Apple 2.0

Covering the business that Steve Jobs built

The Paris Hilton of mobile phones makes a comeback

May 10, 2012: 12:52 PM ET

The notion that the Apple has a "carrier subsidy problem" just won't die

FORTUNE -- In the summer of 2009 a Danish mobile phone analyst named John Strand issued a 105-page report entitled  "The moment of truth: a portrait of the iPhone," that listed the "10 largest myths" about Apple's (AAPL) smartphone:

1) The iPhone drives data traffic into mobile operators networks
2) The iPhone helps operators attract new customers
3) The iPhone is good business for mobile operators
4) The iPhone is dominating the mobile services market
5) App store is a huge success that has revolutionised the services market
6) There is money to be made by developing applications for the iPhone
7) It is iPhone customers that are generating the majority of online mobile surfing traffic
8) The iPhone has a large market share
9) The iPhone was the first mobile phone with a touchscreen
10) The iPhone is a technologically advanced mobile phone

Many of Strand's ideas seem so laughably wrong today that it's hard to believe that they were ever taken seriously. But they were happily picked up by headline writers on both sides of the Atlantic, in part because Strand was always willing to dress up his heresies with eye-catching quotes. In his favorite, repeated at every opportunity, he called the iPhone "the Paris Hilton of mobile phones," as if it were a sexy but empty-headed flash-in-the-pan.

Fast forward to 2012, and Strand's Myth No. 3 -- the (mistaken) idea that carrying the iPhone is good business for mobile operators -- has been making a comeback.

It started in early April, when Walter Piecyk, an analyst at BTIG, downgraded Apple from buy to neutral and told Bloomberg TV "operators are trying to fight back against the impact that Apple is having on their business" -- a reference to the higher subsidies companies like AT&T (T), Verizon (VZ) and Sprint (S) pay Apple for the privilege of carrying the iPhone.

Soon the iPhone's subsidy was being blamed for everything from a CEO's multimillion dollar pay cut to the drop in Apple's share price that preceded the company's Q2 2012 blow-out earnings.

Now that Apple's share price has retreated to pre-earnings levels, the idea is back in the headlines.

"Okay, This Carrier Subsidy Problem May Be A Real Concern For Apple's Stock" wrote Business Insider's Henry Blodget Tuesday, picking up on a theme explored in the Wall Street Journal the day before.

I don't get it. If the iPhone is so bad for the phone companies, why are they falling over themselves trying to get Apple to let them carry it?

We put the question to Horace Dediu, who spent several years doing market analysis for Nokia (NOK) before launching his Asymco blog and conference business.

"An iPhone subsidy costs about $400," Dediu replied. "An iPhone customer will spend about $2,400 for service over the life of that phone. Every dollar of subsidy is worth six dollars of revenue. In addition, iPhone customers are more loyal, spend more and tend to stick with the carrier. What's the question again?"

John Strand, by the way, is still around, trash-talking the iPhone at every opportunity. Here he is (below the fold) at Mobile World Congress in Barcelona a few years ago using the Paris Hilton line again and making his oft-repeated claim that in all the years he's been covering the mobile business, he's never made a mistake:

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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