Could Apple Solidify GSM in the US?

ThinkSe­cret reports that the much-rumored-about iPhone from Apple is com­ing and will be avail­able exclu­sively through Cin­gu­lar. If true, it would mean that Apple has decided to take a posi­tion on what phone stack it is will­ing to sup­port and has come out on the side of GSM.

Under­stand­ing the mobile landscape

In a lot of ways, the mobile phone land­scape in the United States could be con­sid­ered a case study into how some­times the free mar­ket fails end users. Let me explain: in the late 80s and early 90s, there were two dif­fer­ent types of tech­nolo­gies avail­able in the US for mobile phone deliv­ery: CDMA and TDMA. How­ever, due to ven­dor dif­fer­ences, the mar­ket frag­mented even fur­ther with Sprint PCS (now Sprint Nex­tel) adopt­ing a dif­fer­ent fla­vor of CDMA than Ver­i­zon. Mean­while, Nex­tel (now part of Sprint Nex­tel) adopted a pro­pri­etary tech­nol­ogy called iDen, which was based on TDMA while T-Mobile and Cin­gu­lar adopted GSM, a fla­vor of TDMA that has become the global stan­dard out­side of the US.

The bot­tom line on this whole acronym soup is that most mobile oper­a­tors in the United States can­not oper­ate on each other’s net­works because they are using dif­fer­ent tech­nolo­gies. This is why for­eign­ers vis­it­ing the US gen­er­ally lament about the poor qual­ity of the mobile expe­ri­ence in this coun­try and why the US is falling behind in the global mobile race. This is also why most Amer­i­can mobile phones don’t work abroad.

Because Cin­gu­lar and T-mobile used the same GSM tech­nol­ogy, they agreed to share their net­works, allow­ing their cus­tomers to use both net­works trans­par­ently, in a sit­u­a­tion sim­i­lar to the one one would wit­ness out­side of the US. The fact that they use GSM is also why a lot of cool phones make it to their net­works before they are avail­able to other providers. Ver­i­zon is now hedg­ing its bets by intro­duc­ing hybrid CDMA/GSM phones under the head­ing of Global Phone Ser­vice. To many out­side the US, it looks like GSM is already the win­ning for­mat in the stan­dards war.

Enters Apple

Tra­di­tion­ally, Apple has been known for its excep­tional indus­trial design (cre­at­ing hard­ware peo­ple lust after) and mar­ket­ing (also known as the real­ity dis­tor­tion field). How­ever, one of the other inter­est­ing fea­tures of Apple is the company’s will­ing­ness to take a stan­dard and move for­ward with it. For exam­ple, by rebrand­ing the 802.11b stan­dard into Air­port and later the 802.11g stan­dard into Air­port extreme, Apple pushed for­ward usage of wire­less net­work­ing. Apple was also the main­stream PC first com­pany to decide to drop disk dri­ves being installed by default on their machines, prompt­ing the rest of the indus­try to fol­low suit. The recent removal of modems from their new lap­top lines does, in my view, har­bor the death of modems being built into com­put­ers by default.

Mean­while, the recent suc­cess of the iPod eco-system has got­ten many ven­dors to rethink their strat­egy when it comes to the portable media player.Microsoft is now cre­at­ing a closed sys­tem called Zune, fol­low­ing the Apple iPod + iTunes strat­egy and San­disk and Real Net­works are work­ing on a sim­i­lar walled gar­den approach. These trends seem to be defy­ing com­mon wis­dom as to the pro­gres­sion of mar­kets, whereas mar­kets would gen­er­ally tend towards standardization.

But what does all this have to do with mobile, you might ask?

Well, the ques­tion here is how suc­cess­ful Apple can be. If it cre­ates a prod­uct that is so com­pelling that users will be inter­ested in switch­ing car­rier for it, Apple may actu­ally tip the scale on adop­tion of GSM in the United States. Going back to the ThinkSe­cret piece

insid­ers say Apple is inter­nally esti­mat­ing that ship­ments of the iPhone will top a stag­ger­ing 25 mil­lion in 2007 alone

Accord­ing to Gart­ner, roughly 700 mil­lion phones will be sold this year so it’s not improb­a­ble that Apple would try to sell 25 mil­lion, which would gar­ner it a mar­ket­share of 3 per­cent. But the over­all mar­ket num­bers may be mis­lead­ing as many of those mobile phones are on the lower end of the price range, aim­ing at the devel­op­ing world, a mar­ket Apple is not cur­rent going after. The num­bers get more inter­est­ing when one con­sid­ers sin­gle oper­a­tors: for exam­ple, Cin­gu­lar is the largest US oper­a­tor with 56 mil­lion sub­scribers. If Apple were to work its magic here, Cin­gu­lar could see any­where up to a 10% growth or more in their sub­scriber base just on that one prod­uct. These users would move to a GSM net­work and away from CDMA technology.

From there, two pos­si­ble sce­nar­ios could evolve: Apple could decide to license CDMA tech­nol­ogy from Quall­com (CDMA is a pro­pri­etary tech­nol­ogy so every ven­dor has to pay Quall­com for its use) or say that they are happy in the GSM-only mar­ket. If they were to do the lat­ter, they could poten­tially tip the scale in a life-long fight in the US, mak­ing GSM the standard.

But why is Apple inter­ested in mobile?

When con­sid­er­ing rumors about an iPhone, one might won­der the inter­est Apple may have in that mar­ket­place. After all, it’s not one that the com­pany has ever entered and there doesn’t seem to be much over­lap with their cur­rent exist­ing products.

How­ever, one has to look at the nat­ural pro­gres­sion of the music busi­ness to under­stand why Apple would be inter­ested in this mar­ket seg­ment. While its cur­rent iTunes store sells roughly US$2 mil­lion a week of tracks, the ring­tone mar­ket is much larger and the mar­gins are sup­pos­edly bet­ter. So Apple is get­ting into the mar­ket for two pos­si­ble rea­sons: first, it needs to pro­tect the mar­ket it’s cre­ated with the iPod and sees mobile as the next evo­lu­tion and a poten­tial com­peti­tor to their sin­gle use device. Sec­ond, the com­pany sees a mar­ket it wants to dom­i­nate. So that adds up to a new phone

But can Apple tip the scale on GSM?

As it stands, GSM in the US is sup­ported by 2 of the big four oper­a­tors. If Apple is suc­cess­ful, one could see defec­tion from the other two. It’s not going to be an overnight kind of thing but, much like Apple has forced its com­peti­tors in the music field to recon­sider their posi­tion, it could hap­pen in the com­mu­ni­ca­tion field.

Of course, all this is pred­i­cated on those stan­dards still being rel­e­vant fur­ther down the line. If phones move towards more of a VoIP model, as I sus­pect will hap­pen over the long run, this may all be irrel­e­vant but, for the time being, a major shift of that kind could have tremen­dous impact in the tele­com world.