Rivals vie for slice of lucrative iPhone market

WHETHER commuting on a bus or on a train, or just walking down the street, Apple's iPhone has become inescapable. But aside from its iconic styling and the vast range of software written to run on the device, the iPhone means big business. Apple sold 5.2 million iPhones in the three months to the end of June alone, including more than one million of the latest 3GS model within three days of its release.

While sales of Apple's iPod digital music player rose by 7 per cent year-on-year and its computer sales edged up 6 per cent, the iPhone posted a 626 per cent surge, helping the company net a record quarterly profit of $1.23 billion (771 million).

Now Orange and Vodafone want a slice of the pie, signing distribution deals with Apple to bring an end to rival O2's two-year monopoly in the UK. While Apple sells iPhones from its own shops – including the outlet on Glasgow's Buchanan Street – O2 has been the only network to carry the mobile phone, which can also take pictures, record video and play music.

With three network operators lining up to sell the device, who will be the winners and losers in the non-stop march of the iPhone?

Ofcom, the communications regulator, valued the UK mobile phone market at about 3.4bn in the fourth quarter of 2008, and so the prize on offer is massive. O2 certainly won't be happy to have lost the jewel from its crown.

"We estimate that the iPhone represents more than 100 per cent of O2 UK's growth, 6 per cent of subscribers, 14 per cent of service revenues and 13 per cent of earnings," explains Robin Bienenstock, an analyst at Bernstein. "In the UK, O2 has consistently taken contract share from competitors – in particular Vodafone – since its sole distribution of this iconic brand began."

Bienenstock says a 2003 survey showed that 60 per cent of UK consumers chose their handset first, and then the operator, when looking for a new phone. He says this trend was likely to be even higher for a phone with the "star power" of the iPhone. O2 benefited strongly from securing the first contract to sell the iPhone in the UK and currently has more than one million subscribers using the smartphone.

But now O2 has competition: the firm will go head-to-head with Orange this Christmas in an effort to get Santa to drop more iPhones into consumers' stockings.

Orange's iPhone deal comes after the mobile phone operator announced plans to merge its network with T-Mobile in a move that would oust O2 as the market leader in the UK. Orange and T-Mobile, currently the UK's third and fourth largest operators respectively, would have 28.4 million customers between them and claim a 37 per cent market share.

The deal, expected to be signed this month and completed next year, comes as mobile phone operators struggle in a highly competitive, and saturated, UK market.

The firms, which are in exclusive talks over the merger, promised better coverage and improved customer services, saying the deal would "bring substantial benefits" to customers.

With three operators now offering the iPhone, consumers should be looking to take advantage of competitive deals being launched to win their business. While handset prices are unlikely to change and tariffs will not be drastically cut, networks will be battling to come up with the best packages. For example, they will be offering more call minutes or texts as part of the monthly fee.

But O2 has an ace up its sleeve: the launch later this month of the Palm Pre. Running Linux's webOS software, the phone includes a large touchscreen and a sliding keyboard.

An O2 spokesman said it always knew its exclusive deal was for "a limited period of time".

"We're proud that we've been able to offer an exclusive iPhone deal to our 20 million customers for the past two years," he said. "We always knew that iPhone exclusivity was for a limited period of time, but our relationship with Apple continues and will be an ongoing success. We have over one million iPhone customers and they remain very important to us."

One of the biggest selling points for the iPhone has been its ease of use, with Apple's acolytes praising its operating system and the vast range of applications – or software – that are compatible with the phone.

Applications, or apps, for the iPhone range from mapping software to help users find streets or buildings, through to software for composing music.

Rival operating systems include the mobile version of Microsoft's all-conquering Windows system – one of the main selling points for which is its compatibility with the popular Word and Excel file formats – and Google's Android software.

In the short term, the loser could be Vodafone, which will start selling the iPhone next year but won't have the device in its shops in time for the Christmas rush. As Mark James, an analyst with Evolution Securities, put it: "Vodafone tells us it will allow people to pre-register – but I don't think an 'iPhoneOU' under the Christmas tree will cut the mustard."

Vittorio Colao, Vodafone's chief executive, recently confessed that losing out on the exclusive deal for the iPhone two years ago had "dented" his business.

Vodafone's star has been fading for a number of years. It has gone from running the UK's largest mobile phone network to being overtaken by O2. If the proposed merger between Orange and T-Mobile goes ahead then Vodafone will be relegated to third place, a sad indictment for an international group with its headquarters in the UK.

But the real winner looks like being Apple, with two more distributors for its iPhone in the UK. Adding Orange and Vodafone to the roster for the iPhone brings the UK into line with the distribution agreements operating across much of Europe – where more than one network supports the device – but AT&T remains the only network carrying the phone in the United States.