Original URL: http://www.theregister.co.uk/2007/09/19/uk_iphone_at_last/

The iPhone arrives, but is O2 being taken for a ride?

'You want... how much?'

By Bill Ray

Posted in Mobile, 19th September 2007 12:34 GMT

Analysis Yesterday Apple announced that O2 would have the exclusive rights to their iPhone in the UK, with punters paying £279 for the phone and signing up to an 18-month contract.

But how much is O2 paying for its five-year exclusive, and can it really make any money out of it?

Estimates of how much O2 is going to share with Apple vary between ten per cent (the Financial Times) and 40 per cent (The Guardian). Then again, it's perfectly possible for both figures to be correct: the smaller cut being given to Apple when an existing O2 customers gets an iPhone, the larger figure used when a punter changes networks just to get thier hands on an iPhone.

AT&T pays $3 a month when one of its customers takes up an iPhone, but $11 a month when someone switches, so a similar arrangement would be unsurprising for O2.

O2's ARPU (Average Revenue Per User) is around £23, so 10 per cent of that would be £2.30 while 40 per cent comes to £9.20 - not incomparable with what AT&T is paying, if a little higher. Still, that would be in keeping with the "high cost of doing business here", as Mr. Jobs put it when justifying the price of the handset.

It also matches nicely the additional cost of the £35 a month iPhone tariff, as reader Dan put it:

But 200 minutes and 200 texts usually cost £25 a month on O2...

Seems like the end user is paying the 40 per cent revenue that goes to Apple.

Of course the un-metered data tariff will affect ARPU, especially as O2 expects the majority of access to come from Wi-Fi hotspots where fair-use capping is unlikely.

Around 30 per cent of O2's ARPU comes from data, but only 2.6 per cent of that is data as we would understand it - the rest is SMS traffic which is unlikely to change significantly for iPhone users (though the inability to send to multiple recipients, or type messages one-handed, might reduce traffic). So O2 stands to lose at least 60 pence in data charges per month, per iPhone user.

The iPhone doesn't support MMS (Multimedia Messaging Service), but O2 users only send an average of half a message a month, so assuming the iPhone user would also have received half an MMS per month, that's another 45 pence off the ARPU.

The real money-spinners in mobile data come from games, ringtones and graphics which users download and pay for on their mobile bill, but the iPhone won't support any of those. While O2 is expected to share its call revenue with Apple, you won't find O2 pocketing a percentage of the iTunes take.

As reader Andrew Fenton puts it:

So that's 279, then [£]35*18 [months], for a total of over 900 quid.

For that you could get yourself a Nokia N95 on a 12 month Flext35 contract, with double the included minutes, and unlimited 1.4mbit 3.5G.

What's more, you'd still have enough left to buy an 8GB iPod Nano. And an entire PC.

You'd need to spend another 87 quid on a year's access to Wi-Fi network The Cloud too, if you were trying to emulate the iPhone contract.

We don't know how much O2 is paying The Cloud for that access, but it's probably not a lot as it makes nice publicity for The Cloud, and they'll be hoping to sign up laptop users on the basis of their iPhone experience.

O2 has had to start rolling out EDGE onto its network, and are claiming they'll have 30 per cent of their network supporting the 2.5G technology by the November 9 launch.

Given the internal opposition to EDGE within O2 - understandable when it has spent more than £4bn on a better technology - it's remarkable it's managed any deployment at all. Don't expect EDGE to spread much beyond London - it's only there because O2 would be a laughing stock if it hadn't been seen to be making the attempt, and it will be quietly killed off as soon as the opportunity presents itself.

So it would seem that the high cost of the iPhone tariffs covers the percentage paid to Apple, while money which would normally go towards subsidising the handset will instead pay for The Cloud Wi-Fi access and a limited deployment of EDGE around the smoke. O2 won't make any money on games or ringtones, but they aren't losing anything here either, and when their own customers switch to an iPhone tariff they stand to make a few quid too.

Apple worked very hard to get the revenue split they wanted. Orange has a better EDGE network in the UK, and could have offered a cross-company deployment, but wouldn't agree to Apple's demands.

With this morning's announcement that T-Mobile has the exclusive German rights, at €399, it seems likely an announcement from Orange in France is imminent, unless they are waiting for the 3G version.

Back in January your reporter confidently predicted that no European operator would take on the iPhone without 3G, as to do so would be a slap to their investors who ponied up billions on the 3G license and infrastructure. I stand corrected, the Apple magic is stronger than I imagined.

For O2 this deal actually looks like quite a good thing, assuming the iPhone isn't too successful: they wouldn't want to risk their content-sales revenue. Their risk is minimal, and the publicity has been considerable - as long as Apple don't get too big for their boots then everyone can be a winner.®