Framtiden nu

Disclaimer

Note: I work for Ericsson, a manufacturer of mobile systems, so I wish to make the following abundantly clear:

1) this post does not express the beliefs of my company and

2) i do not have any inside information. All facts presented here are based on publicly available information.

Introduction

In this post I will make the argument for why Apple should buy a US-based mobile operator. To get there I will need to explain how Apple has worked with their mobile devices so far and why it makes sense for them to buy an operator.

Source: This was sent to me from the future.

Apple has made it clear that there is no place in the value-chain where they do not operate as long as it gives them a competitive advantage. They started by providing their own OS bundled with services from other service providers (Google and Yahoo). Since the iPhone launch Apple has bought Placecast, (rumored to be replacing Google Maps), Siri, a mobile search assistant  and Quattro Wireless to let Apple in on the quickly growing mobile advertising pie.

But Apple has not only grown upwards by owning more of the services bundled with the iPhone, they have also grown downwards in the value chain by creating their own chipsets. They have bought PA Semi Conductor and Intrinsity, both ARM processor specialists.

This gives them the possibility to have chipsets perfectly adapted to their own devices, and services not available on any other devices.

Apple are relying on third party baseband processors and various other commodity components only when it gives them no competitive advantage, for example chipsets for GPS, Wi-Fi and 3G baseband.

Connectivity through a mobile operator on the other hand is not a commodity. It is expensive and everytime Apple wants to include mobile connectivity they must start negotiating with the mobile operators. In the end, how well AT&T are doing at managing their network affects what price tag Apple can put on the iPhone or iPad.

But above all, Steve Jobs is keen on selling the “Apple experience (TM)”. Ever noticed how Macbooks don’t have any Intel Inside logo or other stickers that comes on other PC machines?

Now imagine Steve Jobs creating the iPhone. There is exactly one part of the iPhone experience that Apple can’t control: the connectivity – the most important part of any mobile device.

I have no inside info on the relationship between Apple and AT&T but I would assume that there is plenty of frustration on both parts. Apple, on one hand is getting a bad reputation when AT&T’s network lack coverage and AT&T is getting a bad reputation when the iPhone is having more dropped calls than other phones. Everything that comes with the iPhone is controlled by Apple up to the point where you select an AT&T subscription.

Being in control of a mobile operator would not only put an end to these issues – it would put Apple in a unique position. Imagine this: being able to come into any Apple store and buy any device bundled with 3G connectivity. You pay an upfront fee to Apple and then a monthly fee to Apple for the connectivity.

Apple can set up the data plan just as they like. How about the iPhone 32 GB coming with 32 GB of data every month? And while they’re at it they could make their own services like maps, App Store, iTunes and MobileMe not count towards your monthly quota.

But Apple can’t manage a mobile network!

I already hear the critisim: But Apple doesn’t know how to run a mobile network! Well, most operators don’t know that either. Last year Sprint as one of many operators outsourced the whole operations of their network.  Key quotes from the press release:

Sprint retains full ownership and control of its network assets, and solely owns network strategy and investment decisions.

[Outsourcing parnter] assumes responsibility for the day-to-day services, provisioning and maintenance for the Sprint-owned CDMA, iDEN and wireline networks.

(To give you full disclosure I should also mention that the outsourcing partner is Ericsson)

And Apple doesn’t even have to care about the messy parts about being a phone operator either. They could remove the voice and SMS services from the device and only sell a device with data connectivity*. Anyone that wants to make phone calls from an Apple device can install Skype or Truphone. The user experience from Skype on iPhone is considerably worse than the user experience from the built-in messaging and voice applications, but remember that OS4.0 is set to give Skype access to the same APIs as the native voice application is using.

With an outsourced network and a phone app managed by someone else, all Apple would have to worry about would be to tell their operations partner where next to expand the mobile data coverage for their devices.

* Except using the cellular network for E112 calls

And there’s more..

As an american you can’t really use your iPhone in Europe in good concusioness. It just costs too much without a local SIM-card. Apple could solve this problem by requiring that all operators that wants to sell Apple devices to sign a roaming agreement that dictates free roaming between the Apple US networks and the other operators network.

The economy

So the only question left to answer now is – which operator should they buy?

If I were Apple I would have the following list of requirements:

• GSM/UMTS/LTE based operator. So far Apple has not created any CDMA devices. Even Verizon is now betting on LTE instead of CDMA. If Apple wants to sign roaming agreements with operators in Europe and Asia they would need to have GSM/UMTS technology as this is what all operators in those regions use.

• Struggling operator. Apple only needs the actual spectrum and mobile phone license. To Apple it doesn’t matter if the operator already have tens of millions of subscribers, it just adds more weight.

• Nationwide coverage. Pretty self explanatory.

If we skip rural operators that leaves us with the following choices: MetroPCS, AT&T, Verizon and T-Mobile.

MetroPCS with a market cap of $3 bn looks like a strong candidate on paper but with no GSM network and an LTE network only in the planning stages they are only semi-interesting.

T-Mobile is wholly owned by T-Mobile Germany and unless Apple can convince the germans to exit the US market they seem like an unlikely candidate.

AT&T has a market capitalization of $143 bn and just seems to big to be broken up (market capitalization is the total value of all the company as judged by the stock market – buying a company would require paying a premium on the market cap).

Verizon then seems more likely but are still only planning to roll out an LTE network. That their stock has not been going all too well lately plays in Apple’s favor, but still, at a market cap of $77 bn you are looking a pretty hefty transaction.

Verizon wireless is roughly 50% of Verizon business and could be worth somewhere around $40 bn so that brings down the figure somewhat. But still, that would assume that Verizon wanted to be split up. Vodafone owns half of Verizon wireless which complicates things as Vodafone just as T-Mobile probably does not want to lose their stake in the US market. But still, Verizon owns 55% of the wireless business so that may not be a problem after all. Who knows, maybe Apple could use Vodafone to their advantage and buy Verizon Wireless together with Vodafone. They could then let Vodafone have all the existing subscribers under the Vodafone brand as Apple would only be looking to get access to the mobile data network.

Apple as a comparsion has a market cap of $200 bn and more than $40 bn in cash. Buying ANY mobile operator would be a huge transaction for Apple, given that their biggest transaction ever was buying NeXT for $0.4 bn. But then again, Steve Jobs was quoted saying “doing something big [with their cash] is not out of the question” and with some venture capital it would be doable. A bit crazy and game changing – yes. But then, isn’t that what Apple is all about?