Apple's Reintermediation of Smartphones: The iPhone as a Service

With Apple's recent announcement of their direct sales of not just smartphones, but phone & plan bundles, mainstream customers are about to experience a big, visible change in mobile business models. While lots of articles do a great job comparing Apple's new iPhone Upgrade Plan to similar carrier-specific offerings, there's another issue at hand behind the scenes as Apple closes the loop of the iPhone experience. 

First, a quick recap: in Apple's early-September event, CEO Tim Cook announced the newest iteration of Apple's wildly-popular iPhones, and embedded in his announcement was an important change to business model. Instead of just activating or occasionally upgrading a user's carrier account for their new iPhone, leaving the management of amortized payments on the cost of the device to T-Mobile or Sprint, for example, Apple's customers can now have the entire experience of their mobile service and phone installment plan brokered through Apple—without carrier lock-in. For customers dissatisfied by their carrier's customer service, it's a relief. For carriers, it could mean lower customer service costs. The most important takeaway, though, is that Apple has taken a big step towards reintermediating the mobile carrier process, while disintermediating the device sale and finance process, and has closed the supply-chain-to-recycling loop on their phones. In lay terms, now Apple can manage nearly every element of the iPhone experience for their customers. 

Reintermediation (reintroduction of a middleman) is a business process which sometimes occurs in an industry or business model after disintermediation (removal of a middleman) has been instituted in a previous phase. From the carrier perspective, Apple's selling of their service is a form of reintermediation. From Apple's perspective, selling their devices directly, versus through carriers, is a disintermediation of a chunk of their smartphone sales. 

Most mobile phone operators have longstanding reseller relationships with companies small and large to help with the distribution and basic service on their plans, associated hardware (like mobile phones) and the like. As the rise of e-commerce started to change that landscape, many providers disintermediated that process, cutting out the middlemen or lessening their role. Now, as data-rich mobile phone service has become more ubiquitous, well-understood and uniform, customers are having a hard time distinguishing between provider services unless they live in an unusually-poor coverage area or have unusual needs which require them to communicate extensively with providers. Apple, with its top-selling, evergreen iPhone (and iPad) has started to see that they might be able to do a better job than the carriers at selling devices on installment plans. While last year's Apple SIM card (which allowed iPad users to easily select the best plan based on their location, such as when traveling from one country to another) focused on a small subset of iPad users, this offering could shift the carrier industry for individual plans in a fundamental way beyond specific devices, features, and relative service value. Let's look closer.

Purchase of the Phone and the Plan

The Old Way: Experience as Afterthought

Traditionally, users have had to purchase their phone directly from their carrier or an authorized reseller to take advantage of carrier subsidies/financing plans, insurance offerings, or special 'keep-up-to-date' programs focused on providing access to the newest devices. Such programs do not necessarily save users much money, but do allow them stability in their payments and protection from the burden of replacing broken or defective devices. But even with these benefits, the experience for customers can be very poor. Mobile carriers originally did not have to service complex, software-based experiences for their customers. Carrier employees often are low-paid, entry-level, sometimes offshored staff who must use scripts and very basic knowledge of devices, mobile operating systems and plans to serve almost any kind of customer who walks into the store or reaches a call center. Data migration, say from Android to iOS or back, advanced technical issues like international roaming and tethering (mobile hotspot) and other data- and software-related services can cause an endless escalation of customer service calls, store visits or referrals out to the device manufacturer or software developer in question. Carriers cannot afford these costly moments in customer relationship with the pressure of cutthroat downward price competition, and customers are impatient with the difficulty of managing what is an increasingly essential device and service for their daily lives. 

Apple: Reimagining the iPhone as a Service, Not Just a Device

Apple noticed these trends and has attended to the substantial segment of the consumer market who are willing to commit to the Apple technology approach and ecosystem in exchange for simplicity, a respectful and helpful customer service experience, and a no-surprises, always-up-to-date pricing model for a slight premium (or sometimes savings) over other options.

