Joining the crowd of the mortals

It has been quite some time since I wore my favorite "critic" cap but it wasnt because of the dearth of topics. It may be because of the lack of time(but I am not getting into that). This time round, i'm taking a huge risk of wearing this cap again. That is because everyone seems to be very happy about Apple offering the 3G iPhone for USD 199. The other day, in a discussion with a group of professionals, i was overwhelmingly short of support when Apple's 3G iPhone strategy was being discussed. Its tough to be a naysayer without the company of fellow naysayers. Through this medium, I'll try to put across my views, in totality as to why i think 3G iPhone @ USD 199 ain't such a good idea after all.

First of all, lets be clear that it is great news of all those longing to own an iPhone but couldn't because of the high entry barrier. Sometime after this announcement, I was lucky enough to experience iPhone first hand (thanks to my manager who managed to get the one from US unlocked in India) and needless to say, it didn't disappoint one bit. Leave alone disappointing, it only increased the urge to own one. But that's when the telecom cum marketing guy(albeit a crude one !!!) deep inside raised alarm bells. Is it such a good strategy after all? Apple was always a company known for its premium products/services. Be it MAC or be it the iPod line of products. Its products always had fashion as being central to them. The need was driven by its designers and fulfilled by its R&D team. A look at its history suggests that Apple had always succeeded even though the core functionality of the products it introduced was already available in market although at various levels of comfort, quality and innovation. The reasons behind two of its biggest successes are mentioned below.

• iPod: It wasn't like iPod succeeded because there were no portable music devices in the market. Sony, Phillips etc were manufacturing them and were making good business out of it. What Apple did was to give a PC interface to a portable music device and create a hip looking device. Giving iPod windows support was single most important decision in iPod's PLC. Windows support helped iPod reach the masses - much beyond its initial kitty of MAC users.


• iPhone: Here again, Apple was a late entrant and the market wasn't short of mean mobile devices or manufacturers. The reasons for iPhone's success are again creation of a really hip looking device with a killer user interface. Visualizing (and developing) a mobile phone without a physical key pad left the competition and the target market spellbound.
  

Apple's products always had a distinct look and feel about them. Same is the true about its marketing and positioning strategy. iPhone's (for that matter all of its products) branding and positioning till date have been spot-on. Its products are known for their cult following. 3 Australia, the only other company which couldn't strike a deal for iPhone 3G has gone to the extent of launching a iPhone website and started a campaign allowing its subscribers to register interest in the iPhone, send SMS messages about the iPhone and provide comments which would influence the for the powers that be at Apple to see to strike a deal with 3. All this may be pointers to a real rosy scenario for iPhone 3G. But the factors which create doubts aren't about iPhone 3G but about Apple's overall mobile market strategy.

Below are some of the challenges that Apple (after the launch of iPhone 3G) will face in its overall quest for the mobile market.

• Apple iPhone is successful today even though there is only one product in its line because of its pinpoint positioning - appealing the youth with significant disposable incomes. By giving out iPhone 3G @ USD 199, its starts competing is segments dominated by traditional players who have the capabilities to derive better scale advantages.
• Apple just doesn't do enough R&D in mobile & wireless. Somewhere down the line, the Nokia's and the Samsung's of the world have better laid out product strategy for future technology evolutions. Already people have started talking about LTE and handset manufacturers have started developing handsets for LTE & WiMAX.
• iPhone 3G isn't going to yield much for Apple because ATT is retailing it at 199 USD. It will take some time before Apple can derive scale economies and the biggest risk here would be the launch of WiMAX/LTE networks by rival operators. For that matter, with congested 3G networks all throughout the mature markets (coupled with limited 3G networks in the third world countries) and femtocells pleading for more time, delivering a satisfactory 3G experience will be challenge.
• The possibility of more number of unlocked iPhones storming the market cannot be completely discounted with the locked phones being made available at such cheaper rates. With this, the revenue realization strategy of Apple will go for a toss.

