10 FAS: 3 – Apple’s iPhone Kickbacks vs RIM, and Verizon vs AT&T
July 25th, 2007
Daniel Eran Dilger
Our dizzying ride through invented iPhone scandals is just getting started. The third scandal was presented by a competitor, but when interest in the scandal waned, it was repeatedly resurrected by its paid-to-say tools. The clincher is that the scandal mongers haven’t lined up their own dots, which point to a marginally interesting, but profitable company they love to love.
Fake Apple Scandal 3: the Apple’s iPhone Kickbacks!
After falsely complaining that the iPhone costs more than other phones–it does not–and then gnashing teeth over the iPhone’s exclusive contract with AT&T–a practice common to all popular mobile phones introduced in the US–the most obvious sequel is to combine the two and insist that Apple is using its exclusive contract to extort too much money out of AT&T.
Normally, such a heavily leveraged deal as the one described for Apple would garner praise. However, in the upside-down world of infomercial journalism, the deal is being presented as a scandal, using words like “kickback” and headlines like the Streets’ “Huge iPhone Fees Juice Apple.”
The reason this scandal of supposedly unprecedented, unorthodox behavior is being reported is not to celebrate Apple’s ability to do business, but to stoke a particular response from the market. Here’s how.
Verizon’s Very Sour Grapes.
The idea of iPhone kickbacks was first suggested by Verizon Wireless, which claimed in a defensive posture that it had snubbed its own crack at the iPhone because Apple demanded too much control.
Verizon announced this at the end of January 2007–just as iPhone buzz was taking off–but explained that its actual disagreement with Apple happened nearly two years earlier in 2005.
At that time, Verizon didn’t have any idea what the iPhone would look or work like, so it was easy for the visionless service provider to rather arrogantly dismiss Apple. Even in late 2006, other mobile makers continued to laugh at the rumors that Apple was building a mobile phone that might have an impact like the iPod.
Palm: All Thumbs, Pointed Downward.
Palm CEO Ed Colligan famously stated that Apple would be hopelessly stymied in its efforts to build a rival phone platform. ‘We’ve learned and struggled for a few years here figuring out how to make a decent phone,“ Colligan said last winter. ”PC guys are not going to just figure this out. They’re not going to just walk in.“
Colligan had worked at Palm, then Handspring, and back at Palm throughout the development of the Treo. Surely he was also aware of how poorly Palm had performed, and that his company had bungled the Palm OS so badly that it was forced to first buy up BeOS, then start over with a Linux strategy, and ultimately throw away its software platform and license the marginal Windows Mobile from Microsoft.
After struggling for years to figure out how to make a decent phone, Palm has certainly delivered very little new innovation in hardware recently. Its phones are built by HTC, the same company that puts out the most clunky, chunky boxes that run Windows Mobile. After working with companies like Palm, why would Verizon think Apple would deliver anything better?
Microsoft Purportedly Not Ashamed of Windows Mobile.
After the iPhone was revealed publicly, things began to change. Microsoft CEO Steve Ballmer nervously twitched on TV about how confident he was in his company’s Windows Mobile platform, which he said had sold ”millions and millions“ of units.
Ballmer demonstrated his calm confidence by sweating bullets as he laughed at the iPhone for being ”the most expensive phone in the world“ and lacking a slide-out, chicklet keyboard. He skirted specifics about the market share of Windows Mobile, preferring to instead claim that Microsoft’s Zune had taken 20 to 25% of the market for music players.
Of course, none of his comments was even remotely accurate; people don’t interview Ballmer for facts and truth, but rather as an opportunity to segue to stock footage of his Developers, Developers, Developers Dance or perhaps his terrifyingly seething ”I love this company“ sound bite, which rivals Joan Crawford’s ”no wire hangers!“ line from Mommie Dearest.
Ballmer could have at least pointed out that Windows Mobile finally managed to grow in market share in 2006, due entirely to Palm’s licensing it for its WinCE based Palm Treos.
