Apple Sets Iphone Customers Free

Some call it the "Jesus Phone" or the "Messiah Phone." Hype notwithstanding, sales of Apple's vaunted iPhone have been lackluster in Europe. Fewer than 350,000 of the 165 million mobile phones in Britain, France and Germany are iPhones, estimates Seattle-based consultancy M:Metrics. In April, Germany's T-Mobile slashed the price from €399 to just €99, and in Britain O2 and partner Carphone Warehouse knocked £100 off the price of its iPhones, to £169. Sales, though, have not been as strong as they have in the United States. Is Steve Jobs losing his touch? Not necessarily. Sleek, feature-packed iPhones cost more than most handsets.

The big explanation for slack sales, analysts say, is because iPhone users cannot pick their mobile-service carrier. Apple chooses for them and collects a cut of revenue. Apple has insisted that this setup works well, consumers like it and sales are good. But Apple's announcement last month that it was overhauling its "single carrier" business model suggests that the strategy isn't working.

Consumers in seven countries will soon have a choice of telecoms when Apple introduces the iPhone, says the company, probably later this year. Two telecoms will compete for iPhone users in Australia, and the device will also be introduced in the Dominican Republic, Egypt, India, Italy, Portugal and Switzerland. The telecoms involved—América Móvil, Bharti Airtel, Orange, Optus, SingTel, Swisscom, Telecom Italia and Vodafone—have not elaborated on the arrangements. A Vodafone spokeswoman in London, scanning PR guidelines, said: "For every question it reads 'Not allowed to comment'." Nor has Apple provided much elaboration.

Apple is changing tack, say analysts, because consumers are increasingly annoyed at being limited to one telecom, handset competition is getting fiercer and telecoms are less willing to share revenue. Having rolled out the iPhone in just six countries—the United States, Britain, France, Germany, Ireland and Austria, Apple is still tweaking the model. European consumers have created a huge black market for hackers who can "unlock" the iPhones, so they work on any network. Unlocked iPhones are sold illicitly in shops in Italy and other countries where Apple has not authorized iPhone use. Apple's "anticompetitive practice" of locking phones has damaged its reputation in Europe, says Stefano Cazzani of Studio Cazzani, a telecommunications consultancy in Milan. "People here, they want choice."

So do Asians. Neil Montefiore, CEO of Singapore telecom M1, says he recently discussed an iPhone deal with Apple and concluded that it wouldn't make sense. Introducing the current iPhone model to Singapore, an advanced market, would be "just ridiculous—no one would use it," he says. It doesn't help that the iPhone is slow by Asian standards; whereas Apple is expected to launch a faster "3G" model sometime this summer, Nokia, Samsung, Sony Ericsson and others are coming out with competing 3.5G mobiles.

Apple's new openness may stem in part from a desire to succeed in the important China market. An estimated 600 million people in China will own a cell phone by the end of the year. Shaun Rein, head of China Market Research Group, an analyst firm in Shanghai, says Apple is choosing countries for dual-carrier arrangements based in part on what lessons those markets may provide for success in China. For example, in both Italy and China a high percentage of users prepay phone calls and talk less, which complicates the business of obtaining good money for iPhone usage and music and movie downloads. "China is the battleground," Rein says.

Apple's negotiations with China Mobile have been bumpy, says Edmund Hung, a telecoms analyst at Maverick China Research in Beijing. In the United States and European countries, Apple successfully pits market leaders against each other. The telecoms that won iPhone exclusivity—AT&T, O2, Orange and T-Mobile—now pay Apple a significant (and undisclosed) percentage of revenue from iPhone users. Hung says Apple "found out very quickly" China's telecoms would not pay nearly as much. China Mobile commands more than 70 percent of the market. Its sole competitor, China Unicom, is probably too small to ignite a serious bidding war for iPhone service.

Slow iPhone sales in Europe have emboldened China Mobile and other telecoms to drive a hard bargain with a weakened Apple, says Neal Mawson, a telecoms expert at Strategy Analytics, a market-research firm in Milton Keynes, England. Mawson says China Mobile has been "balking" at Apple's revenue-sharing proposals.

Apple is not abandoning exclusivity arrangements, which are expected to be rolled out in many countries this year. (Apple's U.S. contract with AT&T is expected to last four more years.) But Dan Moran, an editor at Macworld, an independent San-Francisco publication, says the company's new telecom strategy will likely increase iPhone revenue. It will also quiet critics who say Apple has exhibited an "its our way or the highway" approach to the iPhone, he says. And it may even help to quiet consumers who have accused Apple of selling "monopoly phones."