By Mark Goldstein
It is clear that in the past, Apple's (AAPL) prominence was driven by the advent of the iPhone and its "one stop shop" approach as a communications and entertainment provider to consumers in America. In this article, I will show how the company is transitioning toward "dynamic carrier selection," which will erode margins at carriers Verizon (VZ) and AT&T (T). Dynamic carrier selection allows the consumer to select the phone first, and then select the service provider. In effect, Apple is pivoting to commoditize the major telecom providers' services.
It is clear now that Tim Cook and management are capable of driving this unique corporation as leaders into the mobile carrier market. Apple sold an extra 5 million iPhones in Q2 of 2012, an increase of international sales from 63% in Q1 to 75% in Q2. Many people underestimated the smartphone market that is rapidly growing along with the emerging markets like China.
Smartphones are growing to become the standard preference for communication throughout the globe by consumers and businesses as well. Apple is the leader in this industry as is differentiates itself from Samsung (SSNLF.PK) and Google (GOOG), the other top organizations in smartphone sales. The iPhone accounts for about half its revenue after selling over 35 million in Q2. Apple differentiates from the competition because it can manufacture the hardware and the software opposed to Samsung, which just makes the phones or Google, which just makes the Android software. Both Samsung and Apple have passed Nokia (NOK) as the top producers and earners from global cell phone sales. However, Apple only makes high-end smartphones whereas Samsung and Nokia make the standard cell phone as well. The popularity and capabilities of smartphones is growing exponentially, so much so that Visa (V) hopes to generate 50% of its revenue from international markets by 2015.
The sales numbers in China blew away analysts and offset minimal gains in revenue from the iPad product line. The fact is, the sales in China were in the minority markets of Taiwan and Hong Kong and not from the major carrier China Mobile that services 660 million customers in the country. The 35 million smartphones Apple sold is up from the 18 million plus it sold the previous year. As of march, over 100 million, a third of the people in America, own smartphones. The sales from the minority carriers in China accounted for around 20% of the revenue generated by Apple in Q2 of 2012. This is three times the amount from the prior year and a significant increase from less than 5% of Apple's revenue in 2010. Apple has already sold the same number of iPhones in China in the first two quarters of 2012 that it sold annually in 2011. Tim Cook recognized that market saturation is a key factor; many analysts overlooked this when reviewing Apple's potential.
Success in the international markets offsets the over saturation and seasonal highs and lows from releases Americans have grown accustomed to. Simply put, even the iPhone has only shown the tip of its iceberg. Other markets like India, Brazil, and Russia, may also prove to be viable markets in years to come. Apple has the hardware, software but also the point of sale advantage over major competitors like Google and Microsoft (MSFT). iTunes, the Appstore and 363 Apple stores around the globe clearly distinguish Apple from any other organization on the planet. Tim Cook's first executive hire of John Browett as SVP of retail underscores this mentality and growing business model. Browett reports directly to Cook and his core function is to improve global expansion and the overall service and experience for customers. Browett is the former CEO for Dixons Retail and Tesco.com.
Apple continues to position itself quite well to eventually carry out the master plan. In June of 2011, Apple extended a patent known as "Dynamic Carrier Selection" that was originally filed in October of 2006. This patent is designed to enable Apple to become a wholesale wireless provider that would contract with multiple carriers, allowing the customers to ultimately pick and choose personal preference of service providers. In contrast to today, customers would pick Apple first, and then decide what carrier plans and services they wanted whether it is from AT&T, Verizon, Sprint (S) or another third-party carrier. This patent, in conjunction with the growing number of Apple stores and evolution of iTunes point-of-sale software will clearly distinguish Apple from any other organization on the planet. Apple will further position itself to dominate the high-end personal communication and entertainment services through global expansion and exclusive contracts with flagship brands in multiple industries.
Acting on this patent would make Apple the largest mobile virtual network operator to date. Apple has been attempting to establish smaller SIM cards that would include the service profile and telephone numbers of the customers in order to make this a real possibility in the near future. A mobile virtual network operator or MVNO is type of telecommunications broker for the end user in the simplest sense. Taking on the function would allow Apple to accept bids from multiple carriers in order to pick and choose which was most advantageous to establish the initial connection for starting customer Apple Mobile accounts.
Becoming an MVNO allows Apple and the end users to pick and choose carriers based on the user's location, product and quality of data being used. This role would allow a user to pick the cheapest and most profitable rates and services available while perhaps even allowing the user to make extensive carrier contracts a memory from the past. This would solve many of the problems with roaming, service quality and long distance charges that many people encounter when traveling abroad. Under the proper context this is a more evolved solution to people needing to unlock their iPhone for various reasons. This invention will potentially give more power to Apple to turn a larger profit per user while allowing that user more freedom, higher quality service and lower carrier fees as well. All of this can easily be done through an evolved iTunes point-of-sale user interface. This move would make Apple more enticing to an increasing number of users while giving it a serious advantage over its main competitors like Google and Samsung.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.