Such news isn’t great publicity however, as it’s a bit like rats claiming to have jumped to infest another ship, when it’s obvious that their new home is actually sinking rapidly.
AT&T’s Secret Deal.
It’s hard to say with any certainty whether AT&T was just desperate to find a strong hardware partner and assumed the maker of the iPod might be one, or whether the company was acutely aware that Palm and Windows Mobile were both jokes in search of a punch line.
In any event, AT&T clearly made significant concessions to Apple to forge a deal that would advance its mobile subscriber base, particularly within the growing segment of smartphones, which are rapidly outpacing the growth of phones that just place calls.
Verizon’s rejected deal offers some hints as to what was involved. It singled out Apple’s iPhone distribution limits as a major barrier; Verizon seems to think Wal-Mart, Best Buy, and RadioShack offer great mobile service representation.
Verizon VP Jim Gerace also claimed Apple insisted on handling iPhone replacement and repair itself. ”They would have been stepping in between us and our customers to the point where we would have almost had to take a back seat … on hardware and service support,“ Gerace reported.
What wasn’t revealed by Verizon or AT&T was the specific revenue sharing Apple claimed as part of the deal. Back in February, Citigroup Investment Research analyst Michael Rollins reported that Apple might make hundreds on each new subscriber it earns for AT&T, noting that retailers like RadioShack are paid $300 for setting up a new service contract.
No Information? The Street Has Anonymous Sources!
Who needs facts when New Journalism can simply make stuff up and report it as verified by anonymous sources ”close“ to the companies involved? It requires so much less work, and there’s no risk of those whispering sources having their credibility challenged; they don’t even need exist.
One master of New Journalism is Scott Moritz of the Street. Earlier in the month, he broke the ”story“ that the iPhone’s launch was a failure because everyone involved had secretly bet on a million unit launch weekend.
That simply wasn’t true; real analysts had provided estimates of 150,000 to 300,000 units, and none had suggested that Apple would ship a million iPhones before Moritz began rewriting history in order to suit the needs of his flacks.
It took Microsoft nine months to ship a million Zunes to its 30,000 retail outlets; should it be expected that Apple would sell at least as many iPhones to consumers within the iPhone’s debut weekend?
After all, Apple has less than 200 retail stores. Add in AT&T, and there were about 2,000 stores selling iPhones. Was each store selling nearly twenty per hour throughout both business days at every location?
Inventing More Disappointment.
Moritz’s same whispering voices that outlined the great disappointment of the iPhone’s launch are now claiming to know insider secrets related to the iPhone deal between AT&T and Apple. Moritz says Apple is getting a $150 to $200 bounty per phone and another $216 in service fees from AT&T over the length of its two year contract.
Forget those phony 50% iSuppli margins, Apple is now purportedly making over $700 in profits per iPhone! Either that, or Moritz is being fed another story by Roger Entner’s IAG Research group, which offers nothing but praise for its clients, Verizon and Sprint, and nothing but fear, uncertainty, and doubt for the iPhone.
Sure enough, Moritz even cites Entner doing an Enderle-like quote near the end of his article. Entner is the Verizon flack outed by the Macalope for regurgitating lines about the iPhone’s ”mythical proportions“ and the impossibility for it to ”live up to expectations“ across various newspapers, purportedly as an unbiased expert researcher.
The best way to make sure such pro-Verizon prognostications come true is to publish false expectations that Apple is making impossible sums of money on every iPhone, and then pretend to be dismayed afterward when the truth is revealed.
Problems in the Kickback Scandal.
The Street needs to create disappointment related to Apple, and the way to do that is to pretend that everyone expected a million phones to sell on opening weekend, and to create expectations that every phone is netting Apple a $700 windfall.
In a video segment produced by the Street, Moritz pats himself on the back for uncovering this new information, without citing any sources.
Because he quite obviously falsified the revisionism that feigned disappointment about Apple’s initial iPhone sales, it is that much easier to dismiss his current ”research“ as guesswork designed to serve the needs of paid-to-say mobile flack-master Entner.
