Why Telstra can't afford to offer the iPhone

Why Telstra can't afford to offer the iPhone

Summary: What a week it's been for mobiles.

SHARE:

What a week it's been for mobiles.

First we had Vodafone's 56-word press release (pdf) announcing that it will offer Apple's iPhone later this year. Optus quickly followed suit with a 39-word announcement that it will join SingTel's regional rollout — shortly after it announced plans to expand its 3G network coverage and partner with Google to offer content that happens to suit the iPhone perfectly.

Pundits are taking a global shortage of iPhones and a flurry of carrier announcements as confirmation that Steve Jobs will indeed deliver the 3G iPhone on 9 June during his Apple Worldwide Developers Conference keynote.

In the meantime, competitors are cashing in on the hype with new phones like the HTC Touch Diamond and Research In Motion's call-the-lawyers-it's-an-iPhone-with-a-keyboard BlackBerry Bold, soon to get Windows Live HotMail and Windows Live Messenger apps.

Even though the 3G iPhone is still for all intents and purposes an urban legend, for Apple to deliver anything else next month would be a catastrophe in a market that has already willed the device into existence.

By mid June I suspect we will all be suffering iPhone overexposure. However, the really interesting thing about all this is that Telstra — Australia's largest mobile carrier, and hardly a company known for keeping its mouth shut — has remained curiously quiet.

When I first conceived of this column, I was convinced that Telstra would not offer the 3G iPhone at all, for reasons I will explain shortly. However, after my colleagues at CNET.com.au secured confirmation that Telstra's iPhone is imminent, I must change my perspective.

What I will say now is this: offering the iPhone will force Telstra to make an extremely difficult strategic decision that will fundamentally shape its mobile business.

Here's why.

Years ago, everyone was arguing that content was king, and that consumers would flock to telcos offering the best content. Then it became clear that consumers actually valued a mobile service that works and didn't cost the world, so price was the differentiator.

These days, carriers are taking a middle road by marrying content and carriage. I argued months ago that Seven was transforming into a content-cum-carriage provider to rival Telstra; Unwired's planned AU$500m WiMax network confirms this.

Expand this network in order of magnitude and you'd get the US$14.5 billion WiMax network to be built across the US by telcos Sprint Nextel and Clearwire. WiMax sceptics were quick to attack Sprint's plans last year, but this time around they have the support of Intel, Google, and cable operators (and content providers) Comcast, Time Warner Cable, and Bright House Networks. Each of these companies has one very, very important thing: content rights that they can leverage to turn the WiMax network into a full triple-play service.

Instead of pursuing the "if you build it, they will come" mentality that made past network expansion hard to justify, these ventures are fundamentally changing the game. "It" is no longer enough if "it" is simply a network, but adding a steady stream of strong content — real-world content that customers actually want — creates a compelling reason for consumers to use the network.

Optus and RIM know this, which explains the Google and Windows Live deals. Nokia knows this, too, which is why it's finally capitalised upon its mind-boggling market share by launching its Nokia Music Store. Where phones used to be for calling people, they are now portals into a specific range of content services.

Now, what does this have to do with the iPhone?

You would probably be aware that Telstra's BigPond Music service is Australia's largest source of legal music downloads. Apple's iTunes Music Store, on the other hand, is the world's largest source of legal music downloads and does pretty well here too.

Phone calls may generate some revenues, but it is in content revenues that 3G mobile carriers can differentiate themselves with revenue-raising services. And this is why Telstra simply cannot afford to offer the iPhone — which, despite all the hype, is really a glorified iPod that happens to make phone calls.

When it comes down to it, the iPhone is simply a new interface into iTunes — which, as we learned earlier this year, will soon become the only official way for users to load applications onto their iPhones. Apple, of course, will take a cut.

Whereas Optus, Vodafone and 3 get most of their content from third parties, Telstra has invested significantly in building music and video services. Telstra's BigPond Movies is Australia's largest source of legal movie downloads and competes directly with iTunes. BigPond Music and iTunes formats are incompatible with each other, and there is zero chance of that changing on either side.

