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  The marriage of music and mobility.
How Apple can rock the wireless
market.

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There have been entries into the market in the past- Sony made phone for Japan's NTT DoCoMo in 2000. Sony's failed experience in the cell phone business needs to be taken into consideration for any consumer electronics maker - including Apple. Sony failed to make an impact in the music player/phone, and in mid-2001 DoCoMo recalled 40,000 of the handsets due to software problems. Another Japanese operator thereafter recalled more than 500,000 Sony Internet-capable handsets. Sony thereafter entered a joint venture with established telecom player Ericsson to gain much-needed wireless expertise. The alliance, Sony Ericsson, today is the No. 4 maker of wireless phones, after Nokia, Motorola and Samsung.

Handset hardware has enhanced entertainment functions, designed with music playback added storage capacity. Sony Ericsson sold 15.5 million Walkman music phones worldwide in the 14 months ended Sept. 2006. That does not mean a computer maker simply can install some radios, receivers and vocoders (short for "voice encoders" that translates voice sounds for digital transmission) and turn any old device into a cell phone. Several makers of personal digital assistants tried to do just that in the late 90s and early part of the decade, with disastrous results. The voice quality wasn't very good, and the PDA makers discovered what most cell phone users already know: Talking on the phone a lot is a big drain on batteries. Heavy voice users found they couldn't access their calendars or address books, the very things they needed from their PDAs.

There are many good reasons why even the most sophisticated consumer electronics companies team up with wireless specialists when it comes to making phones. Bang & Olafson's Serene, for example, is produced in conjunction with Samsung, which had its own challenging transition from consumer electronics to cellphones.

So what do Bang & Olafson and Sony get from their wireless partners? Help with the logistics of getting wireless devices to interconnect with the hundreds of phone networks around the world. Each phone company network is engineered a little differently, and in order for a phone to work on that network, it must go through trials and tests. Then there are all the special extras a phone company might ask of the phone maker: a special logo on the device, special user interface software, etc. In addition, a global infrastructure, the ability to do localization, and language variants are required to deliver value. There aren't that many players that can do that.

The key to how successful the iPod phone will be will depend on how Apple markets them. It is possible that the iPod phone will be introduced with an Apple branded wireless service with a wholesale purchase of network service from a carrier like Cingular. In such a relationship Apple would become a mobile virtual network operator or MVNO and reseller of the service under the Apple brand, along with its device- an expensive and risky operation. However, such a strategy would give Apple complete control of the user experience. It may involve operations like billing and customer service. Its historical model of generating sales of hardware would be difficult to replicate in an industry where markets are driven by discounts of hardware and higher margins from selling the wireless service. Another option would be for Apple to sell only the hardware- allowing customers to get their service from a wireless carrier- a business prevalent outside the US. The MVNO model would limit Apple's base of potential users, and may thrust it into the role of phone operator. The most successful MVNOs in the U.S. are companies such as Virgin Mobile and Tracfone, which focus on the pre-paid market. Virgin targets teens who don't have credit histories needed to get traditional cellular plans, and Tracfone similarly targets credit-challenged or thrifty users.

The track record for MVNOs trying to address the high end of the market is not so good. Disney shut down its ESPN mobile operations earlier this year, in part, because consumers didn't want to pay a premium price for handsets and services that weren't all that different from offerings from Verizon, Sprint or Cingular. The strategic challenge would be for Apple to remain a consumer electronics company without becoming a phone company or reseller of air time, with all its customer-service headaches. No matter how Apple enters the wireless market, it is sure to make a big splash. One of the big questions is whether the company can learn to navigate the industry alone, or, if like Sony before it, Apple will end up seeking a wireless partner.

                                                                                                

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