Apple Is Dialing Up IPhone Debate With Exclusive Deals

SAN FRANCISCO -(Dow Jones)- Apple Inc.'s (AAPL) iPhone may be new to Europe, but concerns about the product's exclusive distribution contracts aren't.
Investors and Wall Street analysts have long pointed to how Apple is cloistering the red-hot gadget by striking lucrative deals to give a single operator per country the exclusive rights to sell it.
Now, recent iPhone developments in France and Germany are providing fresh evidence of the longer-term downside of Apple's exclusive deals, and the conflict between preserving the riches Apple gets by striking them and the sales gains from breaking with that strategy.
Even with its exclusive sales strategy, Apple has sold nearly 2 million iPhones since its debut in late June, according to published figures. That's despite limiting factors such as a relatively steep price of around $400 and a required multiple-year service contract.
But over the last few weeks, thousands in Germany and France have purchased iPhones that work on virtually any cell network, even though they couldn't take advantage of exclusive iPhone services the operators created and the iPhones cost four times what they would normally with the preferred service contract.
The brisk business caught people's attention. In France, 20% of iPhones sold were unlocked despite the exorbitant premium. To some, that's suggestive of how Apple's missing out on a much bigger payday by not reaching deals with multiple carriers in each country or selling a more reasonably priced unlocked iPhone.
"From a distribution standpoint, Apple clearly benefits long-term from selling phones that aren't locked to a single carrier's network," said Trip Chowdhry, an analyst with Global Equities Research.
Apple declined to comment for this story.
An Argument Grows Louder
Concerns about Apple's iPhone sales strategy have been around since the iPhone first went on sale in the U.S. through AT&T Inc. (T) on an exclusive basis.
In the U.S., AT&T charges $400 for the phone and requires buyers to sign a two-year service contract, with fees starting at $60 a month.
Apple also has reached exclusive deals with T-Mobile in Germany and France Telecom (FTE), and is expected to reach exclusive deals with operators in Russia and China.
As each deal surfaces, critics contend Apple is better off making iPhone available to as many people as possible. Rather than limit the potential audience through exclusive arrangements, these voices say Apple needs to expand distribution, given how cellphone industry giants are fighting back with cellphones of their own to counter the iPhone.
Apple's closed system also runs counter to an industry that's slowly opening itself up, as exemplified recently by Google Inc.'s (GOOG) open cellphone programming and a move by Verizon Wireless to open its networks to unlocked phones. Verizon Wireless is a venture between New York telecommunications company Verizon Communications Inc. (VZ) and U.K. wireless carrier Vodafone Group PLC (VOD).
Of late, these voices have grown more numerous and louder. They point out that in Germany, residents took advantage of a rare opportunity over the last three weeks to buy an iPhone that is free to use on most other cellphone operators' networks. The unlocked version was the result of a decision by a Hamburg court in early November. Sales were healthy, despite the unlocked iPhone's $1,465 price tag, which is more than four times what it would cost with a two-year service contract. On Tuesday, after the court reversed itself, things were back to normal, and the unlocked iPhone was pulled from the market.
Meanwhile, telecommunications operator France Telecom reported Wednesday that nearly a fifth of all the iPhones it has sold so far were of the unlocked variety. French law requires operators sell unlocked versions of cellphones.
Earlier this year, AT&T said some 15% of those that purchased an iPhone in the first three months of sales didn't buy an AT&T service contract, suggesting their intention to unlock it and use it on another network.
"Apple could blow away competitors like Nokia and Sony-Ericsson for years to come if they were not tied down to these exclusive deals," said Mike Demmick of the London-based cellphone market research firm Dialed-In.
Apple's Sticking With Strategy
Despite the mounting evidence, Apple and its carrier partners have been doing everything to fight anything remotely threatening these exclusive deals. These exclusive arrangements represent an extraordinary revenue opportunity for a cellphone maker. To win exclusive sales rights, carriers are paying Apple up to 40%, or more than twice the industry average, of what their customers pay for the devices and their service contracts, according to various estimates from Wall Street analysts.
It appears from various estimates, not from Apple, that should Apple hit its goal of selling 10 million by the end of 2008, the exclusive deals will generate about $2 billion, or 6% of Apple's expected 2008 sales.
Moreover, there are arguments against buying an unlocked phone. Certain iPhone features might be missed out on in order to make the phone compatible to all services. Meanwhile, Apple's exclusive operator partners have created shortcuts on their network that other, more universal phones can't incorporate.
It seems, in the short term, nothing is likely to derail iPhone sales. For now, the iPhone is Apple's fastest seller ever, no easy feat considering Apple makes and sells the iPod digital media player. But despite the short-term positives, there's a larger concern about Apple potentially blowing a longer- term opportunity.
"I can't understand why they are doing this," Demmick said.