Why Telstra can't afford to offer the iPhone

What a week it's been for mobiles.
Written by David Braue, Contributor

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.

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