Now Apple has made it possible for these customers to enter the Apple Store and either start a plan from scratch or utilize an existing plan, finance/amortize the entire cost, and manage device upgrades as often as once a year—matching Apple's own release cycle. Customers will select a phone and commit to a monthly plan (or continue their current plan), and Apple will assist with basic phone number migration if a carrier switch is involved, data migration, and any other configuration needed. Unlike typical carrier store offerings, not just the carrier elements of the phone are attended to, but the entire experience of the phone's most important functions: photos, contacts, calendars, etc. While the carrier still technically owns the customer service relationship, it is increasingly possible for a user to avoid interacting with a carrier directly at all. Additionally—and this is very important—the phone provided to the customer is unlocked, allowing them to use it with any carrier at any time, purchase local SIMs when traveling, and otherwise cut out carrier lock-in protections which customers conceded in exchange for what had been effectively a device credit program. 

As Apple is shouldering the financing responsibility of the phone amortization, carriers' justification of plan lock-in simply no longer makes sense to customers.

Service of the Phone and the Plan: Near-Complete Commodification of the Carrier

The Old Way: Whose Fault is It?

Currently, smartphone customers with functionality and/or connectivity problems face a maddening chain of "not our fault" conversations with the service provider ('you should check with the device manufacturer—our network is fine'), the device manufacturer ('it's the network, our device works perfectly,') or the software provider ('we can't do anything about your phone or network's problems'). Even the most tech-savvy customers cannot possibly troubleshoot the complexity of the issues which could make video chat not work well, or download speeds lag. Relationships between the customer and the service provider, device manufacturer and software developers predictably become negative due to this time-consuming and frustrating process which often results in finger-pointing and sometimes doesn't even solve the customer's problem.

If a device is found to be defective and is covered under carrier or third-party insurance programs, typically the old device is returned to the carrier with little or no help migrating data and functional settings to a new refurbished device, which may arrive with its own problems for the customer to deal with. Customers also often don't get a new device right away, and are annoyed by waiting for days or weeks without access to what is increasingly an essential tool for most users' daily lives.

The Apple Way: We'll Get it Fixed, No Matter What—and Move Your Data, Too

From the inception of the iPhone, Apple has offered AppleCare services for its smartphones whether or not they were purchased via Apple. These plans covered manufacturer defect, especially excessive battery life depletion. In the past few years, such plans have also offered optional accidental damage coverage along the lines of carrier-offered or third-party insurance. But these plans required users to pay up front, costing about $99 to $149, depending on the type of coverage.  For customers who purchase their device through the new Apple iPhone Upgrade program, defect and accidental damage coverage is included at no additional cost.

In this model, a customer who has purchased an iPhone through the Upgrade Program can bring their broken or malfunctioning phone to Apple's global chain of retail stores or use their phone or online customer service centers to resolve the issue. It is predictable that customers will attend to hardware and software problems in this way. But now, complaints they have about their carrier service itself might not have to be referred back to the carrier's technical support—they could simply be resolved through migration to new service carrier, and customers can make that change through Apple customer service. This is not to say that Apple will jeopardize its carrier relationships by doing this all the time, or at all, but with number portability and without device-based contracts, there is effectively nothing forcing a customer who has an unlocked phone (as all phone provided under the iPhone Upgrade Program are) to stay with a carrier who is not meeting their needs. Apple's industry-leading customer service teams and loyal, well-trained staff will be the sole face of the mobile phone relationship for many customers. 

Additionally, Apple's warranty approach means that devices which don't work are refurbished to Apple's own quality standards. Closing the loop of refurbishment and reprovisioning of devices could cut out the frictional costs of passing a phone from a carrier to a refurbishment team, for example, and ensures high-quality parts are used at cost and that a higher percentage of defective phones are refurbished, rather than being discarded. 

