Analysis: Lots of questions ahead of European iPhone launch

While carriers might have to make concessions, so could Apple

Although few details are known about the anticipated launch of the iPhone in Europe, analysts agree that Apple Inc. could be forced to pursue a different distribution strategy than it has in the U.S. and may even tweak a technical feature or two.

Discussion of the iPhone's arrival in Europe intensified following a report in the Financial Times about a deal between Apple and mobile phone operators in three key European markets.

Germany's T-Mobile Deutschland GmbH, France's Orange SA and the U.K.'s O2 (U.K.) Ltd. are reported to have signed exclusive deals to sell the iPhone in their respective markets, with an announcement expected as early as next week, according to the report, which cited unnamed sources.

As part of the deal, the operators agreed to give Apple 10% of the revenue they generate from the sale of voice and data services for the device, the report said.

All three operators declined to comment. Other potential partners, including Telefonica SA and Telecom Italia SpA, are keeping mum as well.

Vodafone Group PLC, Europe's largest mobile phone company, diplomatically pushed the ball into Apple's court. "We really don't have a lot to say, I'm afraid," a company spokesman said. "This is really a question for Apple."

Apple has not provided details about its iPhone strategy in Europe, other than to say it plans to launch the device later this year.

Some analysts agreed there won't be one deal but several and that each could vary, depending on market conditions.

"I don't expect to see a duplication of the highly exclusive, multiyear commitment that AT&T won in the U.S.," said Emma Mohr-McClune, an analyst at Current Analysis Inc.

Because no single operator covers Europe entirely, Apple will need to work with several, according to Mohr-McClune. "We'll see some exclusivity, but it will be short-term, like months not years," she said. "I see a parallel to YouTube, which signed exclusive agreements with some operators to sell its mobile service for a limited period of time."

Analysts also expect European operators to bow to Apple demands for a slice of the revenue. "This is the price that operators in Europe will have to pay to benefit from selling a product with a powerful brand," said Niek van Veen, an analyst at Forrester Research Inc.

Operators could be forced to meet additional demands as well, analysts said. To win the contract in the U.S., AT&T Inc. had to make numerous concessions in pricing and functions as well as changes in its network, such as the capability to support visual voice mail, which pushes voice messages directly to handsets, according to Ben Wood, director of consultancy CCS Insight in London.

"It's that extra 10% operators are willing to give that will make all the difference," he said. "In return, they'll have an opportunity to sell to a potentially very lucrative target group of consumers."

Wood warned that Apple needs to have total control over pricing, marketing and distribution of the versatile iPhone, which besides serving as a telephone, allows users to surf the Web, take and store pictures, and listen to music. If the company doesn't, it could have "a dramatically negative impact" on other parts of its business, in particular the iPod music player, he said.

What concessions, if any, that Apple might make to European operators is unclear, but there could be a couple, among them a data transmission technology faster than the currently supported EDGE (Enhanced Data for GSM Evolution) system and visual voice mail.

Higher-speed Web surfing on mobile phones is an issue in Europe, according to Mohr-McClune. Operators in the region have been trying to stir more interest in mobile data service by offering, among other things, faster transmission speeds. While most operators have deployed 3G (third-generation) networks, several have upped 3G speeds one notch higher with HSPA (High-Speed Packet Access).

Last month, on a conference call to discuss the company's quarterly results, Vodafone CEO Arun Sarin expressed concern about the lack of 3G connectivity in the iPhone.

Yet some analysts, including Wood, don't view data transmission as key criteria for the first-generation iPhone that Apple launches in Europe. The region already has some EDGE coverage, he said, and a proliferation of Wi-Fi networks, a technology also supported by the iPhone.

"To be honest, Apple is a lifestyle choice for many consumers," Wood said. "I think a lot of people just want a cool phone, and that's what the iPhone is, even if it has some limitations."

Copyright © 2007 IDG Communications, Inc.

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