Apple takes the operator's shilling

Apple's new iPhone is faster, better and cheaper than its predecessor, but the low cost is achieved by taking a subsidy from the network operator: a business model that Apple rejected last time, and one that will drive the unlockers quickly out of business.

Most mobile phones are sold to operators and retailers - Nokia's biggest UK customer is Carphone Warehouse - who then sell those devices on to customers as a loss-leader, to get them signed up to long contracts. With the iPhone Apple rejected this model, believing the device was so pretty it could be sold direct to customers, at the full price.

The company has had some success, but not as much as it would have liked. After all, you have to be a lot better than the competition when it has a price label marked "free".

This time around the iPhone is going to be heavily subsidised, up to 100 per cent in the UK - customers will be able to get hold of the shiny handset for free if they are prepared to sign up to a big enough contract. But the change also reflects a shift in the balance of power between the operator, the customer, and the manufacturer.

Apple will have to start selling the iPhone to O2, rather than to the end customers, just as all the other manufacturers do. No end customer ever asked for a phone with a camera or Bluetooth. Operators wanted those features to push MMS and headset sales respectively, and as operators are paying for the handsets they get to dictate the features.

Most operators will have a list of features, each of which is worth a specific amount of subsidy based on the revenue that feature will generate. One-button MMS, for example, cuts the price significantly, while a music player isn't really of interest unless it's linked to the operator's download service.

That subsidy will be clawed back over the length of the contract, just like any other mobile phone handset, so there'll be no buying of handsets just for unlocking – the contract will be signed in-store. In the US AT&T allows customers to buy out of their contracts for $211. This puts the cost of the phone back up to $411, which those not interested in the AT&T network might be willing to pay.

Exclusivity is worth a considerable amount, and the iPhone brand will ensure that for the moment O2 will be willing to pay over the odds to have the handset on its network alone. But in a year or two, when customers start looking to replace their handsets or switch networks Apple is going to need a product that will appeal to their new customer: the network operators, rather than the man on the street. ®