Telstra's strategy of revving Next G — 42Mbps is the new target — confirms the importance of new and compelling content services. Mobile FOXTEL is another such example. However, the iPhone is hard-wired to iTunes, which means offering the iPhone will effectively force Telstra to hand Apple the keys to its most significant future mobile revenue stream.

Given Telstra's insular mentality, it's hard to imagine Telstra kowtowing to Apple by entering into a partnership that would devalue its own investments in content.

Telstra is used to being able to throw its weight around to get what it wants but that's not going to work this time. With Optus and Vodafone on-board, Apple has no incentive to share revenues with Telstra; Telstra customers wanting the iPhone can easily switch carriers.

This leaves Telstra with several equally unsavoury options: offer the iPhone as a concession that keeping customers is more important than selling them content; avoid the iPhone altogether, thereby risking the loss of customers to competitors; or pursue a compromise strategy that would push the iPhone 2.0 update over its existing EDGE network.

This last approach would satisfy customers who see the iPhone as a glorified music player — EDGE could carry music to an iPhone effectively if slowly — but who might eventually be convinced to "upgrade" to a Telstra-friendly alternative if they want fancier accoutrements such as downloadable apps and on-demand video.

The iPhone will force Telstra to make some hard choices — and Telstra knows this, which I reckon is the real reason it's been so vocal in bad-mouthing the device in the past. But as Optus and Vodafone (and 3, assuming it joins the party) woo eager customers with attractive bundles, Telstra may find itself alone in a corner, singing the BigPond Music blues.

This column marks a full year since I accepted the mantle from Renai LeMay. I enjoy writing it and all the discussion it generates, but I'd like to mark this milestone by inviting your feedback. Are there areas you'd like to know more about? Telecoms ventures I haven't heard of? Cheesecake recipes you'd like to share? Please drop me a comment below or use the recently launched ZDNet.com.au Forums. If you're shy, e-mail me at edit@zdnet.com.au.

Topics: Apple, Broadband, iPhone, Legal, Piracy, Telcos, Optus, Telstra

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

25 comments
Log in or register to join the discussion
  • Extra Points

    I know well enough about Telstra's view on a mobile device, it's all about having that Telstra button put annoyingly on the front of your phone "for easy access". They really like to brand any phone with "Telstra" heavily, and it is what apple dislikes. As discussed in this article mainly about music content, another worthy feature would be maps.. ie Apple iPhone uses Google Maps, but Telstra will want to use Sensis. That is just another example. It is either that Telstra drops their hat to allow Apple to have their way...after all it is a fancy iPod so it should be controlled by Apple content.
    anonymous
  • David, I'm impressed

    I have to admit, when it comes to that tiresome but inevitable Telstra lovers/Telstra haters discussion that always ends in these forums, I am unashamedly firmly planted on the pro-Telstra side.
    Unfortunately, despite my love of all things telecoms/current affairs, I often leave David's blog's disappointed. I enjoy the articles, and I am passionate about the topics, but there is often an anti-Telstra theme embedded into his weekly offerings which like the pro-T vs anti-T arguments, quickly becomes tiresome and uninteresting. Don't get me wrong, it's an opinion piece and that is duely noted, we are all entitled to one, but I have often read the blogs and reminisced about the days of Renai and how much more I enjoyed this site in those days as in my recollection he generally conveyed more balanced commentary about the world of telecoms.
    Nostalgia aside, I think this is one of a handful of David's blogs that I enjoyed the most, and this one in particular would comfortably be in the top tier of that group.
    This is hardly a good news story for Telstra, as they potentially face a significant loss in their market share by not budging about the iphone and associated processes/revenues/content etc. But the manner in which it was presented to us was quite enjoyable. David's opinions are not only enough to provoke some thought, but could possibly be spot on. It was just refreshing to read this without having to tolerate the proverbial anti-Telstra lines.

