The iPhone Conundrum: Why Cingular?

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

Almost immediately after the news broke regarding Apple's (NASDAQ:AAPL) iPhone, Allan Harris and I scratched our heads, befuddled as we tried to understand, "Why Cingular?" At best, Cingular is a tertiary provider, its customer service and technology sucking wind behind the leaders. And what is this about relying on GSM technology? Even admitting that the iPhone is less a phone than a smart(er) communications device, why use GSM? Too much data on its thin pipes, and...

Allan reports from third parties that Cingular will roll out its own EVDO-like (Evolution Data Only/Evolution Data Optimized) high speed data network this summer, maybe in time for the iPhone. But Allan "finds that answer only adequate, as it still doesn't explain Jobs choosing a slower, less robust data network when better technology is available on better networks, i.e. Sprint (NYSE:S) and Verizon (NYSE:VZ), right here, right now. But I also think we don't know all that Jobs, Apple, and Cingular know... Not yet, anyway."

I could not agree more with his two final statements. We can only speculate. Think Secret reports the iPhone represents just the first of several wireless products Apple/AAPL plans to launch exclusively with Cingular over the coming years. While terms of the agreement do not appear to restrict Apple from delivering other products with different mobile carriers, it appears that products launched jointly with Cingular will remain Cingular exclusives for the duration of their market life-span. Unconfirmed reports from other sources suggest a version of the iPhone capable of operating at faster network speeds is in the works for an early 2008 release.

The LA Times reports...

"... But the revolution is already well underway in Japan, where cellphones are used for everything. Besides downloading music and surfing the Net, Japanese use their cellphones to navigate their way home by global positioning system, to buy movie tickets and to update personal blogs from wherever they are.

"They have been a natural extension of daily life here for the last few years, spurred by Japan's decision to be the first country to upgrade to third-generation mobile-phone networks, or 3G, which increase broadband capabilities and allow for better transmission of voice and data.

"Apple's iPhone, by comparison, will operate on a second-generation network.

"It was 3G that sparked the boom in music downloads that makes it common for phones to be used as portable digital music players here.

"And it is 3G that has led the Japanese into a world where they can watch live TV on their phones and use them as a charge card to ride trains or buy milk at the corner store or take a taxi. Ticket Pia, Japan's major entertainment ticketing agency, has been selling e-mail tickets to cellphones since October 2003. The phones also can be used to conduct conference calls among as many as five people.

"Another widely used 3G feature enables users to point cellphone cameras at bar codes and be directed to websites. For example, every seat in the Chiba Lotte Marines baseball stadium has a bar code, which takes a cellphone to a special home page..."

The Washington Post comments...

"The iPhone is a cool innovation," said Verizon Wireless spokesman John H. Johnson. "But it's only as good as the network it's on. It will be six months before anyone knows how those two pieces will work together."

Some analysts suggested the exclusive deal with Cingular was the result of undisclosed agreements regarding profit distributions, shared advertising or other matters.

But Glenn Lurie, Cingular's president of national distribution, said the two sides reached compromises.

"Apple is used to getting what it wants, and we're used to getting what we want, so we both had to bend a little bit," he said, adding that Cingular took a risk by signing the agreement before seeing the device.

Likewise, Apple was looking for "a partner that was trying to innovate, and the similarities we've had with Cingular were more than you might expect," said Eddy Cue, Apple's iTunes vice president.

And with Apple's ambitions to market the phone globally, Cingular seemed like a logical choice. Cingular -- unlike Verizon Wireless and Sprint Nextel -- operates on a technology standard known as GSM, which most cellphone providers in other countries use.

"When you go to the world with a phone, it has to be based on world standards, it has to be GSM," Bajarin said. Others, however, noted that T-Mobile also uses the GSM network but was left out of the deal with Apple. Some said Apple could develop an iPhone compatible with the CDMA network used by Sprint Nextel and Verizon Wireless.

Finally, The Economist offers its thoughts, albeit more on the iPhone itself...

"WE'RE going to make some history here today," said Steve Jobs this week at the beginning of his annual speech at Macworld, his company's cult-like trade show in San Francisco. He was as good as his word. First, he launched a product that promises at last to bring digital entertainment from people's computers to their television screens without fuss. Then he unveiled an even more impressive device that transcends the description “mobile phone”.

"The mobile phone is called the iPhone. It will go on sale in America in June starting at $499, in Europe in the autumn and in Asia next year. The television-set add-on is called Apple TV and will hit stores next month at $299. With these two products, Mr Jobs intends to enter and transform new industries, and ultimately people's lives—just as he did in 1984 when Apple transformed computing with the launch of the Macintosh, and again in 2001 when it introduced the iPod, which shook up the music industry."

So it seems we have something of a conundrum. Until we read David Pogue, who conducts a Q&A FAQ...

Does it get onto the HSDPA (3G) high-speed Internet network that Cingular has rolled out in a few cities?
–No. But Steve Jobs said a later version of the iPhone will — once there’s enough HSDPA coverage in this country to justify it.

“Why is everyone missing the fact that this phone/device will seamlessly switch between Edge and Wi-Fi saving big $$$ on data rates?”
–Because nobody bothers to post about what they like. If Internetters can’t say something disparaging, they say nothing at all.

Plenty of excellent questions and answers on David's blog; I suggest you mosey on over and check it out. For all that, here are some excerpts from David Pogue's (p)review of the iPhone...

...The iPhone can get onto the Internet in two ways: using Wi-Fi, at least when you're in the presence of a wireless hot spot, or using Cingular's disappointingly slow Edge network.

That's right: the iPhone's exclusive carrier will be Cingular. (Nor is the phone "unlocked"; you can't use it with any other carrier.) At least it's a quad-band G.S.M. phone, so it will work overseas.

....Nonetheless, the iPhone won't be the smartphone for everybody. You may well consider the Cingular exclusivity or the price a deal-breaker. You may also be disappointed that the iPhone can't open Microsoft Office documents, as the Treo can (although Apple says it can open PDF documents), or wonder why it's not a 3G cellphone that can exploit higher-speed, next-generation cellular towers as they arrive in the coming years. And you may worry about putting all your digital eggs into one losable, droppable, glass-front basket.

Note, too, that the software is still unfinished, and many questions are still unanswered. Will you be able to turn your own songs into ring tones? Will there be a voice recorder? Will the camera record video? Can you use Skype to make free Internet calls? Will the battery really last for five hours of talking, video and Web browsing (or 16 hours of audio playback)? Will you someday be able to buy songs and videos from the iTunes Store right on the phone?

At this point, Apple doesn't yet have the answers, or isn't revealing them.

What it does have, however, is a real shot at redefining the cellphone. How many millions of people are, at this moment, carrying around both an iPod and a cellphone? How many would love to carry a single combo device that imposes no feature or design penalties? Considering that the cellphone is many people's most personal gadget, how many would leap at the chance to replace their current awkward models with something with the class, the looks and the effortlessness of an iPod?

....As investors, we must ask what all this portends for the stock. Obviously excitement, as the shares soared 27.5% in a matter of days (to ~$98 from ~$77); such price moves, however, often typically manifest as culmination moves, signifying the end of an extant trend. But this is the sole item that signals a possible reversal from the new all time high trade. Nothing else in the charts signal caution. So I remain bullish, long -- and now excited. I already own an iPod, the Apple-designed stereo system for the iPod arrives Wednesday (ordered in place of the BOSE system, which I favored until a side by side comparison)... and I admit my next computer purchase will be a MAC. Hmm, have I been converted...?

As always, but especially now, I welcome your comments and insights. On the topic of Apple and its (new) products, I truly would like to hear from you...