over. AT&T will buy iPhone 3G wholesale, mark it up and discount (subsidize) it for new customers buying a 2-year contract. Apple's net is the margin for the sale, period. There's no more monthly start-up stipend. That's how it works for other handset manufacturers, and as odd as

Apple, welcome to the handset business. Apple's sweetheart deal with AT&T, which grossed Apple an extra $360 for every iPhone sold, is over. AT&T will buy iPhone 3G wholesale, mark it up and discount (subsidize) it for new customers buying a 2-year contract. Apple's net is the margin for the sale, period. There's no more monthly start-up stipend. That's how it works for other handset manufacturers, and as odd as it seems after a year of special status, AT&T is turning Apple into one of the herd. Apple saw this coming, and it has spent the past year setting itself up for life after AT&T's unique generosity.

I've seen it written that this apparent $360 drop in revenue per iPhone will hurt Apple. The naysayers aren't doing their math. I estimate that, compared to iPhone, Apple will clear an additional $100 in wholesale price from AT&T for each iPhone 3G sold. Apple's sales volume will explode at AT&T's subsidized prices, so component and manufacturing costs will plummet as Apple crosses higher volume discount thresholds with suppliers. The high cost of AT&T "enterprise" coverage plans that permit access to Exchange Server e-mail will steer professional users, as well as consumers, toward MobileMe's integrated collaboration and over the air sync services. A MobileMe subscription adds $198 to each iPhone's gross revenue over the course of a 2-year wireless contract. Apple also reaps a fixed 30 percent margin on all iPhone software sold through AppStore, and a minimum of $99 from every iPhone developer. Keep in mind, too, that writing code for the most developer-friendly handset on the market, and gaining entry to the world's largest mobile shareware marketplace, requires a Mac. Developers will buy Macs to get to iPhone.

Then there's iPhone's role as the ultimate media player. It's so idiot-simple to buy music and TV programming from iTunes that iPhone users will be walking cash machines to a greater extent than any iPod allowed. Users can buy and download content over 3G whenever and wherever the impulse takes them, and it will take them often.

All of this new revenue is Apple's; none of it earns AT&T an extra dime. In fact, except for supporting a hike in coverage plan pricing, iPhone 3G will hit AT&T's infrastructure harder than any device except for tethered notebooks. With a treasure trove of Apple and third-party-hosted content at their fingertips, iPhone users will put the "unlimited" in unlimited data. They'll be downloading, surfing, and streaming because they can. There's no guarantee of a particular speed for 3G connections, so if the network creaks under the strain, don't call AT&T. Call all your iPhone-toting friends and tell them to get off YouTube.

The services that Apple brilliantly built around iPhone 3G raises Apple's prospects sufficiently to fill in the revenue hole created by the end of AT&T's monthly support payments, and to start the construction of a mint where that hole used to be. Apple will clear more revenue from iPhone 3G users than AT&T will, which turns the usual manufacturer/carrier relationship on its head.

Where enterprise sales of iPhone 3G are concerned, Apple's services don't come into play. Apple is pitching iPhone 3G as the ultimate enterprise device. AT&T already has enterprise devices from BlackBerry and HTC, manufacturers that not only lock devices to AT&T's network, but stamp AT&T's logo on the case, emblazon it on the home screen and preload AT&T client software that links to private services like unit-billed media viewing. BlackBerry contracts are billed at unlimited data plan prices, but BlackBerry users are not big on surfing, downloading, or streaming. They care more about low latency than high bandwidth. Carriers love BlackBerry.

Apple has come out, guns blazing, over iPhone 3G's superiority as an enterprise device. AT&T has been noticeably absent from these presentations, and a June press release hints at a, let's say, difference of strategic objectives between the two companies. AT&T stated its intent to sell unsubsidized iPhone 3G devices without bundled AT&T coverage contracts "in the future." All kinds of things have been read into this, but it's par for the course. Business buyers purchase handsets and coverage separately. The unsubsidized price is the sticker price for corporate buyers, and customers haggle down from there.

The Post reported something of a stunner, that AT&T might sell unlocked iPhones from its stores. That statement has defied my efforts to verify it. Keep that in mind as I speculate about what might drive AT&T to publicly threaten to cut off its own nose. Know, however, that if AT&T needs to bring a big stick to a stalemated negotiation with Apple, the threat of unlocked iPhones is a whopper.

It could be that AT&T is in no hurry to prod its business reps into pushing iPhone. Their job is to sell coverage, and handsets are a means to that end. If an AT&T rep suits up to visit an enterprise prospect, and that prospect says "no, thanks" to iPhone, the rep isn't walking away. He or she will lay out AT&T's catalog of enterprise devices to see what might catch the customer's eye.

This is not as Apple would have it. AT&T cares about coverage, but Apple wants to sell iPhones, and Steve Jobs is not famous for his patience. Perhaps Apple had in mind to hurry things along by direct-selling handsets to enterprise accounts. Would-be AT&T prospects become Apple's, putting Apple in competition with iPhone's exclusive reseller, and if iPhone doesn't win the day, AT&T loses the coverage deal. That'd be a good reason for AT&T to point its missiles at Cupertino.

Perhaps an ironic loophole in Apple's exclusive contract with AT&T forbids Apple's sale of iPhones to the U.S. market that are not locked to AT&T's network, but fails to explicitly apply the same restriction to AT&T. Why would an Apple lawyer think it necessary to include a clause enjoining AT&T from acting against its interests?

The prospect of unlocked iPhones horrifies Apple. It would lose control of iPhone distribution. Unlocked iPhone 3G handsets purchased from AT&T would be worldwide best-sellers. Used iPhones would be cleaned up and sold as new by unscrupulous sellers. Carriers who do not have contracts with Apple can sell iPhone just the same. It would be impossible for Apple to stop a trade in cracked devices that leave system software unprotected, or worse. If some wise guys started a port of Android to iPhone, it'd be the first time that most of humanity took notice of the Open Handset Alliance.

I doubt that it will come to that. AT&T's threat is enough to make Apple blink and say "yeah, we should have talked to you first." Apple will subject itself to AT&T's pacing of iPhone's enterprise debut and to AT&T's competitive positioning of iPhone against its other devices. That's how AT&T works with other handset manufacturers. Whatever happens, AT&T adores iPhone as a consumer device. iPhone will find its way into AT&T's enterprise bag of tricks, but it seems that Big Bell wants Apple to remain mindful of the fact that without AT&T, there is no iPhone. For better or worse, carriers run the wireless game, and nothing can move faster than they want it to.

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