Editorial

Yes, it's mad - but Apple could become a mobile operator

You may have read an article here on Neowin a few days ago on the apparent frustration that mobile operators are feeling over their relationships with Apple. While the networks have been falling over each other in a mad scramble to stock the iPhone as demand for it has continued to increase, they are now starting to count the cost of putting so much emphasis on the Apple handset, particularly as an increasing proportion of their smartphone sales is now represented by iPhone purchases.

In the words of one analyst, carriers are “sick of taking orders from Apple”, especially as the cost of each iPhone sale is far higher to the operator than for any other smartphone. The increase in carrier support for a third mobile ecosystem – in the form of Windows Phone – was said to be the operators’ way of reclaiming control from Apple. But Apple may be preparing to become a mobile network operator in its own right, in a move that could further subjugate the role of existing carriers.

Whitey Bluestein is an industry strategist with over 25 years of experience who has worked on deals for some of the biggest brands in tech, including AT&T, Verizon, Nokia and Microsoft. At this week’s Informa MVNO Industry Summit, he told conference delegates that it is his firm belief that Apple will soon become an MVNO (mobile virtual network operator), and that this isn’t just likely, but inevitable.

In a nutshell, he asserts that – like other MVNOs – Apple will negotiate deals with existing carriers around the world for access to their networks, creating a virtual network of its own, much like Virgin Mobile has done in many parts of the globe, for example. Apple would start off by selling data bundles with iPads via the iTunes store, and customers would be billed via the same credit card that they use to buy music and apps. This would naturally progress to offering voice services with iPhone purchases, at which point the end-user relationship would eliminate network operators like Verizon and AT&T entirely.

So extraordinary is this concept that some might simply be tempted to dismiss it as the ramblings of a mad man. But perhaps the most startling aspect of all is how much sense it starts to make – for Apple at least – once you move beyond the initial scepticism and examine the factors that support it.

Back in 2006, Apple filed a patent for a “dynamic carrier selection” system that would see each iPhone communicating with an Apple server, which would itself be communicating with carrier networks that would be dynamically ‘bidding’ to provide service to the iPhone handset. After news of the patent filing emerged in 2008, Apple Insider noted that the model would have essentially seen Apple establish itself as a ‘smart MVNO’; most MVNOs have a relationship with a single operator, but Apple’s patent saw it as having a relationship with several (or all available) carriers in any given region. Last June, five years on, TechCrunch reported that Apple had extended the filing, fueling speculation that the idea remains very much alive in Cupertino.


A diagram from Apple's 2006 'smart MVNO' patent filing. Image via Apple Insider

Of course, patent filings in and of themselves tend to be fairly meaningless, but that’s not all there is. John Stanton co-founded Western Wireless back in 1994 which, through various divestitures and mergers, ended up part of what consumers know today as T-Mobile and Alltel. A few months ago, Stanton revealed that he had worked with Steve Jobs, shortly before the launch of the iPhone, on plans that would have seen Apple establish itself as an MVNO. As Pocketnow reported in November 2011, Stanton said that Jobs “wanted to replace carriers. He and I spent a lot of time talking about whether synthetically you could create a carrier using Wi-Fi spectrum. That was part of his vision.”

It seems that Apple was ultimately able to negotiate such favourable conditions with AT&T for their exclusive launch of the iPhone that by 2007, Jobs had dropped the idea to focus on other business priorities, but the idea never really went away.

In late 2010, Apple butted heads with mobile operators over its plans to do away with traditional SIM cards, replacing them with device-embedded SIM modules. The idea was that they would be enclosed and sealed within an iPhone; Apple would then be able to take charge of activating devices remotely, updating a tiny flash storage component of the SIM with carrier-related information. As Ars Technica reported at the time, the networks were furious that the company was attempting to “undermine their relationship with their customers and give Apple too much control over the activation process”. Cupertino yielded, of course, but this was a further hint that Apple was still looking at ways to make the operators less relevant.

But perhaps the most important factor in all of this is that the establishment of Apple as network provider would be the last major component in its vertical integration strategy. It designs its own mobile hardware (including the processor); it has its own OS and software; and although its hardware is manufactured by third parties, the strictures which govern the whole process – from sourcing components to device assembly and yes, even quality control (in spite of some high-profile cases) – are unrivalled among mass market technology brands.

