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Lose a Battle; Win a War
[June 30, 2008]

Lose a Battle; Win a War


Managing Director, Core Capital Partners
 
Ever since the potential of mobile data began to be contemplated about a dozen years ago, wireless carrier executives have fretted about being made a “dumb pipe” like their wireline brethren. The latest Apple-AT&T (News - Alert) announcement shows carriers lost the battle with the Web but won the war to protect and grow revenue.


 
With graceful jujitsu the carriers have embraced openness for their network platform while maintaining a closed monetization strategy. Both AT&T and Verizon (News - Alert) are inviting third parties to develop new uses for the network, then leverage off those new apps to sign up more subscribers and make them stickier.
 
The carriers’ first response to digital services was the walled garden; a brute force effort to avoid commoditization by controlling data services. The Web blew a big hole in that plan, however. It’s hard to tell users they can only go to carrier-selected applications when one click on the Web browser vaults the wall.
 
To its credit, AT&T’s original iPhone strategy sought to invent a new model for the times: no handset subsidy and revenue sharing with Apple (News - Alert). It’s newly announced 3G iPhone strategy walks away from that experiment. In the process AT&T Mobility CEO Ralph de la Vega might even have taught Apple’s Steve Jobs a thing or two about pivoting off someone else’s thrust to make it work for you.
 
Users of the original iPhone consume much more data than normal data plan users (one report is 30 times more). The iPhone is a media device that invites consumers to a new wireless data experience, much of which is Web-based. Instead of fighting the victory of the Web, however, AT&T embraced the new reality by leveraging it into increased stickiness and ARPU.
 
The jujitsu came when AT&T decided the new iPhone would be subsidized. I paid $600 for my iPhone when it first came out; I’ll get its replacement for $199. In return for the subsidy, however, I’ll need to sign a two year service agreement and pay higher monthly data fees. Like a Black Belt Master, AT&T has used the force of demand from the non-walled garden to lock in long term subscribers who pay more for their 3G data. Brilliant!
 
The principal business of wireless carriers has always been to monetize customers. Attracting new subs and reducing churn are the twin pillars of carrier success. The new iPhone strategy is built on those pillars; surely the $199 iPhone will outsell its more expensive predecessor — and these new subscribers will be sticking around for two years and paying more. The model does what carriers do best: produce stable cash flow.
 
Steve Jobs must have been taking notes. Apple has also shed its walled garden control of the applications on the iPhone. Apple’s new open platform encourages developers to build for the iPhone. Venture capital legend Kleiner Perkins has even created a $100 million iFund to seed companies building these new apps. It’s a virtuous circle: applications make the iPhone attractive to more consumers who then buy more applications.
 
Like de la Vega, however, Steve Jobs has leveraged off his open platform with a closed monetization strategy. All those new iPhone application developers have only one place to sell their product: the Apple Store. Jobs’ company will take 30 percent off the top on those sales.
 
Amazingly, after all the angst about being commoditized, the new carrier model is awfully close to the business model carriers have been following since the early days of cellular. Back then it was coupling demand for anywhere voice service with subsidized phones to build a base of long-term customers. The new model is from the same playbook, but modified for the post-voice world. By embracing the innovation of others, carriers leverage the demand for new apps to lock subscribers into a long-term relationship at a higher price.
 
Apple and AT&T are not alone. Verizon’s open initiative produces the same kind of expansion of network usage and stickiness. Nokia’s effort to break out of the commoditized handset market via content applications also echoes this pattern.
 
After a dozen years of building walls the garden gate is open because it is now possible to find profits from letting a thousand flowers bloom.
 
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Tom Wheeler (News - Alert) is a managing director at Core Capital Partners, a venture capital firm specializing in early stage technology-based companies. He has been the CEO of both the Cellular Telecommunications & Internet Association (CTIA (News - Alert)) and the National Cable Television Association (NCTA). For more articles by this author, please visit his columnist page.


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