This year's model: upwardly mobile phone costs

As Apple insists on revenue sharing for its iPhones, the days of operators subsidising handsets could be over, writes Tony Glover
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The Independent Online

Apple's iPhone, a cross between a mobile and an iPod music player, could herald a dramatic power shift in the mobile industry between operators and manufacturers, as well as ending the practice of subsidising phones in the UK, forcing consumers to pay hundreds of pounds for the latest handsets.

Apple chief Steve Jobs is preparing to rewrite the rules of the sector by taking a slice of operator revenues in exchange for letting them offer the iPhone to their customers. It is a business model already understood to be in use with US operator AT&T, and one recently reported as being about to be deployed with O2 in the UK, T-Mobile in Germany and Orange in France, with Apple taking 10 per cent of the revenues from voice and data sent over the device.

"I view it as a big industry shift and a negative one for operators," says Richard Windsor an analyst at Nomura. "It shows how powerful the manufacturers' brands are becoming compared to the operators'. This is good news for other manufacturers."

Nokia, for example, also believes that the introduction of internet-based mobile services such as music and gaming means the sector is about to undergo major changes. "When the internet and mobility come together, a lot of new business models and revenue-generation opportunities start to emerge," says a spokesperson.

The operators may soon find the value of their brands rapidly reduced as consumers increasingly buy services such as music downloads from the handset makers. There is a danger of the operators being relegated to the status of utilities providers to brands such as Apple and Nokia.

Dr Windsor says: "The reason the operators are prepared to lean over backwards like this is that they believe being able to offer the iPhone will win them new subscribers. They are right in that the look and feel of the device is fantastic, even though its performance as a straightforward phone is only middling."

Vodafone, though, is taking a different line: "We have been in discussions with Apple regarding the iPhone but are not comfortable," says a spokesperson. "Sharing revenues with mobile phone makers is not the way Vodafone's industry model works. The economies have to work well for our shareholders and customers."

Vodafone also believes that the iPhone has severe limitations: "The device is not 3G-enabled which means it is likely to be too slow for European users. It does not seem to support picture messaging and it is difficult to use the device for text messaging."

Carolina Milanesi, an analyst at research firm Gartner, warns of the dangers if operators do succumb: "Operators would be unlikely to want provide handset subsidies as well as sharing their revenues. And if customers were forced to pay the full price of £500-plus for some high-end handsets, it would have a negative effect on the market, at least in the short term."

Established mobile makers, meanwhile, are not prepared to step aside and allow Apple to rewrite the industry's rules in its own favour in order to steal market share. Nokia, for example, is planning to pip Apple at the post with a rival music service that could be announced as early as Wed- nesday this week, when the company is scheduled to unveil new products and services at a global event called "Go Play" in London, to be celebrated at the Ministry of Sound nightclub.

"The sector is expecting Nokia to announce a rival service to iTunes at Go Play, with the difference that customers will be able to download songs direct from the internet to their phones," says Ms Milanesi. "Nokia is also expected to unveil at least one music phone."