From the very beginning, the iPhone was conceived as an end-to-end Apple experience. For example, those with short memories may need to be reminded that, while the platform has become synonymous with apps, the iPhone was originally intended to be a ‘walled garden’ with a limited set of Apple-curated services and features giving users everything they could possibly need. Steve Jobs didn't want third-party apps, as he didn't see the benefit of them for Apple or the iPhone; that quickly changed, of course, but even so, wherever possible, Apple has worked hard to retain control of the end-user experience.

The focus for content in the Apple ecosystem remains primarily upon iTunes, with protectionist policies often dissuading – and sometimes simply excluding – competing services or features that might “duplicate” something that Apple already offers, ostensibly with language suggesting that users might get confused, albeit loaded with the implicit understanding that users should frankly be satisfied with what Apple already provides. Its success with iTunes has given it unprecedented market dominance – certainly in terms of where the money is, if not necessarily in pure market share – which has led to commanding levels of influence in other industries too, with music labels and book publishers now recognising that they no longer call the shots when it comes to offering their content through Apple’s store.

Meanwhile, the company has completely upended the traditional manufacturer-operator relationship. Carriers are now at the mercy of a market that has happily eaten up the marketing messages that those operators have been feeding to it. Four out of every five smartphones sold by AT&T was an iPhone last quarter, for example, thanks in no small part to AT&T’s own promotional efforts. But this has now placed carriers in the precarious position of being completely powerless to say ‘no’ to Apple, such is their dependency upon the iPhone and, to a lesser degree, the iPad.

This provides Apple with a major advantage in creating a potential network strategy. But in addition to its influence upon carriers, the company has also established control over the design, manufacture and, to some extent, the distribution (through direct sales via its website, plus over 350 Apple Stores worldwide) of its devices, along with the software platform that it owns, and its position as financial intermediary in the sale of virtually all content on that platform. An Apple mobile network represents the last significant tier in creating a true end-to-end Apple experience for the user.


One day...?

Apple is where the money is in mobile. Just a few months ago, articles such as this one from ZDNet were commonplace, with eyebrows raised over Sprint’s plans to ‘bet the company’ on a $20bn deal to bring the iPhone to its network. As the article stated at the time, “Sprint’s future largely rides on the iPhone”. It’s hard to imagine a more potent indicator of Apple’s dominance and influence over the mobile industry than an entire operator's existence being predicated upon its ability to stock an Apple device.

So if Apple does decide to establish itself as an MVNO, it’s even harder to imagine a scenario in which the operators won’t simply bend over and capitulate to Apple’s will. Of course, Apple wouldn’t simply seek to eradicate the networks overnight; the process would likely be far more insidious. But in much the same way that carriers can already see the error of their ways – recognising how damaging it will be in the long term to keep relying so heavily on Apple – while they continue to sell iPhones and iPads in ever greater numbers, the short-term gains of any commercial relationship with Apple will surely outweigh the long-term predictions of doom.

As such, the promise of significant new revenues from an Apple MVNO would undoubtedly be too tempting to resist for network operators and their demanding shareholders. Of course, there would be significant discussion – both publicly, in the media, and privately, behind closed doors – about the implications of Apple getting into the business of providing the wireless service. But with the prospect of vast new incomes to be generated, the carriers would surely succumb to the misguided belief that they would retain overall control by virtue of owning the physical network and wireless spectrum.

The rest, as they say, would be history. Users have demonstrated such unfailing loyalty to the Apple brand that they remain content to pay top dollar for iPhone hardware, and often pay higher monthly tariffs to get it. Anyone suggesting that consumers wouldn’t flock to an Apple-branded mobile network - thus drawing away vast long-term revenues from existing carriers - simply isn’t paying attention.

