Apple Music Services and Additional iPhone Models

Implications: Apple considering music alternatives could lead to additional iPhone models differentiated by bundled music packages, mobile Internet applications, and exclusive carrier offerings. 

Analysis: Apple’s evaluation of alternative music services is a challenge for positioning the iPhone product.  The trade-offs could be music revenues, iPhone sales and device margins.  Also, increased retail distribution of music offerings could impact winning exclusive carrier deals for mobile Internet applications.  Apple has the huge base of iTunes customers and iPod owners to exploit for upgrades to the iPhone.  Apple also has the iPod retail distribution to extend beyond the dependency on carrier store locations for the iPhone.  Apple’s only recent carrier agreements have been expanding the previous T-Mobile and O2 contracts to include Austria and Ireland.  Apple gained distribution to 3.6 million subscribers of T-Mobile and O2 in those countries. 
Apple’s CFO in early March noted that the unlocking issue of the iPhone indicates “unprecedented demand” and a “positive indicator of future demand.”   With the iPod sales only increasing last year compared to 50% the previous year, the iPhone could re-ignite Apple music devices with subscription offers or built-in bundles.  But iPods start at a $49 price point, and the iPhone is unlikely to be able to increase the price and compete with a bundled-in package like Nokia’s “Comes with Music” for a year of unlimited music through the Universal Music Group and EMI.  And Sony Ericsson recently indicated the price softening for mid to high-priced handsets and lowered the expectations with average price dropping from $196 to $189.
The significant factor is Apple’s revenue-sharing contracts with carriers for data usage and content.  With a music subscriptions and device bundles, Apple can sell more iPhones and increase iTunes revenue.  However,  Apple might forego the opportunity for the iPhone to identify with the emerging mobile Internet applications for messaging, search and navigation.  Apple’s solution could be a product family of iPhones differentiated by the price point, music offerings, and Internet features.  Certain models could be exclusive with a contracted provider to generate data usage revenue.  An example is the content provider Handango developing an exclusive Pink Pearl model from RIM for the UK’s Carphone Warehouse with its 2400 stores in 11 markets.  Handango is customizing and packaging the content to directly merchandise at retailers.  With differentiated iPhone models, Apple can exploit the dominance of iPod music and also develop compelling Internet applications for exclusive distribution.