Apple’s “iPhone Upgrade Program” squeezes the networks

One of the least glamorous announcements at Apple’s product launch last week is a blow to the mobile networks. Under Apple’s “iPhone Upgrade Program”, US customers can pay Apple monthly instalments to receive a new iPhone each year. Such instalments are traditionally part of monthly contracts with networks, who look set to lose out in various ways. First, a hit to revenue – buying an iPhone monthly tends to cost customers around ￡50 extra compared to a SIM-only contract. Second, upgrades are a way to incentivise customers to stay with their network and encourage dialogue generally. Third, SIM-only contracts are perceived as low value and this encourages customers to shop around.

Apple has repeatedly encroached into the business model of mobile networks (and the music industry, publishing, watches ...). The first iPhone reversed the balance of power between networks and handset manufacturers. The iPhone was so desirable that AT&T paid for exclusivity (around $10 per handset for five years). More generally, whereas networks previously controlled access to content and levied a proportion of revenue through ability to collect “micro payments”, iTunes enabled Apple to sell directly to customers and build up an independent payment system for content, apps, in-app purchases, magazine subscriptions, phones, computers and accessories.

Apple’s latest push (alongside Samsung), to replace physical SIM cards with “e-SIMs”, would make it even easier for customers to switch network.

More generally, the rise of the smartphone has increased demand for data while reducing interest in networks' premium services. Voice and SMS services are being supplanted by VOIP (Skype, FaceTime, etc.) and iMessages as general data. Customers can bypass networks through private and proliferating public WiFi connections. Mashable suggested last week that free public WiFi in the Philippines might encourage consumers to forgo network data contracts altogether.

In response, networks may move down or up market. They may choose to compete purely on price for no-frills data connections, slashing all possible overheads, from R&D to customer support. To avoid becoming a mere data “pipe” they may offer unique packages of services or content. We already see networks offering bundled TV, internet, home phone and mobile contracts. We may increasingly see networks offering lifestyle packages – combinations of content (film, music, gaming, publications, etc.) with levels of connectivity - by the hour or by the month – tailored to your consumption habits and wallet.