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Has Apple CEO Steve Jobs considered buying a wireless carrier? Photograph: Justin Sullivan/Getty ImagesWe're at the end of the 2011 iPhone 5 launch. The demos went well; Steve Jobs has come back on stage to thank everyone and conclude the proceedings, "… but before you go, just One More Thing. I'd like you to meet someone." And the CEO of Deutsche Telekom walks onstage. "Deutsche Telekom owns a company you know as T-Mobile USA, but let's start calling it by its new name: Apple Wireless."
An audible gasp – louder than the one when Jobs announced the $499 price for the iPad – and then the room erupts in applause. At long last, iPhone users will enjoy the level of carrier service and support that is their birthright.
This is fiction, of course, wishful thinking. But bear with me …
The idea came up during a "what if" conversation with my wife Brigitte, while walking along University Avenue in Palo Alto. What should Apple do with its almost beyond comprehension $76bn in cash? The COO of the Gassée family is creative and practical, an abstract painter turned "lumber VAR" – she builds or rebuilds houses in Palo Alto. She's not enthralled by technology and takes a utilitarian view of computers, phones, navigation systems, tablets … an attitude that provides a useful counterpoint to my sometimes overly-enthusiastic embrace of anything that computes.
She immediately nixes a big acquisition that could dilute Apple's culture, an aspect of the company that's integrally important to Steve. She has no interest in financial engineering and concludes that Apple will continue to make small acquisitions that pose few cultural challenges – but small buyouts won't solve the cash "problem". What to do with all that money?
As we chat, we walk by the wireless carrier stores: T-Mobile, a couple AT&T retailers (one is shutting down), Verizon and, next to the Apple Store, Sprint, a big store with a bored sales staff that easily outnumbers the customers. "Why doesn't Jobs buy a carrier?" she asks, "He'd easily do a better job than these people."
As befits our well-debugged relationship, I immediately launch into a critique of her suggestion: "This is a terrible idea, on so many counts!".
First, there are regulatory problems. Getting FCC approval for a new iPhone is one thing; wrestling with Washington bureaucrats for spectrum allocation is another. Apple's maverick culture, its blatant spite for government bureaucrats and Congress windbags won't do well there.
Second, carriers are capital intensive: Their return on equity (the profit-per-dollar invested in the business) is way below what Apple enjoys, in spite of its having "way too much cash for its own good". For example, last quarter, AT&T's net income was $3.6bn for $113.8bn in equity, a ratio of 3.16%. Apple's numbers were $7.3bn for $69.3bn, a ratio of 10.5% – more than three times AT&T's.
And just imagine the other carriers' reactions. Not only would they kick Apple products from their networks and stores, Apple would find itself in court for anticompetitive practices, for unfairly favouring its own wireless arm.
One can see Apple's stock losing 10% on the day of the announcement and critics would have yet another field day: "Apple does it again, their Walled Garden™ just grew taller walls!".
But it's also a beguiling idea. Let me count the ways.
Imagine the dancing in the streets. Apple would be finishing the job it started when it broke AT&T's err … back, when it took over content distribution with iTunes. We don't like carriers; we experience their service as both poor and expensive, to say nothing of their impenetrable and ever-changing contract pricing:
(Not to pick on AT&T. Every carrier offers a similar, bewildering array of entrapping offers.)
By contrast, imagine Apple's simpler pricing. Three tiers to fit your appetite for data: $49, $79, $129 per month. No gimmicks, no SMS surprises, no fees piled up at the bottom of the bill: Just the price in your contract, plus taxes. If you approach the data limit for your plan, you get an SMS offering to upgrade you to the next level – but only for this month. No underhanded up-sell.
With $76bn in cash and another $10Bbn or so per quarter, a carrier is certainly within Apple's budget. AT&T, with its $167Bbn market cap, is probably out of reach (and too complicated, too many businesses), and Verizon ($97bn), with its dying landline business and unionised workforce, isn't in keeping with Apple's ways.
But consider another carrier, T-Mobile USA. It no longer offers landline services, it's non-union, and it's affordable – it got a $39bn offer from AT&T. Acquiring T-Mobile from its parent company Deutsche Telekom offers several advantages.
