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Analyst Offers Thoughts on iPhone Success, Multi-Carrier Business Models, iTunes Video Content

Monday August 31, 2009 7:15 am PDT by Eric Slivka
Piper Jaffray analyst Gene Munster today issued a note to clients this morning offering his team's thoughts on 14 "unanswered questions" about Apple. Several of his more revealing comments relate to the iPhone, which Munster feels will see its reach broadened to multiple carriers in the U.S. sometime within the next year.

Munster points to data from France, where Apple was forced by the courts to adopt a multi-carrier model, as an indication that Apple will rapidly transition its distribution model to multi-carrier agreements wherever possible, suggesting that such a change may occur in the U.S. next summer during the next probable iPhone refresh.

By way of example, for various reasons the company moved from an exclusive relationship with French wireless carrier Orange to a multi-carrier model. In France, the company now enjoys dramatically higher market share (in the 40 percent range vs. about 15 percent in ROW) than in countries with exclusive carrier agreements (such as AT&T in the U.S. where the iPhone has market share in the mid-teens). We believe Apple is seeing the increased unit sell-through more than offset the slightly (~10 percent) deteriorated economics per unit involved in non-exclusive agreements.

The report also suggests that Apple is unlikely to ever offer a low-cost phone model to compete with "rudimentary $10 models", citing the App Store as a key component to Apple's success in the mobile phone market and the near certainty that Apple would not be able to create a profitable low-cost phone still capable of running those applications.

Munster also sees the success of the iPhone 3GS, beyond that of Apple's expectations, as being due to two primary factors: 1) The success of the App Store, both in its applications themselves and in the cross-promotional "free advertising" the iPhone has received from high-profile companies promoting their iPhone applications, and 2) The fact that the smartphone industry has positioned the iPhone as the "gold standard", whereby competitors trying to emulate the iPhone experience are actually promoting the iPhone platform instead of their own products.

On the topic of iTunes Store video content, Munster sees Apple looking to modernize its offerings within the next year, entering likely lengthy negotiations to revamp arrangements currently limiting the amount of content and the allowed periods of availability. Apple would be looking to offer a monthly package of video content designed to replace a customer's cable bill, and may launch the service alongside upgraded Apple TV software and/or hardware.

We continue to believe that Apple will eventually offer a monthly subscription for iTunes TV shows accessible on Apple TV, iPods, iPhones, and Macs/PCs. Apple could leverage its deep library of content with many network and cable channel content owners to provide unlimited access to a sub-library of its TV shows for a standard monthly fee ($30 to $40 per month). Such a product would effectively replace a consumer's monthly cable bill (~$85/month) and offer access to current and older episodes of select shows on select channels. While timing on the launch of such a product is very uncertain given the negotiations that would need to take place, Apple may work to launch it simultaneously with a new version of Apple TV, or updated Apple TV software within the next year.



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