iPhone 5 – The contract killer?

iPhone 5 – The contract killer? Dominic Smith reviews the launch of the iPhone 5 and finds that mobile operators should have great cause for concern at the unbundling of the device from the network service.

The iPhone 5 finally went on sale last week on the back of a tidal wave of media publicity and public expectation. Walking through Covent Garden on Friday morning I passed the Apple store and witnessed first-hand the throng of people waiting to get their hands on the latest generation of Apple’s iconic device.

Eleven months ago it was the iPhone 4S that hit the shops and not the iPhone 5 that the world expected. Back then I wrote about software being the key differentiator, not the hardware, and it’s been software that’s hit the headlines following the iPhone 5 launch but for all the wrong reasons. Apple’s decision to remove all things Google from its devices has resulted in a half-baked mapping application replacing the perfectly functional Google Maps and making a mockery of the new product launch.

There has already been widespread coverage of a bridge over the river Thames in London that resembles a rollercoaster, Premiership football clubs in the wrong location, large areas obscured by cloud, and even some towns that are missing completely. The list of gaffes goes on and on. Finding faults in Apple Maps has seemingly turned into an international sport, with people around the world taking to social media to share screenshots of the glaring mistakes.
However, though this particular application appears to be riddled with problems, there is still no stopping Apple when it comes to selling the iPhone 5 by the truckload. Latest figures show that 5 million devices have been sold in the first weekend alone, compared with 4 million units for the first weekend of the iPhone 4S.

The new device does feature a number of hardware changes, including a faster processor (of course), a larger screen (who’s copying who now?) and a new ‘Lightning’ connector which makes old cables and accessories redundant, to name just a few. The iPhone 5 also supports LTE, but only in a limited set of frequency bands, which means it will work in some parts of the world but not others. Though I don’t think LTE will necessarily live up to the hype, this industry relies on standardisation and inter-operability, but once again Apple is ploughing its own technology furrow and risks fragmenting the industry as a result.

It strikes me that this is more the behaviour of a consumer electronics giant, than a member of the telecoms industry. In some ways it’s like the old battle between Betamax and VHS video, except this time there will be no outright winner in the technology stakes. This behaviour is also borne out by the hordes of people I saw on Friday morning in Covent Garden, where there were two places to queue outside the Apple Store – one for SIM-free purchases; and the other for iPhone 5 purchases on contract. However, in the time I was there the contract queue was completely empty and you could walk straight to the front to make your purchase.

Public appetite for these devices is such that the majority of people appear to be buying the new iPhone without contract. Hypnotised by the Apple marketing machine, they are parting with between £529 and £699 (UK prices) of their hard earned cash in a time of supposed austerity. Truly incredible.

I take my hat off to Apple for their extraordinary marketing that means they don’t have to sell their devices; people simply queue up in droves to buy them at almost any price. However, what is very worrying for the mobile operators is that customers now place such a value on the device and not the connectivity or service. Is this yet another nail in the coffin of the traditional mobile operator business model?

Whilst operators have been gradually extending their default contract periods to 24 months in a desperate attempt to lock-in their subscribers, customers are voting with their feet and buying devices independently to use as they choose. This could be on pay as you go or SIM-only contracts, or even just a new handset on an existing contract.

I am yet to see an official breakdown of iPhone 5 sales between SIM-free and contract, however if this London snapshot is reflective of the general buying pattern worldwide then it signals further problems for mobile operators on the road ahead. 

It means that the majority of iPhone 5s will not be on a specific iPhone 5 tariff, so attempts to lure customers away from all you can eat packages and free Wi-Fi onto specialist LTE plans may not be as successful as they hope or expect. It also further devalues the operator brand as consumers grow increasingly loyal to the device manufacturers and over-the-top (OTT) service providers, and the network operator becomes a simple utility that can be changed on a whim.