Greg's Bite: The Cellular Game, Spectrum and Money
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Greg's Bite: The Cellular Game, Spectrum and Money

By Greg Mills

Apple has clearly revolutionized the cellular phone industry since the iPhone 1 was launched. In the past, the cellular carriers had all the power and the hardware manufacturers like Motorola, Nokia and RIM simply sold handsets to them and got the best deal they could. Cell phones were manufactured to please the networks first and then the customer who would use them. Exclusives on certain handset models were common.

Three companies pretty much owned the cellular handset business not that long ago. Now, all three of those giant handset makers are in a desperate race to catch up or die in the race to provide smartphones that can compete with the iPhone. The dumb phone market is collapsing rapidly as contracts expire on old cell phones or their batteries die. People want to move up to a smartphone.

The recently reveled make-or-break deal Apple made with Sprint shows how much things have changed. Apple simply doling out iPhones or withholding them is an economic power that nearly destroyed Sprint and hurt Verizon and T-Mobile in the US market.

As long as AT&T had an exclusive to sell iPhone, the other carriers were desperate to sell anything that even came close to the magical Apple device. Enter Android. Google was actually able to launch the Android OS into the market place in the void Apple left open with the lack of iPhone in the inventory of AT&T's competitors. This also played out around the world, until Apple finally got around to selling iPhone to additional carriers in each market.

The exclusive right to sell iPhone in a market came at a very dear price. Bargaining with the electronic Godfather, Steve Jobs, wasn't easy; he knew how much the other carriers desperately needed the iPhone. As Apple ramped up production of the iPhone and the hardware matured to enable an iPhone flavor that would work on any cellular radio network, the power to extract unbelievable concessions from the carriers didn't diminish; Sprint is recent proof. I have never heard what Verizon had to pay to get into the game. The current prices carriers pay is north of US $500 for a basic iPhone and more for the ones with more memory. Apple has a bill of materials of about $200 on the iPhone 4S, so to say it makes a tidy profit is an understatement.

Apple forced Sprint to agree to a deal worth twice the company's current market cap of about U$9 billion. Over the next four years Sprint has agreed to buy 30.5 million iPhones at a current valuation of about $20 billion. They must buy all those iPhones or default on the contract with Apple. Both Sprint and Apple certainly have confidence that selling iPhones will turn Sprint around. The point is, who else could force Sprint into such a make-or-break deal, who else has the handset that could make it work? No one else comes close, including any of the Androids.

While Apple has faced some criticism for holding to the exclusive cellular carrier marketing model for so long, it gave Google's Android an opening to fill the "I wish I could buy an iPhone but I will accept an Android instead" niche. That isn't any longer the case. I fully expect the Android numbers to fall dramatically soon due to four main factors.

First, the uncertainty factor. The previously free "open source" Android OS carries significant legal baggage in the form of Apple's lawsuits and lots of relevant patents that are causing uncertainty and hold major potential unknown costs for handset makers. Microsoft has cashed in recently and collects more in royalties on its patents covering its technology found in Android than it makes on Windows Mobile OS. It has been estimated that about $10 is the Microsoft "tax" on its patent license on each Android handset sold.

This does not factor in any potential damages Apple may collect for previous infringement. The legal baggage also includes the likely potential Apple will win and force a major revision in the Android OS that will orphan both hardware and apps. Then Oracle wants to force Google to pull Java out of the Android OS or license Java and comply with its standards. Building Android handsets and tablets that can't even be sold in entire markets is a major brand disaster. These terrible nightmares are not something the CEOs of the world's handset makers like to dream.

Secondly, the Android platform has some serious problems with the common piracy of apps, a severely fragmented app store infrastructure and various flavors of the Android OS that have some incompatibility issues. Apple avoids all these problems by fully controlling both the hardware and the software. The uncertainty the handset makers see in the Android OS will certainly open the door for the other platforms. Windows Mobile, Palm and other mobile OS platforms can only hope for a chance in the sun, should Android fail.

Thirdly, Google is sending mixed messages since they moved to buy Motorola. The rest of the Android handset makers rightly fear Google will try to follow Apple's lead of making both the hardware and writing the software for a better user experience and thus intentionally favor Motorola over them with Android innovation.

Finally, the exclusive iPhone market thing is over. Apple is about to really open the flood gates and sell iPhone just about everywhere. That drains the pond for the Android. Why buy an iPhone simulation when you can buy the real thing?

If I had the money I would go long on Apple and Sprint both. I figure Sprint is way down and, with their value due to sepctrum they own, either the iPhone will fix the company or it will go down and will be bought up by some company with the money to fix it. Or Apple will buy Sprint and fix it. Any way, Sprint investors win. I think the Android advantage is over and Apple is about ready to clean up.

That is Greg's Bite for today.


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