Apple would also have an extraordinary opportunity to do what no major operator has yet done, in considering all traffic across its (virtual) network as nothing but bits and bytes of data. Carriers remain resistant to the idea of this data neutrality, as they prefer to be able to charge by the minute for voice calls and to main their extortionate pricing for SMS text messaging for example, while the likes of Skype and WhatsApp treat this stuff as pure data. In so doing, Apple would be presented with a further opportunity: to take control of international roaming charges, offering its customers the ability to move their iDevices between countries where its MVNO service is enabled, without the brutal pricing that currently dissuades consumers from using their smartphones extensively abroad. With embedded SIMs managed by Apple and networks treating all traffic as pure data with Apple-managed data packages, the process of roaming could become infinitely simpler and a good deal cheaper, giving users yet another reason to love the brand and its offerings.

‘Cheaper’ doesn’t necessarily mean ‘cheap’ either. In the UK, for example, T-Mobile laughably charges £7.50 GBP ($12 USD / €9.25 EUR) per MB when roaming in some countries. An international Apple MVNO could easily charge far less than that and still generate vast profits, while with its trademark marketing prowess, it could certainly entice users into paying a modest premium for domestic network access within their respective markets.

Would the company miss the enormous subsidies paid by network operators for its handsets? Sure, but it doesn’t need them. While some articles on the web will tell you that Apple makes $400 or $500 profit on each phone, that’s a bit farfetched. The cost of components and manufacturing for a 16GB iPhone 4S comes to around $220, but such considerations of cost versus profit rarely factor in big-ticket items like design and development, or other elements such as marketing, packaging and broader logistics. While we don’t know the exact figure, it’s clear that Apple earns far, far less profit than those wild figures suggest, although its profit margins remain enviably healthy.

But the more control it can exert over every aspect of its operations, the more efficiencies it can exploit and the more value it can extract from what it does. While the loss of carrier subsidies would not be inconsequential to Apple's revenues, new incomes from wireless service plans and associated extras, the ability to more efficiently expose its numerous properties to its customers (offering wireless data bundles to notebook buyers, for example), and other efficiencies driven by a greater degree of vertical integration, would all help it to narrow that gap in its revenues. Amazon has been able to sell its Kindle Fire tablet at a loss, subsidised by connected services and content sales, and now commands over half of all Android tablet sales. Hardware sales are a source of revenue but not the only one by any means, especially for a company like Apple with its fingers in so many pies.

The reasons pointing towards Apple becoming a mobile operator far outnumber those against it. More importantly, Apple has already signalled its intent to make something like this happen, and it clearly has the means (including $110bn in cash) to match its will.

But if you’re still sceptical, I can’t really blame you. The idea seems so out of this world, and such a departure from the norms that we've come to know, that it’s far easier to just brush it aside than it is to accept it as a realistic possibility. But just a few years ago, The Wall Street Journal published an article telling Apple to give up on its foolhardy iPhone project, including this wonderful line:

[The mobile handset business] has gone so far that it's in the process of consolidation with probably two players dominating everything, Nokia Corp. and Motorola Inc.

In tech, sometimes you have to expect the unexpected.  


Apple 'smart MVNO' patent filing diagram via Apple Insider | 'iPhone 4G' concept image via Call Let

Report a problem with article
Previous Story

New Steam beta adds remote game downloads

Next Story

Microsoft to subsidize Xbox 360 + Kinect with $15 monthly subscription

55 Comments

Commenting is disabled on this article.

I don't see how Apple will be satisfied with the amount of control they have as an MVNO. If a user calls and complains to Apple about reception at their place (perhaps some obscure place) how will Apple respond? Apple's users have high expectations, but as an MVNO, they don't have control over tower placement or other nitty-gritty stuff that Apple would want control of. Even with multiple operators, what will happen if a user is at a place with poor reception with all the major operators? Users today seem to have a bad impression of the operators - moving to become an operator would likely affect Apple's image unless they can provide a significantly better service than what is currently available.

But if they move to become a full operator with their own cell towers, that would be a huge expense - they need to get spectrum, build up the cell infrastructure, and then provision it with more than sufficient capacity, which will be expensive as more capacity = more cell towers. While Apple might be able to afford it, I'm not sure if they'll do it because of the same "image" reasons with the failure to provide flawless wireless service, which is technically very difficult.

And I'm not sure how this will work out overseas. In some places, MVNOs have succeeded while in other places they have not. Furthermore cell service is significantly cheaper in some Asian and European countries as compared to the US and people aren't as frustrated with their operators (or at least that's what it seems on the Internet).