Return of the Phone and Selection of the Next Device

Most customers interact with their mobile carriers very rarely and for just a few reasons: to pay their bill, to address complaints about their service or device (as we've discussed above) and to select a new device. New phones and tablets are usually purchased at the point of 'upgrade eligibility' when the user has effectively paid off enough of their current device's actual cost to the carrier. The transactional nature of this relationship means that almost every obvious interaction the customer has with the carrier costs them money, and often doesn't provide them additional value (paying a bill, for example, costs money but doesn't usually provide the customer any new value). The process of selecting a new device can be a helpful moment where new value is created—or a painful one which annoys the customer—but either way, the experience the customer has had with the carrier to date and especially during this critical interaction will strongly influence whether or not she chooses to continue with the carrier. For the carrier, this is a critical interaction—because, historically, most customers are actually unprofitable for the carrier until about this point in the relationship. Thus, many carriers have increasingly disaggregated (separated out) the service cost and the installment payments for the phone.  All of the industry appears to be making this shift, which works well for the carriers' financial reporting and customer interactions, and provides some increased 'common sense' and flexibility for customers who can clearly see the service and device installment plan costs as being separate functions. 

The Apple Way: One Easy, Positive Relationship

In Apple's new Upgrade Program model, customers who want to upgrade to a new device simply come in to the Apple Store after twelve payments on their current iPhone and select their next device. Apple's iCloud services and staff assist the user in migrating to the next device as seamlessly as possible.

Apple has developed what author and consultant Mark Bonchek calls an ORBIT—an Ongoing Relationship Beyond Individual Transaction—for its devices. Every positive touch of the Apple experience—the phone itself, the retail store, the app store, the things created with it, the devices and accessories—almost all of the value of the iPhone experience is associated with Apple itself. Literally thousands or millions of positive 'touches' with the Apple brand as embodied in these elements are there to encourage continued interaction. Apple's brand has a gravitational pull not just because of its solid hardware and slick brand—the pull comes from continued positive interactions wherein the more the user invests in their Apple products and services, the more they stand to get out of them. Carriers, by contrast, have to push marketing messages at their customers and rarely is a customer rewarded for additional touches with that brand in the same way they are with Apple. Going into an Apple Store has the potential to be a fun or at least productive experience. Going into most carriers' stores is more like going to a dentist—no matter how nice the decor and friendly the staff, it's always going to be uncomfortable, costly, and it may even be painful. 

Apple's iPhone Upgrade Plan users won't have to visit their carrier—or its salespeople—to upgrade their device. Since their loyalty to Apple is rewarded with easy upgrades to new devices, Apple's guidance regarding the carrier relationship will also likely be well-respected. It is not too much of a stretch of the imagination to think that users might begin asking Apple staff to suggest the best carrier for them—or to imagine that were Apple to offer their own mobile service, customers would be happy to try it out.  Carriers, if they permitted their services to be offered under an Apple brand (or had to, based on market pressures), would only make marginal profits on fully-commodified network access to voice and data. Only price, speed, quality, network reach, and security would allow carriers to be distinguished from one another. 

Apple, importantly, also closes the loop on recycling or reuse/refurbishment of their phones—including the precious metals or toxic materials in them—by accepting their own phones back through their stores. 

The Importance of Quality and Relationship

Recently, I have attended several telecom conferences (the Telecom Industry Association and the QuEST Forum's EMEA and Americas conferences, for example) and heard several telcos and vendors speaking about quality at a level of granularity no customer will ever care about, but which affects their experience of networks. Few discussions there, however, really attend to the enormity of the new business models of the industry and the reintermediation of the smartphone purchasing process. Smartphone service is a substantial chunk of the telecom market, and related digital industries (for example Internet of Things devices and sensors) are also affected by these key issues of price, speed, quality and security but do not always have other carrier-customer interaction on a regular basis.

There are arguments for letting go of the customer experience part of the value chain, passing it on to parties like Apple who could potentially do a great job of customer service for mobile network providers and might be eager to incorporate this into their offerings. But, if carriers want to retain their customer relationships they will need to provide greater value to their customers and have recurrent, positive relationships with them to earn deep loyalty. This means a focus on quality of service and quality of relationship, fundamental paradigm changes throughout the industry, and frank communication about the value and quality of the network and the difficult, shared, responsibility for their customers' total smartphone experience.

Full disclosure: Causeit has been paid to speak about issues like innovation, disruption, business models and the Internet of Things at several telecom industry events and does work for telecoms and their vendors. This article is not paid for by any of those third parties or written at their request, and does not not necessarily reflect their views; it is provided of Causeit's own volition as a contribution to our readers.