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iPad 2: Apple forced to make carrier concessions

Cupertino vulnerable in the face of Android/LTE

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Apple has been a blessing and a curse for cellcos. When it launched the first iPhone, the terms it demanded in return for operator exclusives were onerous and highlighted how a strong device brand would trump that of a carrier every time. However, as the world started to shift towards open access, its iPhone deals hugely strengthened the old notions of carrier lock-in, at least for those who nabbed exclusives.

But Apple clearly held the balance of power, and started to experiment with more disruptive ideas that would further devalue the cellco's role, such as non-carrier activation. But the launch of iPad 2 reveals a move in the opposite direction, and some signs of Apple's new vulnerability. With exclusives virtually a thing of the past, and the iPhone facing credible competition from a host of Android superphones, the iPad is in a category where Apple can truly shine. However, the tablet may have a shorter day in the sun than its handset stablemate, and Apple knows that, this time around, building on the early momentum will require concessions to the operators.

Placating the carriers

So, on one hand we have disruptive Apple. On the Q1 earnings call, acting CEO Tim Cook said the current structure of handset sales was "poorly constructed", and that Apple would try to "innovate" and provide "clever" solutions to the market. Several projects have pointed to a world where iPhones and iPads would be easily transferable between networks, and the customer relationship would be with Apple – not the cellco. A dual-mode phone or tablet that could span GSM and CDMA, using a chip such as Qualcomm's Gobi, for instance; the idea for an integrated SIM card which could be remotely activated by Apple, not the operator, as floated in Europe last year – even an Apple MVNO.

All these would break down the ties between the mobile consumer and the cellco – but none of them showed up in the iPad 2. Indeed, in some markets the new tablet made more nods to the operators' interests than the first one. Apple did produce models for both Verizon and AT&T, unsurprisingly in light of the iPhone shift, but the lack of a Gobi-type feature means these remain locked into their carriers.

More seriously, in Canada – where users could previously switch between the cellcos with a simple microSIM swap – there are now specific models tied to each of the three supporting operators. This is likely to be repeated in other markets, especially as cellcos, particularly in Europe, start to subsidise iPads and compete to offer special deals, cellphone-style.

In theory tablets are an easier place to test new business models and channels than phones, because they are a new category and many do not even have a cellular connection. But the operators remain the single largest channel for wireless devices, and they plan to leverage this position to offer a host of non-phone devices too. As such, even a brand with the consumer power of Apple cannot afford to upset them too much, and its new friendliness indicates its vulnerability in the face of Android rivalry.

The lack of GSM/CDMA roaming also means Verizon Wireless and AT&T will have another battleground where they will need to compete on the basis of their claimed network qualities. As with smartphones, Verizon is hobbled on the Apple front because there is no LTE support, so it cannot promote its showcase data network on the iPad. That leaves it on a more level playing field – EV-DO Rev B versus AT&T's HSPA – though as with the iPhone, Apple remains firmly behind the curve on connectivity, and is not even supporting AT&T‟s HSPA+.

No 4G yet

This could be a bad mistake on Apple's part. Increasingly, consumers are opting for devices on the basis of network quality (perceived or real) as well as product features and data speeds/fees. That means the "4G" label that Verizon uses for LTE and AT&T for HSPA+ does carry consumer weight, because the carriers have successfully associated that term, even in the minds of non-technical people, with better data rates and reliability. If they start to innovate on pricing too, for instance with multi-device data plans, it really will become de rigeur for the most desirable gadgets to sport "4G".

And the carriers need to justify their investment in the more efficient networks by moving users swiftly towards them. The lack of LTE may make Verizon's active support for the iPad less enthusiastic than its rival's. Though Verizon Wireless CEO Daniel Mead, in a recent interview, was positive about Apple's 4G plans, few share his confidence. He told The Wall Street Journal: "You'll see more coming from Apple on LTE. They understand the value proposition of LTE and I feel very confident that they are going to be a part of it."

But few believe that the upcoming "iPhone 5" will be a 4G handset (though it may have HSPA+). Sam Greenholtz of Telecom Pragmatics is one of the analysts who thinks we will have to wait for "iPhone 6" to get LTE, with launch in mid-2012. "I don't think Apple saw this level of hardware competition when they locked in iPhone 5 specs," commented Tero Kuittinen of MKM Partners, talking to The Street.

The same applies to the iPad, and once LTE tablets are available, Verizon will want to encourage as many high value users as possible to migrate to 4G, to gain efficiencies for itself and to keep them loyal with a superior data experience. With no 4G Apple products in sight until at least 2012, that should see Verizon stepping up the efforts behind its Android/LTE phones and tablets. This factor alone makes the Motorola Xoom, which will be upgradeable to LTE soon, the most dangerous rival to the iPad 2 in the US, and goes some way to justify the high price tag.

Motorola Mobility CEO Sanjay Jha has consistently argued that the $799 cost, ahead of $729 for a comparable iPad, is justified by the support for the speed and superior experience of LTE. These arguments carry some weight, even though Xoom is described by many reviewers as very much a first generation product, with attention needed to areas like browser performance. And Android/LTE tablets from HTC and Samsung can also be expected to steal a lot of Verizon thunder from the iPad around midyear.

iPad 2 specs

Back to the iPad 2 itself. Its specs were no surprise, though the appearance of ailing CEO Steve Jobs to introduce it was. This prompted a standing ovation from the audience, many of whom still find it hard to imagine Apple without Jobs banging the drum.

The other mild surprise was that the new device will ship very quickly in the US, on 11 March, so clearly Apple has addressed the much reported production delays. The hasty release indicates that the firm will look to capitalise on the huge headstart enjoyed by the first iPad, before Android rivals such as Xoom start to gain critical mass. For once, Apple is fighting on price, with the iPads coming in below Xoom; some had thought the firm might even reduce prices for the second generation to capitalise on that, but in fact it kept them the same, ranging from $499 for the Wi-Fi only, 16GB model to $829 for 64GB and 3G/Wi-Fi.

International launch will also be far faster than usually seen at Apple, with 26 countries getting the tablet on 25 March, including Japan, several European markets and Australia.

The new tablet comes with the latest release of the operating system, iOS 4.3, and Jobs pointed out that Apple has now paid out over $2bn to iOS developers, and that the majority of the firm's revenues now come from "post-PC products" (iPhone, iPod touch, iPod and iPad). The main improvement in 4.3 is a major performance boost for the Safari browser, Apple having migrated the Nitro JavaScript engine from Mac OS X to iOS. The new OS release will also enable iTunes home sharing via Wi-Fi.

In hardware terms, the most interesting feature is the A5 dual-core processor, keeping the iPad on the cutting edge in terms of silicon – dual-core Android tablets are just starting to come to market. The chip is the A5, a successor to the A4, which is custom-designed for Apple by Samsung and similar to that firm's Hummingbird range. The A5 claims up to twice the performance of the A4, and is nine times faster in graphics performance.

The new product is far thinner than its predecessor, at 0.34-inches, compared to 0.5-inches, and lighter, at 1.3 pounds rather than 1.5. Another accessory is HDMI video output, via a dock accessory cable, priced at $39. The iPad 2 also adds both front- and rear-facing cameras and FaceTime video chat, plus a Wi-Fi hotspot.

Copyright © 2011, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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