That said, Apple might be able to overcome all the issues I mentioned...

And having an MVNO with multiple operator partners globally so that we can get cheaper roaming is exciting...

I think Apple would have to set up their own WiFi Network first before moving into MVNO.
With Wifi Roaming soon to be standardize, Apple setting up a Global Wifi Network should be reasonably simple. Take World wide McDonald, StarBucks, KFC, Burger King, all Fast Food Chains, Apple Retails Store, 7-11, etc... You instantly have a pretty good WiFi coverage.

In Apple's view of MVNO, the will need at least TWO Network Providers, to select the best one there is. Which is fundamentally different to Virgin Mobile. As soon as there is two provider on broad, the others will have no choice but to follow suit. Apple will handle All the customer relationship with its retails store. Single Apple ID account to process all your Apps and Mobile bill payment, which means Apple make significant savings from making multiple Visa / Master Payment.

And i am pretty sure Apple make a 10% price increase and people will still jump over to use it. At least Visual Voice Mail would finally be a standard features on its MVNO, and iMessage means Unlimited SMS within its network.

iwod said,

And i am pretty sure Apple make a 10% price increase and people will still jump over to use it.
I didn't read the whole article, but if iphones were exclusive to its network, I'm sure people would accept a 100% price increase (because people will buy new iphones no matter what, since it is a status symbol)

Flemo said,
Talk about milking the carriers then just kicking them to the curve.

They've made money selling the iphone and they'll make more even if Apple does go down this route.

I was referring to the States. I should have been more clear.

Arron said,
I hope they don't. We have more than enough providers in the UK.

9point6 said,

Because more competition is a bad thing.

It can be, too many options can make it more difficult and confusing for the user. Especially if they are not technologically advanced. In the UK we have a lot of mobile phone carriers and it is growing, supermarkets are all in on the mobile networking industry.

I could really see this but I feel that they should teem up with a world wide brand such Deutsche Telekom (T-Mobile) and launch a true Worldwide Service that will work in any GSM Country. the phone will always be unlocked because one can buy one from any where in the world that GSM is used. Seeing that DT already sells the iPhone and iPad almost everywhere else it would just be economics. Verizon is a part of Vodafone anyhow but operate on the two separate names but basically use the same technologies. There is even Verizon in UK: http://www.verizonbusiness.com/uk/.

belto said,
Verizon is a part of Vodafone anyhow but operate on the two separate names but basically use the same technologies. There is even Verizon in UK: http://www.verizonbusiness.com/uk/.

No matter how good Verizon service could be good in the US I would never use it: the idea that you are locked with a locked phone is ridiculous to me. Btw they use GSM in UK, don't they?

Hardcore Til I Die said,
I've read that mobile networks aren't allowed to manufacture their own devices in the us. Don't know how much truth there is to that..

Correct me if I am wrong but I think Verizon had some its own phones via its pre-paid network. Anyone know of this?

Verizon and AT&T are the worst service providers on the planets. Sadly many people can't compair and so settle for a less than poor quality service. 3rd world countries have better service providers,that don't charge extortionate rates either.

I hope iNet is better and helps the American people to only accept nothing less that the best.

Brian Miller said,
Verizon and AT&T are the worst service providers on the planets. Sadly many people can't compair and so settle for a less than poor quality service. 3rd world countries have better service providers,that don't charge extortionate rates either.

I hope iNet is better and helps the American people to only accept nothing less that the best.


lol Wow....

iNet doesnt even exist. This was a theory article. Man, you guys eat that apple way too much....

htcz said,

lol Wow....

iNet doesnt even exist. This was a theory article. Man, you guys eat that apple way too much....

Never said it did exist. Hoever, I can tell you that we work closely with Apple and there is a lot, about 100% of truth to that article.... ;-)

htcz said,

lol Wow....

iNet doesnt even exist. This was a theory article. Man, you guys eat that apple way too much....

It is not just as simple as carriers vice Apple; it is about the evolution of comunications: people will buy "connection time" packages and use them with different devices and locations.
I travel abroad a lot and I use a SIM free smartphone: when I get in a Country I buy a prepaid SIM and use it while I am there. Never paid those outrageous roaming charges that carriers try to push on customers.