    David, we know the big bad Telstra blogs are very popular and inspire some of the most fruitless and nonsensical (but often quite funny) debates, but if more of your articles turn out like this I know I will be a ZDNet reader for a long time to come. Cheers.
    anonymous
  • lets not forget...

    lets not forget Telstra is in bed with everything Microsoft... I am sure there is some pressure not to pursue the iphone...
    anonymous
  • Choice

    I'm please to see that Apple has brokered deals with more than one carrier here. I only wish that it wasn't tied to iTunes and subsequently iStore. That's not to say that there not great things in their own right, it is the lack of interoperability. Admittedly the iPhone isn't tied to iTunes as it can interface with iStore directly. Sadly the user has no choice in this and they won't be able to use Bigpond or Nokia music (Among others). As an addendum to the three alternatives David has offered perhaps Telstra is also willing to unleash the legal dogs with an antitrust suit levelled at Apple over the lock in?
    anonymous
  • re: lets not forget

    as opposed to Optus' partnership with MSN?
    anonymous
  • Apple SDK

    I'd argue that the iPhone could potentially be a boost to Telstra's multimedia service offerings.
    Using the Apple SDK (and I'm no expert) but I can't see a reason why they won't develop their own applications for the iPhone built around their own multimedia service offerings. (Sure they will need to distribute it out via iTunes).
    Throw in some free bandwidth when purchasing music/movies using their application and you'll have a lot of new customers using those services.
    I am a Telstra mobile customer, and I never buy music on my existing hardware or stream the content, because it's just not worth it. And lets face it, my phone ain't no iPod.
    Give me free/cheap downloads to the service, reasonably priced music I can export to a computer of my choosing. And for the convenience of content on the fly, I am going to use it, why wouldn't I (assuming they have the content I want, which I doubt, but thats another topic).
    anonymous
  • Compatibility?

    Would a 3G iPhone (if it exists) even operate on a 850MHz, Next G network? This frequency is only used by two or three networks around the world, so why would Apple bother making the iPhone compatible? Telstra is being forced to offer the iPhone on it's older, less favoured EDGE network or not offer it at all.
    anonymous
  • As someone else has stated...

    Telstra can easily create their own applications with the SDK that would link their multimedia offerings. Currently iTunes on the current iPhone doesn't allow users to go to the iTunes store over EDGE -- only WiFi. But I guess that can change with 3G...
    anonymous
  • friendships and business.... a good mix?

    apparently Steve Jobs is good personal friends with Sol.... No doubt they are at least talking about ways of co-operating. I know from people up high in Telstra they are hopeful of getting the iphone on board
    anonymous
  • I Wouldn't change carriers just to get an iPhone

    David, congratulations on your First Year Milestone!

    I read your blog a fair bit. I don't often agree with what you have to say, but you provoke strong opinions and robust discussions. That's a good thing, though I think a lot of the Talkback tends more to opinion than fact.

    I have an iPod. I like it, it works. Same with iTunes, I buy the music and it works. That has not been my experience with other music players and music sites. It's not the cheapest player or the cheapest music, but it is a good reliable package.

    It's the same for mobile handsets. It's not just the handset that makes a good experience, but also the performance of the mobile network that you are using, and the customer service you get. If I kept getting call drops, or my flashy handset kept reporting no network available when I wanted to use it, or data speeds were slower than a speeding carrier pigeon, then what use is it having a funky handset with a pretty interface? I think I would prefer to pay a bit more to use a mobile network that worked without problems, and if that means I can't have an iPhone, so be it. I wouldn't change carriers just to get an iPhone (but I would still like to own one). I hope the handset performance is as good as it's looks.

    Oh yeah, I do have a request. It would be good if ZDNET.au could get some prepaid USIMs from each mobile telco, and test the whole package ... handset, customer service and network - in and out of town. That would be interesting.
    anonymous
  • More than an iPod

    The article has some interesting points, however, "which, despite all the hype, is really a glorified iPod that happens to make phone calls" is not in fact what is happening. If you do research on published use of the iPhone in US (remember this is with the official locked in carrier AT-T mode), it is the mobile web experience that has changed the landscape. For those that either have an unlocked iPhone or IPod touch here will know how good (but not perfect of course) the web browsing is compared to offerings from other devices.

    That combined with the apps that will come from the developers (in the sold out WWDC) make it more than a glorified iPod. ie an phone, an iPod and a mobile web device - this is what some people forget when trying to categorize the iPhone.
    anonymous
  • lets not forget...