To start with, it prevents an abomination before the lord: It kills AT&T's predatory acquisition attempt. Furthermore, as my friend Peter Yared noted, Apple might very well have big mounds of cash sitting outside the US, potentially subject to taxation if repatriated. Problem solved. Peter Oppenheimer, Apple's CFO, shows up at Deutsche Telekom's HQ in Bonn bearing a smile and an RSA dongle: "You have a Mac I can use to make the wire transfer?" No, they don't. But a nice 30-year Anniversary Lenovo PC will do for the transaction.
Once the deed is inked, the hard work starts. This will probably be a two-year exercise.
Decisions will have to be made. Tactfully convert existing T-Mobile users to iPhones or free them go elsewhere? (The competition will, of course, welcome these ''victims'' with open arms.) Retrain employees or offer them a decent exit package?
But the big task, the goal of the acquisition: Play the Apple vertical integration game and adapt the network to support one and only one type of smartphone, Apple's.
Other cellular networks have to serve a wide range of devices – from basic phones to gluttonous high-end smartphones – and support a mess of protocols: ancient ones with layer upon layer of patches, more modern ones with their factory-fresh bugs. Contrast this with Apple Wireless' simpler task of serving one type of phone, one type of protocol. Given the two-year time frame, let's assume the protocol will be a stable variant of what markitects call LTE or 4G. And, from there, voice and data coexistence, smoother video calls, voice-mail on iCloud, and so on.
And that's just T-Mobile. Need more spectrum? $10bn, three months of net cash flow, gets you Sprint.
Another possibility, admittedly remote, is to use tight wireless network integration with iCloud to create an inexpensive "smart dumbphone".
What I mean is: today's iPhone is an app phone. It has enough hardware oomph to run a wide range of applications, all "wired" to a screen size. Because of this, cutting the iPhone's bill of materials in half is well-nigh impossible – an "iPhone Nano" would be a much more difficult proposition than the iPod Nano. Apple would need to send developers back to their Xcode.
A better alternative would be to jettison native apps altogether, to go back to the Summer of 2007, when Steve Jobs promoted Web 2.0 apps for the first iPhone. Today, the pitch would be HTML5 Web Apps. We can already see a few good ones on iPhones and iPads, such as the new HTML5 Kindle app:
Or the nicely interactive iPhone manual, which feels like a "real" app:
A putative iPhone Nano on the no-less putative Apple Wireless network would be a dumbphone with HTML5 smarts and tightly integrated (I'll use the P-word) proprietary services to make it sing and dance.
(As it happens, someone else already came up with the name Cloud Phone, see Trevor Sheridan's post on the Apple'N'Apps site.)
As for the reaction from competing carriers, one has only to turn to the history of Apple Stores to get an answer. Existing retailers didn't ditch Apple products when the company started its own retail chain. In fact, Apple Stores set a new standard in pre- and post-sale service. As a result, competing retailers raised their game. One can expect a similar reaction from AT&T and Verizon when faced with Apple Wireless.
So, yes, it's a beguiling idea, but …
Would buying a carrier make sense financially? Look at AT&T's iPhone ARPU, reported at more than $100 a month. For Apple Wireless, this translates into more than $1bn per million iPhones on its network. In 2010, T-Mobile's ARPU was approximately $50 a month for its 33.7 million customers. It's tempting to look at the potential billions in service revenue and pronounce Apple Wireless the next big revenue opportunity.
But service isn't Apple's way of making money. Their one and only goal is selling devices. Everything else is in support of that goal. Execs, starting with the CEO, will wax poetic about the crystalline purity of software, more/better/faster content, new iCloud services; but what really counts is device revenue and profit. In the iPod days, iTunes didn't make money, but it boosted device volume and margin. For today's $100bn Apple, a couple of billions in iTunes revenue is nice, it pays the bills, but it doesn't move the needle. The iPhone is what does.
A wireless carrier owned, operated and integrated by Apple would only take two or three years to generate (much) more revenue than iTunes. But would it sell twice as many iPhones? Probably not.
It's a nice fantasy, a carrier with the service quality and simplicity we get today when we enter an Apple Store. But for the fantasy to become reality, Apple Wireless would need to give birth to services that generate significant new hardware opportunities – opportunities that would need to be unavailable through Verizon and AT&T (otherwise, what's the point?).
Another way to deflate the fantasy is to consider the US-only nature. Apple can't and won't go around the world and buy wireless carriers. With China soon to become Apple's largest and most profitable market, the company isn't about to lose sight of that prize, to be distracted by the complicated task of acquiring and integrating a US carrier.
That was the reverie …
Back to reality, why can't carriers stop playing their games and show us some decency?
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