Well you cannot help but undermine the above comments as a classic "doom-monger's" view countering anything new and anything good that hits the market. But that was why this post was updated. Apple till date has been a company which was mostly untouched by the "volume" bug and concentrating mostly on premium pricing on its brand. With the pricing of iPhone 3G, it looks like this bug has hit Apple and it stands the risk of joining the rest of the mobile pack. The pack which fights day in and day out (after deciding to play the volume game) to prevent their respective brands from becoming commodities. One final food for thought for all the friends around me who are doubly or triply excited about iPhone debuting at less than Rs.9000/- in India. I seriously doubt if its going to retail at that price and even if it does, they are better advised to take one good-deep look at the contracts they'll get into with Airtel/Vodafone.

Music to your ears - Light on your pockets

The post this week is on a topic on which i have been dwelling on for quite some time now. Its on this whole concept of free music. It has been long time since most of us have actually bought a new audio disc. Lets be fair, it has been ages since we have bought music for that matter. Piracy, P2P, online music recording etc have made buying music too cumbersome(and lets not forget, costly) a task for the buyer. If we are getting something for free, then someone else must be paying for it. It is the music companies and the artists (Sadly !!!) who have to suffer.

Not so long ago, this landscape was dominated by music companies who control not only the music distribution but also the music itself. Today, I'd doubt if they make half of what they made out of music a decade ago. It is said that artists(singers and writers included) roughly earn 72 cents out of every $20 audio CD and the rest is retained by the audio company as standard markup plus selling and distribution expenses. The real money that the artists made was out of the touring that they'd do post album release. With the dawn of the new millennium, more and more users were finding even more options of accessing music for free. With the internet and the fact that a large portion of the population is becoming more savvy and alert to new sharing/socializing networks it was only a matter of time before the fans were able to do without the big labels. But this was definitely not the win-win situation that the artists wanted for long. Although it is fair to say that even they were not happy with the revenue share with music labels, they still required an additional popular medium to reach their fans

Something dramatic happened recently that promises to change this and a whole lot of other things as well. Two music bands tried something innovative which was driven more by need than anything else. Nine Inch Nails (one of my personal favorites) and Radiohead were out of contract with their music labels which enabled them walk the path rarely treaded by any of the bands/artists. A renowned metal band, Nine Inch Nails(NIN), released their album "Ghosts" for free on their website. What followed was tremendous online buzz. No one ever tried the "freemium" business model in the music industry at such a large scale. The Artists managed 8,00,000 downloads of the album from their homepage. And it was not all pain no gain. They managed a cool $1.6 million in the first week of launch by giving offers to online down loaders like $5 for a digital copy of the entire album and $75 for 2 CD's of the entire album plus one DVD. The second band which tried something similar was Radiohead. But they tried a different version of the same idea. Their fans were offered the album at "pay-whatever-price-you-are-willing-to-pay" model. But thats not all, they are offering their fans much more than just the music content. In their own terms, they offer their fans a "discbox". The discbox not only has songs but also additional tracks, exclusive artist photos, artwork and lyrics. This band again ended up making a cool $6million in sales.

The best thing about this model is that the entire proceeds out of the online sales would go to the artists themselves. It is startling that the music industry never visualized that something similar would hit them in the future. The artists realised early that no matter how loyal the fans really are, they are still averse from buying music in its present form and package. There are some who believe that Radiohead and NIN lost millions of dollars of potential revenue by not following the classic model(There is no dearth of the classic doomongers in any industry). What these people dont understand is that there are more people outthere who dont pay for the music than those who do. The people who dont pay for the music still get access to the content of their favorite artists through internet (albeit illegal !!). By making content free/subsidized for their fans, the artists, who till date have ben denied their equitable share of profits, still end up making handsome money at the expense of big music labels. Some would say that an NIN or a Radiohead may have the guts to do that with their loyal fanbase, but for any new artist, a music company is still the only resort to reach music lovers. This is a genuine concern but once this landscape completely emerges one has to agree that an album of a new entrant will never sell at $20 when a more popular artist sells at a fraction of that price. If the music label has to survive by reducing the prices and offering more value then so be it. Reduced prices, wider audience and a satisfied fan base can be the only outcomes of this evolving landscape.

