Apple on Verizon: Reinventing Laptop Connectivity?
Building on our previous analysis of 'Device 2.0' strategy and in preparation for the Telco 2.0 Exec Brainstorm next week, below is some inportant news and analysis that could have far reaching consequences for business model innovation across the telecom-media-tech value chain:
Denny Strigl, President of Verizon, made a very interesting aside during their Q1 earnings call:
You know, we have said in the past we are always open to discussions with any suppliers. We have no announcements to make relative to Apple today. But let me say that we historically have not been dependent on any one device.
The commentariat moved immediately into speculative overdrive discussing the possibility of a change in strategy at Apple and whether the iPhone, or some variant thereof, is due to arrive on the Verizon Wireless network.
The Telco 2.0 view is that something far more interesting could happen and we present below a scenario on how Apple could completely disrupt the laptop connectivity market and in the process vastly improve the user experience:
Connectivity - A complicated landscape
Wi-Fi connectivity is now pretty much a mainstream activity. Nearly all laptops have Wi-Fi chips embedded in them and connecting to free hotspots, whether at home or in the office, is a very simple affair. For road warriors, paid for Wi-Fi connectivity is less than an ideal experience, with a multitude of choices with widely different tariffs depending upon location and expense account size.
The take-up of 3G mobile broadband from a cellular operator as an option for road warriors has been widely successful, trading simplicity and coverage for Wi-Fi's speed. However, 3G mobile broadband still predominantly requires an external USB-based device, and requires users to manually switch between Wi-Fi and 3G mobile broadband.
We have long believed that the next great leap forward in laptop connectivity will come when both Wi-Fi and 3G mobile broadband are both embedded in laptops and more importantly switching between networks is done automatically according to both signal strength and cost of connectivity.
The mobile networks are making their first tentative steps in capturing this market with subsidised laptops and netbooks with an associated monthly tariff plan for connectivity. But the user experience is still lacking. The devices frequently either aren't integrated with the PC, or else come with proprietary, operator-specific software clients that duplicate the PC's own network manager, badly, and often don't work across platforms.
For example, a common solution in the UK uses Huawei's E220 device and a software client that is executed by Windows' Autorun function when it's connected to the computer. But why do we need another network manager? Arguably, autorun is a bad idea from a security point of view. And unfortunately, although the Linux kernel supports the E220 natively, the client causes Linux machines to detect it as a USB drive rather than a modem. You can defeat this, but it involves either yet another software client or else extensive work through the command line. Which is especially silly, when you think of the boom in Linux-powered netbooks - computers specifically optimised for mobile Internet use.
We believe there is an opportunity for a disruptive play from the device community.
The Apple side of the equation
Apple's revival has been based upon delivering a wonderful user experience, whether by the aesthetics of its physical devices, the ease of use of its software, or by creating a superior purchasing experience, either physically in its retail stores or online in its application stores.
Of course, it has outsourced many functions, such as chipmaking and device assembly, and even allows some of its devices to be sold in third party stores. But crucially, Apple has remained in control of the user experience.
Apple lost a lot of control when launched the iPhone and in the process decided to partner with several mobile operators. It is our belief that even if the individual operator provides the best customer experience in the world through its activation, billing and care processes, Apple will think that can do even better itself. Ultimately, Apple will take back control.
In the mobile world, this is traditionally done via a MVNO type of deal and Apple with its current iPhone base would immediately become the worlds largest MVNO. However, converting into a MVNO for its iPhone customers would probably be too difficult, both commercially and operationally, in the short term. A much better strategy would be to experiment with a simpler product (e.g. mobile broadband connectivity) with a different operator (e.g. Verizon Wireless) as the first step into the MVNO world.
The Verizon side of the equation
Verizon Wireless has not traditionally been big on wholesaling its services. The vast majority (91%) of its 86.6m customer base are retail postpaid customers. Only 2.5m customers are connected via resellers and just 5.2m are prepaid. However, Verizon Wireless is big on the quality of its network and at every opportunity trumpets quality as its key differentiator. The Verizon Wireless Testman and his "can you hear me now?" message will probably go down in mobile history as the most effective network quality advertisement ever.
Nowadays, Verizon Wireless has a different view of the future, as more and more non-traditional devices get connected. Hence last year, it launched its Open Development Initiative which promised to connect any device from any company to its network if it passed certain Verizon Wireless tests. These companies would be then free to develop their own business models and methods of support.
Given the openness of this initiative, Verizon Wireless could hardly refuse Apple interconnection with its network under any business model of Apple's choice. All that is uncertain is whether Apple can negotiate a wholesale tariff deal that wins for both parties.
The chipset side of the equation
To change the chipset in the iPhone to support both types of 3G technology, EV-DO & HSPA, used in the world would be a hugely complex engineering affair which would involve changing its baseband and rewriting a lot of software code. For the laptop it is a much simpler affair.
Qualcomm already manufacture a Gobi chipset which supports both 3G standards and GPS functionality, and is therefore compatible with most of the mobile networks in the world. Therefore, the complexity would be in the software, integrating with Wi-Fi and making the switching transparent. Future generations of 3G embedded chipsets will surely include Wi-Fi capability and simplify the task even further. We believe there is more to the Qualcomm patent settlement with Broadcom than is apparent in the press release.
Of course, this is unlikely to remain a barrier for very long; Verizon Wireless is planning to abandon CDMA and deploy a LTE network, and the next generation of iPhones will presumably be LTE devices anyway.
Business Model Innovation
Apple already sells subscription based services - for instance, their email service MobileMe is priced at $99/year, and they also sell extensions to warranty through Care Protection Plans. It is not beyond the realms of possibility to sell an annual bundle of connectivity, or even bundle a free trial of one month's connectivity with each new laptop with top-ups available from the Application Store. The options are endless.
Where the business model gets interesting is the ability to arbitrage the cost of Wi-Fi hotspot access with 3G connectivity, using the usage profile of the customer base to negotiate better wholesale rates from Hot Spot providers, Verizon Wireless, or in fact any other mobile operator. If Apple signed up to Verizon's ODI, theoretically it would not preclude them from signing up with AT&T as well.
Effectively, the promise of the internet would be fulfilled in the mobile world, with intelligence moving to the edge devices, which would determine the delivery method based upon bandwidth availability and cost. All controlled by a trusted access aggregator - in this case, Apple. The mobile operators would become the ultimate bit pipe, competing in real time for traffic based upon quality of service and cost.
Ed. - we will be debating these issues at the Devices 2.0 session next Wednesday at the Telco 2.0 Executive Brainstorm. If you can't come, check out the new 'distance participation' packages which allow you to access all the brainstorming input and output without the travel at a time that suits you. Details here.