The excellent blog Going Private discusses Apple’s new iPhone revenue model, whereby Apple allowed AT&T to subsidize the price of the iPhone (leading to more iPhones being sold) but gave up the profit-sharing on new iPhone service contracts. The deal is analyzed entirely from the perspective of whether the increased sales volume offsets the lost service contract revenue:
I suspect the figures are pretty offsetting, leaving any future gain in iPhone revenue as a percentage of total revenue really subject to iPhone sales growth v. other sales growth at Apple… and not the new revenue model which is probably pretty neutral.
I didn’t see a way to leave a comment, so I’ll post my comment here. If the only components to this deal were subsidies and contract revenue, then it would be a nearly complete win for AT&T. But this analysis fails to account for the additional revenue that Apple will gain through the App Store selling applications to iPhone (and iPod Touch) owners.
The service contract revenue lost by the new deal is not offset against increased hardware sales—it is offset against App Store revenues. The more people who own iPhones, the more revenue the App Store can be expected to generate. Apple gave up contract revenue primarily in exchange for permission to run its own store selling software over-the-air directly to the iPhone device. In the traditional mobile marketplace, it is the carrier who sells applications and keeps a generous percentage of the application price. Apple negotiated with AT&T (and, apparently, dozens of other carriers internationally) to allow iPhones to purchase and download applications from Apple’s App Store. To secure this, Apple agreed to no longer take a cut of the iPhone service contracts. Additionally, Apple will allow AT&T to subsidize the iPhone, which is now good for both parties. (This new arrangement is apparently much more pleasing to carriers internationally as well, giving Apple more markets in which to sell its product.)
It’s a win for AT&T because they can attract (or retain) many more customers and they no longer split those contract revenues with Apple. Additionally, I suspect that AT&T even gets a small cut of the 30% Apple keeps for applications sold over-the-air through the App Store to AT&T customers.
Apple wins by dramatically increased hardware sales and the right to sell apps over-the-air to iPhones. And the App Store benefits from networking effects. The more people who own iPhones, the more developers will be attracted to build and sell applications in that marketplace. The more applications there are in that marketplace, the more people will want iPhones. The iPhone’s killer app will no longer be it’s revolutionary interface and ease of use, but rather be the applications that run on it. Finally, Apple wins by attracting huge numbers of new developers to its operating system, libraries, and development tools. John Gruber reports that “two engineers from Apple told me that [interest] wasn’t just for the iPhone — that they were seeing plenty of new-to-Cocoa developers in the Mac-specific sessions and labs, too”.
Everyone benefits.