Why Is the iPhone on a Single Network?

BY busadmin  July 7, 2009 at 10:18 AM EST

iPhones; Ricky Romero via Flickr

Robert Frank: Why has Apple restricted its popular iPhone to just a single wireless network in both the United States and the United Kingdom?

Apple was shrewd to take this step. When it first hit the market in the United States several years ago, the iPhone offered capabilities that no other smart phone could match. Its technological edge is somewhat smaller now, but remains significant. The upshot is that if a wireless service provider had an exclusive contract to provide iPhone service, it could trumpet that fact to attract new subscribers.

That’s a huge advantage, because most of the costs of providing wireless service are independent of the number of customers served. Additional revenue from new subscriptions thus boosts company profits almost dollar for dollar. But why should Apple provide that advantage to an Internet service provider free of charge? After all, it’s the iPhone, not anything the service provider does, that’s pulling in new subscribers.

Apple has considerable bargaining power here. By signing an exclusive service contract with one service provider, it can insist on a sizable quid-pro-quo. The terms of such contracts are not public information, but I’m guessing that Apple claims a substantial share of the monthly service fees paid by all new iPhone subscribers.

If Apple had instead made the iPhone available to every wireless service provider, no company would have had a uniquely attractive offering with which to attract new customers away from rival providers, and Apple wouldn’t have been able to claim any share of the iPhone subscription fees. That may help explain why Apple has been signing exclusive contracts.

Robert Frank’s latest book, The Economic Naturalist’s Field Guide: Common Sense Principles for Troubled Times, was published last month.