The really comical flaw in the kickback scandal is that Moritz and other proponents frame the deal between Apple and AT&T as an unprecedented event. Moritz cited a ”money manager who is long Apple“ as saying ”This is unheard of. No one has this plugged this into their models.“
Hint hint, Street believers: plug this into your models so you can be disappointed! It’s okay because we’re all long on Apple and are hoping for the best. It comes from the most credible of whispering ghost informers.
This whispering also hopes to make the Street’s grandmaster analyst, ”crazy“ Jim Cramer, appear prescient for warning an Apple selloff when profits are reported, saying, ”I am being abject and adamant: Sell some Apple.“
AppleInsider reports that American Technology Research analyst Shaw Wu advised investors ”to take advantage should Apple shares pull back on short-term concerns.“
Once you know how the misinformation game is played, you can beat it. Wu set a $165 price target for Apple.
It Gets Worse, or Better.
Remember how smartphones are outpacing the market, and how Palm and Windows Mobile are faltering, both as products and as businesses? One company that is actually doing well selling business oriented mobiles is RIM, maker of the BlackBerry.
RIM only has 9 million BlackBerry users, but has a $42 billion market valuation. Apparently it is selling more than just phones. Other phone makers have made minimal gains in the last half decade by comparison.
Sure enough, RIM is also selling Blackberry Enterprise Servers, which attach to a company’s mail servers and forward messages and calendar information to the Blackberry devices using proprietary push software. BES Enterprise servers for Lotus Domino, Exchange Server and Novell Groupwise start around $2700, and each BlackBerry mobile user requires a $100 client access license to get their push mail delivered through it.
RIM also makes significant revenues by–surprise!–taking a cut of mobile carriers’ revenues. Reader Vertti Koskinen forwarded an article from the Toronto Star, reporting on RIM’s response to the iPhone. It stated:
”RIM also receives a significant cut–estimated by analysts to be between 10 per cent and 40 per cent–of the carrier’s monthly subscriptions in exchange for handling the email traffic and providing customer support.“
That would be up to two and a half as much as Moritz’ whispering shadows claimed Apple takes from AT&T, even when assuming that all iPhone customers signed up for the cheapest AT&T plan, $23 for RIM vs $9 for Apple. Why isn’t anyone crying about RIM?
If Moritz and his money managers really think that mobile hardware makers getting fees from service providers is ”unheard of,“ how is it they are offering investing advice in the mobile industry, where the most profitable smartphone company is quite publicly making its money through similar partnerships with providers?
Further, why is Moritz presenting himself as the unique discover of a commonplace agreement, which has been publicly discussed over the last six months? In addition to Citigroups’ Rollins, Piper Jaffray analyst Gene Munster earlier estimated that AT&T will pay Apple $3 per month for iPhone users, and $11 per month for each new user.
Even Better News For Apple.
RIM makes huge profits selling expensive push email services to its BlackBerry users. Apple plans to rapidly outpace RIM by selling iPhones to consumers as well as business users. While neither Palm nor Windows Mobile offer anything really desirable to consumers, the iPhone does.
Imagine what happens when Apple ships its own trivial bit of software required to push messages, but fails to charge the $100 per user client access licenses RIM does? It sounds a lot like what will happen to Exchange Server once IT managers realize that paying client access licenses to get mail is not really cost effective.
Apple has a mobile product, a server product, and a desktop product, and all are based largely on open standards and use open protocols. BES does not. Exchange Direct Push does not. Their competing mobiles can’t even render the web decently.
What Apple doesn’t have is a client access license business model that charges fees per user.
Remember that Microsoft’s client access licenses are what makes a $6500 Dell Server ratchet up to cost over $17,200 just to serve email and files to 100 users. A similarly equipped $5500 Xserve does not cost extra per user, making it over $10,000 cheaper.
The Apple scandals get bigger and broader, but remain fake, as the next article indicates.
Like reading RoughlyDrafted? Share articles with your friends, link from your blog, and subscribe to my podcast! Submit to Reddit or Slashdot, or consider making a small donation supporting this site. Thanks!