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iPhone - The W1nners' Club

The iPhone began its life with a request from Steve Jobs to Apple’s engineers to investigate the development of touchscreen devices and tablet computers (which in turn, came into existence later on as the iPad).

Mr. Jobs unveiled the iPhone at the Macworld convention on January 9th, 2007, to much media fanfare and the revolutionary device would go on to change the way people not only used their mobile phones, but conducted almost every area of their daily lives.

Verizon Wireless was the No. 2 U.S. cell phone carrier at the time of the iPhone’s launch and the company had passed on the opportunity to be the exclusive distributor of the iPhone, balking at Apple’s financial terms and other demands.

Amongst the various things that Apple sought in the deal was a percentage of monthly cell phone fees, a say in how and where the iPhone would be sold and direct control of the relationship with iPhone customers, according to Jim Gerace who was one of the Verizon Wireless Vice Presidents.

“We said no. We have nothing bad to say about the Apple iPhone. We just couldn’t reach a deal that was mutually beneficial.”

The Apple CEO had insisted that he maintain overall control of the iPhone’s distribution and whilst this was not necessarily a problem in terms of a potential Apple and Verizon store relationship, other retail heavyweights like Wal-Mart, Best Buy and other Verizon distributors could potentially have been left out of any exclusive arrangement.

“That would have put our own distribution partners at a disadvantage” (to Apple and Verizon stores), Gerace said.

Customer service was another potential area of dispute. If an iPhone experienced a malfunction, Apple wanted to maintain sole discretion over whether to repair or replace the phone in question.

“They would have been stepping in between us and our customers to the point where we would have almost had to take a back seat … on hardware and service support,” Gerace says.

Verizon’s decision to pull the plug on talks with Apple sent the tech firm into the waiting arms of Cingular, AT&T’s wireless division which went on to be the exclusive U.S. carrier for the iPhone. In return for five years of exclusivity, roughly 10% of iPhone sales in AT&T stores and a thin slice of Apple’s iTunes revenue, AT&T had granted Jobs an unprecedented amount of power – a level of influence that was at the time unheard of for manufacturers of mobile handsets.

AT&T had also been cajoled into spending millions of dollars to create a new feature known as visual voicemail and to reinvent the time-consuming in-store sign-up process. Jobs also managed to wrangle a unique revenue-sharing arrangement whereby roughly $10 a month of every iPhone customer’s AT&T bill ended up in the Apple coffers. On top of all that, Apple still retained complete control over the design process, manufacturing, and the marketing of the iPhone. Jobs had essentially achieved the unthinkable which was to squeeze a good deal out of one of the largest players in the then entrenched wireless industry.

About 40% of iPhone buyers became new AT&T customers when the device went on sale on June 29th 2007 and the iPhone managed to triple the carrier’s volume of data traffic in cities like New York and San Francisco.

AT&T’s strategy with regard to the iPhone required consumers to use their mobile phones increasingly for Web access. The voice business was fading fast and price wars had slashed margins down to ever thinning levels. iPhone technology and its ability to cater for the downloading of music and video and surfing the Internet at Wi-Fi speeds, would lead to an increase in the number of data customers. It was to be data and not voice where profits would be generated going forward.

Verizon was ultimately afraid that a deal with Apple would place power in the hands of the consumers, developers, and manufacturers, whilst the wireless networks would lose their historic control. AT&T however bet that the increased innovation that would be fostered as a result of bowing down to Steve Jobs would provide them with more valuable consumers who spend more time on devices, thus on networks and who would as a result rack up larger bills that generate more revenues.

In our opinion Verizon shouldn’t be too concerned with walking away from the initial offer from Apple. Our publisher Darcus White was once offered an Apple iPhone in the street for £200 ‘off the back of the lorry.’ The phone unfortunately turned out to be a fake Chinese import that he ended up using every day in the office as a paperweight.


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