    Telstra in bed with Microsoft? Microsoft's Unified Comms strategy is going to eat Telstra for breakfast. Telstra is a rabbit in the headlights and doesn't trust Microsoft not to ruin its carriage business
    anonymous
  • More than an iPod

    iPhone with the newly announced (UK only I think at the moment) eat all you can Vodafone mobile internet plans could be a winning combination
    anonymous
  • You're forgetting something...

    Sensis has been hiring programmers to develop iPhone apps. This hints that Telstra may go down the iPhone route.
    anonymous
  • Haunting melody...

    "There's an old saying - stick to your knitting - and Apple is not a mobile phone manufacturer, that's not their knitting," Mr Winn told AAP.

    "You can pretty much be assured that Nokia, Motorola, Samsung, Sony Ericsson and ZTE and others will be coming out with devices that have similar functionality."

    "I think people overreacted to it - there was not a lot of tremendously new stuff if you think about it," he said.

    "It was maybe kind of cool on the touchscreen technology but touchscreen technology is another domain, so it's only a matter of time before it went to the device."

    I wonder if Greg Winn(Ha!) even slightly regrets anything he said? I'd love to see him re-interviewed on the subject of the iPhone :-)
    anonymous
  • Of course it's 850/2100 + Quad EDGE

    Of course, AT&T's network - the iPhone's launch network, operates at 850MHz too!
    anonymous
  • In that case, check out Suzanne Tindal

    Steve I tend to agree, with your appraisal of Mr. Braue. I am also pro-Telstra and one who is lured into the pro/anti-Telstra debate - guilty as charged.

    However, I really enjoy reading ZD's Suzanne Tindal's articles, as they are usually, exactly as you say, balanced and without obvious bias.

    If you haven't already, seek her out!

    Cheers
    anonymous
  • Different philosophies

    Telstra is too Microsofty and iPhone is, well, very Appley.
    Their philosophies don't mix and neither can their product offerings
    anonymous
  • Glad it was enjoyable!

    I've been traveling and out of touch with the blog for a few days, but I've dropped in and seen a load of comments - wonderful to see.

    Thanks Steve and all for the ongoing feedback, both positive and negative. It's one thing to write all these columns but another, even better thing, to know that they're being read and enjoyed/reviled as the case may be. Even the most negative feedback is better than feeling like I'm speaking to an empty room.

    If I could just address your comment re anti-Telstra themes -- It's not my intention to use this blog as a platform to slag off Telstra for no apparent reason; what's the fun in that? My only goal is to offer some perspective on the way this critical industry is shaping up. The fact is that in 11 years of covering Australian telecoms -- and I do dozens of interviews on the topic every year with people in every part of the industry -- I have heard very little praise for Telstra's business strategies from anyone but Telstra and its shareholders. They are seen as obstructionist, difficult, and frustrating to deal with -- yet they are essential to the future of nearly every competitor. Building a long-term, competitive telecoms future has been extremely difficult because of this, and therefore most discussions about the future inevitably touch on issues other ISPs and telcos are having with Telstra.

    This isn't really Telstra's fault exclusively; they are just capitalising on a situation created by the previous government, in which they were privatised without the proper preparations taking place.

    However, it's not really time for finger-pointing as much as for encouraging action on the part of everybody involved. It is my hope only that by raising these and other issues -- and doing it in a way that is hopefully interesting enough to engage the right readers -- I can touch off some productive debate that will hopefully contribute in some small way to improving the situation for us all.

    Now I sound like a politician <shudder>. At any rate, thanks again for your feedback and also for your readership! I know there are millions of other things you could all do with your time so I very much appreciate the fact you all dedicate some of it to reading Full Duplex, and to contributing to the thought-provoking discussion in this very interesting industry.
    anonymous
  • Remember Telstra has a significant WiFi network

    The point about Telstra creating an app for the iPhone is a good one -- but would this satisfy user demand? I would assume most people buying an iPhone would be doing so at least partly because it also works as an iPod and can play the music library they're likely to have already invested in. A BigPond Music app would force them to manage two different sets of (incompatible) music, which is never a good recipe for success. Could this approach ever be managed to a satisfactory result for customers?
    anonymous