Brian Miller said,

Never said it did exist. Hoever, I can tell you that we work closely with Apple and there is a lot, about 100% of truth to that article.... ;-)


I know it doesnt exist. "Hoever", I can tell you that we work closely with Apple and there is a lot, about 100% of complete BS to that article.... ;-)

See how easy I can write that too?

Won't happen, there would be too much backlash from Verizon and AT&T or if they went the MVNO route AT&T and Verizon would probably prioritize their own network first and try to make Apple's look like crap... the big 3 don't want more competition, even if it is on their own network

neufuse said,
Won't happen, there would be too much backlash from Verizon and AT&T or if they went the MVNO route AT&T and Verizon would probably prioritize their own network first and try to make Apple's look like crap... the big 3 don't want more competition, even if it is on their own network

And if they do that, they stand to lose billions in revenue to their competitor Spint if Apple decides to cut them out.

Well considering Apple's Mobile Me network was awful as a $99 a year paid service for what amounted to free Google and Microsoft mail services, I don't know how much better they could do in providing a wireless network.

Enron said,
Well considering Apple's Mobile Me network was awful as a $99 a year paid service for what amounted to free Google and Microsoft mail services, I don't know how much better they could do in providing a wireless network.

This.

If this did happen I could also see the network operators (ATT, Verizon, Sprint, etc...) putting priority's on voice/data traffic pushing the iNetwork below all there own subscribers. I for one would welcome this news with open arms, it would give those of us who hate Apple the ability to use our phones without dealing with the slowdown from all the iDrones around the world.

Apple might have the edge now but they would loose it. The carriers might not want to work out a deal with Apple, but lets assume they can work out a deal with the carriers the first time around. Once the contract ends and Apple goes to renew it the carriers could demand more money. Then what will apple do. They can't say no or their network would be down overnight. They would be powerless and have to pay. The only way they can keep the edge is by ensuring that their phone and iPad is worth it to the carriers so that way they would still have leverage.

If apple products have a high cost for the carriers with advertising and everything else and if the Android makes them money without spending money then you think they would wise up and sell Android and ditch Apple. Or at least stop spending money on Apple.

If you think about it Apple is doing well because every AT&T store is an Apple store.

BillyJack said,
Apple might have the edge now but they would loose it. The carriers might not want to work out a deal with Apple, but lets assume they can work out a deal with the carriers the first time around. Once the contract ends and Apple goes to renew it the carriers could demand more money. Then what will apple do. They can't say no or their network would be down overnight. They would be powerless and have to pay. The only way they can keep the edge is by ensuring that their phone and iPad is worth it to the carriers so that way they would still have leverage.

If apple products have a high cost for the carriers with advertising and everything else and if the Android makes them money without spending money then you think they would wise up and sell Android and ditch Apple. Or at least stop spending money on Apple.

If you think about it Apple is doing well because every AT&T store is an Apple store.


You're making it seem as if the "carriers" operate under one entity. If Verizon doesn't work out a deal with Apple, they stand to lose billions to their competitor Sprint or At&T.

I know the carriers are different entities but I missed that in my analyzing and you are right. If one carrier played tough and dropped apple and the other one did not then they would gain over the other carrier. Therefore, the carriers will more likely not gamble and stick with Apple. The carriers are making money with Apple and money is money and is better than no money. I really do not like the carriers and I think that they are all greedy where as I do not fell that way about Apple. I just think Apple is smart and has played their cards well. It is great to have competition. Hopefully WP7 and WP8 can pull it off and become a big player.

I know the carriers are different entities but I missed that in my analyzing and you are right. If one carrier played tough and dropped apple and the other one did not then they would gain over the other carrier. Therefore, the carriers will more likely not gamble and stick with Apple. The carriers are making money with Apple and money is money and is better than no money. I really do not like the carriers and I think that they are all greedy where as I do not fell that way about Apple. I just think Apple is smart and has played their cards well. It is great to have competition. Hopefully WP7 and WP8 can pull it off and become a big player.

