The iPhone Will Probably Be Released In 2007: Who Is Apple Up Against?

Includes: AAPL, GOOG, LPL, NOK, S, VZ
by: Ross Greenspan

It’s become all but certain that Apple (NASDAQ:AAPL) will be releasing an iPhone sometime in 2007. The convergence of the mp3 player and cell phone is natural. In fact, several hardware manufacturers already market mp3 player/phones and the major mobile carriers are rolling out their own music distribution services, or partnering with existing ones to bring content to compatible phones. The hardware manufacturers and the mobile carriers will directly compete against Apple's ITMS and the future iPhone. Which ones and how?

Mobile Carriers

* Cingular has partnered with Apple to deliver iTunes capability on the RAZR.They have also partnered with Napster (NAPS), eMusic, Yahoo! (NASDAQ:YHOO) Music, Walkman [Sony Ericsson] and XM to distribute content through other mobile handsets. Cingular is currently highlighting the BlackJack by Samsung. They're running an ad campaign with the guy who's in a grocery store shopping and all the things he buys are names of bands (Vanilla Ice, Salt'N'Pepa). The BlackJack is a smart phone and it can access music and video from which ever Cingular partner it chooses to use except ITMS.
* Verizon (NYSE:VZ) has not partnered with any of the Internet music distributors. Instead it distributes content through its V CAST platform. V CAST distributes music, video and games. Many of the mobile handsets offered by Verizon are V CAST compatible. Verizon is currently touting its new "Chocolate" handset by LG (NYSE:LPL) as a part mp3 player, part phone.
* Sprint Nextel (NYSE:S) has developed the Sprint Digital Lounge to distribute music and video content to its own customers. Digital Lounge appears to be proprietary and not a partnership with any previously established Internet digital music distributor like Napster, Rhapsody, Yahoo! Music, etc.

Hardware Manufacturers

* LG manufactures at least one mp3 player/phone for the major carriers. The Chocolate (Verizon), the Fusic (Sprint) and the CU500 (Cingular). No mp3 player/phone for ALLTEL.
* Samsung manufacturers the BlackJack and Sync carried by Cingular. The SPH-m500 is mp3/phone for Sprint. The SCH-a950 is carried by Verizon and VCAST ready.
* Nokia (NYSE:NOK) manufactures a number of phones with mp3 player capability. These phones are available on many carriers including the three listed above.
* Sony Ericsson list six phones on its website with mp3 player integration.
* Motorola (MOT) manufacturers the RAZR, SLVR, PEBL, ROKR and other models that have mp3 player capability

The big three mobile carriers in the United States and the global handset manufacturers are linking up to capture the fledging convergence of the mp3 player and the mobile phone. The big question is whether or not Apple can pull the rug on the existing digital mobile music distribution offerings. Below are possible scenarios for how Apple might distribute the iPhone.

Possible Scenarios

* Apple distributes the iPhone through all or one of several mobile carriers. In this case the iPhone would sell in Cingular, Verizon and Sprint branded stores and have access to the ITMS interface. The phones would probably be sold at a loss to the carriers and would depress Apple's revenue/unit if it had to sell the iPhone wholesale to the carriers. Currently, Apple makes the largest profit from the iPod hardware, as opposed to the $0.99 downloads.
* Apple distributes the iPhone through Apple stores and lets customers choose their own carrier. No matter what, Apple will definitely sell the iPhone in its own stores and (depending on other factors) let customers deal with setting up service. The revenue model for this scheme would be similar to the iPod. It’s definitely more attractive to sell individual retail units than bulk wholesale orders for third-party retail distribution.
* Apple becomes a mobile virtual network operator [MVNO] and resells wireless service from one of the nation-wide carriers. Speculation has listed Cingular as the company Apple would lease bandwidth from. This model would also be attractive for Apple. But it could be more trouble than its worth. Apple would have to establish customer service and technical support for the mobile service. In this model, Apple sells its iPhone exclusively with its branded Apple mobile service.

Best Options

* The simplest option is partnering with a mobile carrier to provide service and distribute the iPhone. Selling the iPhone in Apple stores without any service contracts is a given.
* For domination of the digital content market, Apple becomes an MVNO and tries to grab as many customers from the mobile carriers by luring them with the new iPhone. They charge full price for the iPhone and capture all the profits. They will pay for the wireless frequency they have to lease, as well as the cost incurred from developing customer services.

Disclosure: Author holds no position in the above-mentioned stocks.