Who's Next: Apple's iPhone and its Infamous Exclusivity Deal

by Jack Manley

The iPhone is, without doubt, one of the most sought-after electronic devices in today’s market. Since its introduction in the summer of 2007, this attractive and relatively powerful handheld has captivated people all over the world. Its good looks and charm have earned Apple a substantial percentage of the cell phone market share and humongous profits — their stock rose substantially, and customer satisfaction was through the roof. But Apple did not profit alone through this undertaking: rather, the iPhone was a joint venture between the alternative hardware/software giant and the second largest telecommunications company in the country, AT&T. Rather than being released as a multi-platform phone, the iPhone was tethered to a single carrier company, meaning that people who desired one had to switch from their current provider to AT&T or miss out on a cultural phenomenon. Like sheep before their shepherd, millions of people flocked from Verizon, Sprint Nextel, T-Mobile, and any other alternative carrier to the iPhone’s carrier of choice, resulting in a large increase in AT&T’s market share. But things are changing, and the exclusivity deal that has brought AT&T millions of dollars in profits will be expiring by 2011. So what happens then?

Unfortunately for the consumer, it is not as simple as “Everyone gets an iPhone!” There are limitations and crucial differences between the major United States carriers (let alone carriers in the European and Asian markets), differences that will have to be resolved or worked around if we truly expect to see an iPhone on every carrier. (You can equate the situation to that of the Motorola RAZR — once a fashion statement and cultural icon, the RAZR is available across the board, on any carrier imaginable. It is the go-to phone that saturated the market and earned Motorola, quite literally, piles of money.) AT&T, and subsequently the iPhone, run on a GSM network — while this acronym might not mean anything to you, it is sufficient to understand that GSM is the most popular standard for mobile phones in the world, garnering 80% of the market share. Naturally, this seems like a good thing — the majority of the world runs on GSM. But looking at the United States, a country which, despite our economic “dominance,” is extremely far behind in the mobile phone market (it’s the bureaucrats), we see where the problem lies — the nation’s largest service provider, Verizon Wireless, doesn’t run on this standard.

Rather, Verizon’s network uses CDMA technology, one of only two US-based wireless companies to do so (the other being Sprint Nextel). CDMA is an older network, boasting faster upload/download speeds (in general) while being limited in coverage; GSM is a newer technology, and while not as fast, tends to be more reliable with greater general coverage (“More bars in more places,” as AT&T says); both platforms boast 3G capability, a wireless signal with significantly faster upload/download speeds). Aside from network coverage and service, there are physical differences between the standards, with GSM signals requiring SIM cards, a physical, removable card that has all personal data tied to it. AT&T has these, whereas Verizon and other CDMA-standard carriers do not. The convenience that comes with a SIM card is unparalleled in terms of ease of use and consumer selection. On the CDMA standard, all personal account information is tied directly to a proprietary phone, resulting in a person being locked into one device — should you wish to upgrade your phone or simply purchase an alternative, your current phone must be deactivated before your new phone can start making and receiving calls. The phone that you have “abandoned” has become through this process a paperweight — it might as well be a brick. GSM clients have the luxury of freedom when it comes to mobile phone selection, and with all of their data tied directly a SIM card, a new, upgraded phone can simply be activated by putting in your SIM card. Your old phone naturally becomes useless, but useless only until you put another working SIM card into it — upgrading and switching your phone is simple and intuitive on a GSM network.

But will these differences keep the iPhone out of the hands of rival carriers? The answer is: doubtful. T-Mobile, the Germany-based telecommunications giant, operates on the GSM standard like AT&T — physically, there is nothing preventing T-Mobile from licensing iPhones to customers through their service. Carriers operating in tandem with the CDMA standard present more problems for Apple, as both hardware and software would have to be reengineered to function on the vastly different network. It is important to remember, however, that Apple is not a pro-bono organization, and it is not in the mobile phone business purely to boost AT&T sales. Rather, the iPhone operates solely on AT&T in this country because of increased flexibility (Verizon is notorious for putting its own, mediocre software on almost any non-smart phone it offers) and a strong financial incentive (with AT&T paying millions of dollars to keep the much desired phone out of the hands of competitors). But since the iPhone launched, things have changed quite severely for telecommunications companies — Apple is calling the shots, not its carrier, a rarity in the industry.

It is unlikely that Verizon would remain so stubborn in today’s economic climate, where thousands are jumping ship to purchase an iPhone and join the cultural movement that has swept across the world. With an untapped market of nearly 133 million people (the combined subscriber count of Verizon Wireless and Sprint Nextel), it is similarly improbable that Apple will turn down the chance for greater profits. So what will happen? Nothing is set in stone, I remind you, but in the next couple of years, I would look for a lot more iPhones on a lot more carriers.