Alltel: All is well

Back finally to the crowded by lanes of Mumbai and things don't seem too good here. What more can you expect with incessant rains and cancelled trains becoming part of your daily routine. After a small hiatus, I was back tracking the headline makers in the industry and was pleasantly surprised to see Verizon making an offer for Alltel and thereby becoming the No.1 wireless operator in the US. Needless to say that is the story, I'll try and analyze in this post.

Credit crunch. Commodity bubble. Global recession. Peak oil. Global warming. Times like these can make grown men and women weep. The pessimism and despair peddled by businesses and popular media suggest that no industry can prosper in the current economic environment. Yet there are abundant signs that the telecoms industry is weathering this storm well. If ever there was a doubt, just look at these cases in point: France Telecom making an unsuccessful bid for US$40+ Bn for Teliasonera, First Bharti and now Reliance getting ready to for a deal with MTN for a staggering US$ 30+ Bn, Verizon buying out Alltel for a deal that could go up to US$ 28 Bn. So much for the doomongers of the telecom industry. The Verizon deal has all it takes to change the industry dynamics in the volatile North American market. Initially at least, Alltel's subscribers may not be too happy with the deal because this might mean scrapping of some of its popular plans like Mycircle. But micro aspects aside, this deal promises a lot on the macro front.

There are some crucial synergies that Verizon can realize through this deal. First, there is that ever present GSM-CDMA talk. It would massively help Verizon that both Alltel & Verizon follow the same technology evolution. This has some obvious advantages like better scale when ironing out deals with equipment vendors. Alltel with 13mn subscribers is the 5Th largest cellular operator in US. After the buyout by Verizon, the combined entity will have close to 70mn subscribers, a clear lead of around 8mn subscribers over the erstwhile leader AT&T at the top of the US telecom market. What this deal also means is CDMA re-establishes its lead over GSM in its parent North American market. Additionally, Verizon will also get access to some 50 odd markets which it doesn't currently own. Also on Alltel's behalf, not only have Alltel's investors been saved from expensive 4G investments but also (importantly) that never ending confusion about the evolution path to follow to 4G at a time when industry is divided between WiMAX & LTE.

The combined entity however bodes differently to different entities in the ecosystem. On the equipment vendor side, LG can look ahead and consolidate its leadership position in CDMA segment. LG, a favorite with Verizon will additionally get to address the requirements of Alltel thereby gaining access to new markets and subscribers within US. However, the situations isn't that rosy as far as competition is concerned. AT&T which for a long time held the leadership position has to relinquish it with only a distant prospect of recapturing that position again. A gap of 8mn-9mn subscribers is too tough a gap to close in a saturated market like US. This leaves it with only the inorganic route to follow but not many options exist there as well apart from smaller options like Leap Wireless, Metro PCS etc. Again, these options will not come cheap. With this deal, Sprint, the industry's favorite punching bag, moves to a distant third place behind Verizon and AT&T. With continuously falling subscriber numbers and churn, things surely don't look good for Sprint (how many times have I said that ?). One real possibility and the one which i believe will gather real pace after this deal is Sprint being acquired by Deutsche Telecom to consolidate on its industry position and prevent the likes of Verizon and AT&T from taking unassailable lead.

Some industry voices believe that, Verizon must have bought out Vodafone's stake which would have given it a more operational flexibility than actually focussing its resources on the Alltel buyout. But I believe that buying out Vodafone's stake should not be an immediate priority for Verizon. There are millions of dollars of synergy out there to be realized once LTE networks of Vodafone and Verizon go on online-that's when the roaming revenues will come into picture. Verizon has done the right thing by recapturing its leadership position but the challenge will be to consolidate on the leadership position and maintain it at least till the much awaited 4G networks are rolled out.