AWilliams87 said,

You're making it seem as if the "carriers" operate under one entity. If Verizon doesn't work out a deal with Apple, they stand to lose billions to their competitor Sprint or At&T.

It is true that carriers are different entities but it is also true that, at least here in the US, they operate as a cartel.
The idea of a company selling you a package of "connection time" is very intriguing: you have your account, re-load minutes or bytes when you are running low, use your account to connect whatever device you want to use etc. etc.
In Europe pre-paid SIM are by far more popular than regular contracts so the idea is not so far-fetched.
Just think about calling cards you could use to call arounf the World using any public phone..... the principle is not really different.
What I do not think will fly is the idea of a device locked to a single provider, in this case the OEM. Regulators will request devices to be able to use any provider so yes, at the end I believe that the business model we are use to see nowadays will change although not exactly as described in the editorial.

This article is to long and truly boring as he**. Yes I read the whole thing, however, those with OCD will find it difficult to stay on track as they are reading. How about doing a condensed version.

Pam14160 said,
This article is to long and truly boring as he**. Yes I read the whole thing, however, those with OCD will find it difficult to stay on track as they are reading. How about doing a condensed version.

I read and re-read this about 3 times.

Pam14160 said,
This article is to long and truly boring as he**. Yes I read the whole thing, however, those with OCD will find it difficult to stay on track as they are reading. How about doing a condensed version.

I think you meant ADHD (attention-deficit hyperactivity disorder) rather than OCD (obsessive-compulsive disorder).

But thanks for the feedback.

Sounds like a bad idea and a bit of a money sink for Apple. Why would they want the responsibility of the whole network when they can have it the way it is while still being able to stock pile profit.

Cue Apple inventing the iByte, which is the same as a gigabyte in every way, except it costs 3x more and is only available to people on the Apple Network.

Meanwhile, Apple diehards will convince themselves and others that an iByte is both bigger and quicker to download than a "normal" or "Windows-like" gigabyte.

This wont happen. Apple would buy the competion off first (in mobile devices) rather than becoming a MVNO.

htcz said,
This wont happen. Apple would buy the competion off first (in mobile devices) rather than becoming a MVNO.

Um my comment appeared first and now no?

Rudy said,
If they come to Canada I would sign up in a heart beat! I hate Rogers

the big three keep soooo much money here in Canada.. I dont know why people are soo excited to give our jobs away to save a few bucks..


Would be interesting to see how Apple reinvent ahem innovate in this sector. Also would be interesting to see Apple Net to be available everywhere in world , in Asians countries particularly , where AT&T and Verizon are no where seen.

bogas04 said,

Would be interesting to see how Apple reinvent ahem innovate in this sector. Also would be interesting to see Apple Net to be available everywhere in world , in Asians countries particularly , where AT&T and Verizon are no where seen.

Okay Virtual operator , my above post should be thrown to junk.

Hell-In-A-Handbasket said,
" thank you for calling iNet Support, I see your calling about poor reception, unfortunately we are not compatable with your wallpaper "

Quickly! Go buy iNet.com / .co.uk / i.net so Apple will have to buy them off you!

Crisps said,

Quickly! Go buy iNet.com / .co.uk / i.net so Apple will have to buy them off you!

Because they're totally obscure domains that no-one will have bought before..

9point6 said,

Because they're totally obscure domains that no-one will have bought before..

It was a joke, but thanks for your pointless sarcasm.

JhonKaBrohamski said,
I guess they have enough cash to do whatever they want!

article posted 2 minutes ago, comment posted 1 minute ago. I guess you didn't read the article..

Andrew Lyle said,

article posted 2 minutes ago, comment posted 1 minute ago. I guess you didn't read the article..

I infact did not. Don't need to, I've already read similar articles a few weeks ago.

Andrew Lyle said,

article posted 2 minutes ago, comment posted 1 minute ago. I guess you didn't read the article..

Which means you didn't either?

SK[ said,]

Which means you didn't either?


I commented because I noticed it freshly on the front page and noticed a comment already. It's called observation.

Hell-In-A-Handbasket said,

They could buy multiple Carriers

Even with Apple's cash reserves, they do not have enough to even by 49% of most of the major carriers around the world. Let alone buy multiple.