For telcos, iPhone OS 4 just twists the knife

If ever there were doubts that Apple views its carrier partners with contempt, the design of iPhone OS 4 lays them to rest.
Written by David Braue, Contributor

Looking at the feature set of Apple's new iPhone OS 4 release, one can't help but wonder whether Ralph de la Vega, CEO of AT&T, used to steal Steve Jobs' lunch money in primary school. Or whether Vodafone CEO Vittorio Colao once offered disparaging words about Jobs' fashion sense. Whatever Apple's motivations, iPhone OS 4 will have the fanboys gushing — and the CEOs of the world's telcos crying in their Corn Flakes.

Apple has already made no bones about its telco-bypassing content strategy — which, as I have previously observed, makes redundant the millions companies like Telstra have put into staking claims in the content space. But by intrinsically supporting VoIP — and then allowing developers to fund it with iAd, a mobile advertising model that seems to offer absolutely nothing for the carriers that deliver it — Apple has pushed mobile telcos into a difficult place from which it will be hard to emerge.

Telcos are trying to capture waves in their hands on the shores of a river of money that will, with the introduction of iAd, carry advertising dollars straight past them and into Apple's pockets

On the one hand, telcos have to offer the iPhone, because customers want it. Telcos make their money from voice calls and data bundles, and whatever extra charges they can charge in the form of exorbitant voicemail rates, time-restricted free-calling plans and outrageous excess-usage charges. But they are, increasingly, trying to capture waves in their hands on the shores of a river of money that will, with the introduction of iAd, carry advertising dollars straight past them and into Apple's pockets. The execution of Apple's iPhone strategy has made it extremely clear that the company has utter disregard for its carrier partners, which it sees as nothing more than dumb pipes to carry data to and from cashed-up consumers.

This app brought to you by: if you missed the announcement, iAd allows developers to insert ads into their applications. It's being touted as a smoother alternative to the current approach, which involves exiting the application to view ads in the Mobile Safari web browser and then struggling to return to the same point in the application. iAd will allow the app to basically pause for a commercial interruption, then resume in exactly the same place once the ad is finished.

It's great for advertisers because developers get 60 per cent of ad revenues. Apple would not confirm whether or not it gets all of the remaining 40 per cent or will share some with carriers, but its 70/30 App Store split and Google's carrier-free consumption of AdSense money support the idea that it's not sharing.

Despite the plus side for developers, the model threatens to saddle consumers with a new generation of iPhone and iPad applications that are absolutely swamped with advertisements. Some developers will take the high road and keep their apps ad-free, but I wouldn't expect too many to voluntarily give up the type of revenue streams on which the free internet was built. There's money in them thar apps and, for consumers in the short term, that means a mess.

iPhone OS
(Credit: Apple)

Killing them softly with its VoIP: consider also the implications of multitasking, which will allow a VoIP application to keep ticking over in the background and display an alert when you get an incoming call. Suddenly, VoIP — which Apple now allows over 3G as opposed to its previous Wi-Fi-only restriction — is a viable alternative to carriers' phone services. Heck, I've recently started using Skype over Wi-Fi to make international calls from my iPhone; when I can receive incoming VoIP calls as well as make them, and do it anywhere, what incentive is there to use conventional phone services? Carriers will absolutely hate this.

If iPhone OS 3.0's support for tethering and other data-hungry capabilities stuck a knife in the backs of Apple's telco partners, iPhone OS 4 is twisting that knife quite vigorously. The new operating system will allow VoIP providers to not only eat the mobile carriers' lunch, but also to serve up ads that line their pockets in the process. Optus already expressed its thoughts on this business model by intercepting calls to phone-card VoIP services and charging customers normal international rates, and it's likely that other telcos will feel the same. But in the data-only world where VoIP calls look to carriers just like Twitter updates, there would seem to be little similar recourse.

iPhone OS 4
(Credit: James Martin/CNET)

This wasn't how carriers ever expected smartphones were supposed to be. Remember a decade ago, when the carriers were pumping money into their mobile portals in an effort to keep subscribers on-net? And those subscribers were supposed to happily be buying products and concert tickets through carrier shopping portals, and downloading movies to their phones, and buying train tickets using mobile cash, and so on while carriers bathed in commissions? This approach would have allowed carriers to benefit from things like mobile advertising, but the advent of user-friendly mobile web browsing and YouTube access has killed all of that: the walled garden just isn't enough anymore.

Which brings us to the iPad: soon to be released in a 3G-capable version, this device — like the iPhone before it — will exacerbate the very difficult position in which carriers find themselves. They are carrying data to and from these devices, and that data is generating money for everybody else. But it doesn't seem like Apple is offering carriers much of a share of the profits, while expecting them to upgrade their networks to support a flood of mobile data.

Even worse for carriers, it appears the iPad is built around a prepaid mobile structure rather than the guaranteed income that 24-month post-paid plans provide. Perhaps carriers will be able to exchange subsidised iPads for that 24-month commitment, but the prepaid design gives customers choices that carriers would probably wish they didn't have.

It doesn't seem like Apple is offering carriers much of a share of the profits, while expecting them to upgrade their networks to support a flood of mobile data.

I am, of course, not privy to the negotiations going on between Apple and its planned iPad carrier partners. But if I were one of those partners, I would be pushing for a piece of the iAd pie as a concession for the ever-increasing investment I was being expected to make to bring customers ads, streaming VoIP calls, streaming videos in ever-higher quality, and other content that was putting nothing in my pocket. Apple cannot thrive without carriers onside, but it seems to be acting like it can.

Coincidentally, Telstra, which has struggled the most to integrate the iPhone into its walled-garden business model, has today announced an interesting move: partnering with LG Electronics to deliver Telstra's BigPond Movies service straight to LG's 20-strong line-up of 2010 TVs. This will ally Telstra's content strategy with a well-known brand, and will no doubt be quickly replicated by other vendors and content providers.

Yet even moves like that may struggle for success if Apple takes what is the inevitable next step: releasing a major update to its long-suffering Apple TV, which among its many long-needed enhancements will likely gain iAd support that subsidises access to free TV content and marks the return of paid advertising to the PVR world. Whether or not this resonates with consumers depends on their leanings, but one can assume that Apple sees a much bigger future for iAd than simply keeping it on the iPhone and iPad. And while that future relies on carriers' mobile connectivity, it appears clearer and clearer that they are nothing but the wheels on Apple's ever-stronger war machine.

Editorial standards