iPhone Launch: Navigating Powerful Intermediaries

In most consumer oriented markets powerful intermediaries such as retailers, distributors or powerful stakeholders yield significant clout in deciding what products or services reaches the end buyer/user.

In the cell phone market we have two important stakeholders whose participation is a must for any product to succeed – Cell-Phone Subscribers and Wireless Service Providers. Between the two Wireless service providers holds enormous leverage over handset manufacturers on account of their stranglehold on cell phone subscribers.

In 2007 Apple an established name in the PC and consumer electronics world decided to enter the cell phone market. To successfully launch a product such as the iPhone you need to get two important stakeholders on board – wireless carriers and end-users; application developers constitute the invisible third front.

Specifically which of the 4P’s and 1C’s: Product, Promotion, Price and Place and Complementors were strategically more important than the others.

When dealing with powerful buyers (end-users or intermediaries) the strategic options that can be successfully employed depends on whether strong buyers / intermediaries :

A) Can be neutralized – In this case, the strategic choices that one can employ are:

    • Product Differentiation
    • Leap Frog
    • Create Switching Costs
    • Co-opt key influencers or decision makers

    B) Cannot be neutralized – In this case the strategic choices that one can employ are:

      • Integrate-Forward (Eliminate Intermediaries)
      • Adopt a “Low-Cost” Model ( Drive out weak competitors, industry consolidation)
      • Go after Niche Markets ( Focus on Segments that are not powerful)

      Strategies to neutralize powerful intermediaries:

      1. Product Differentiation:

      With a Product Differentiation strategy the idea is to offer and position a product that no one else comes close to matching on all product attributes. In the process you ensure low price elasticity.

      Apple developed a product that is far superior and ahead of competition on all fronts and then complemented the same by providing an ecosystem (applications) around it. In doing so Apple neutralized the power of wireless carriers to negotiate better terms or to even refuse carrying the product.

      2. Leap Frog over intermediaries:

      Apple had built a strong brand awareness and reputation with its iPod product line. By leveraging its brand name and effective use of ‘Pull-Marketing’- (advertisements) directly targeting consumers-end-users, Apple managed to create strong demand for the iPhone ahead of its launch.

      By going after the end user Apple, to a certain extent, managed to tilt the balance of power during negotiations with wireless carriers in its favor.

      3. Co-opt key Influencers and Decision makers:

      A wireless carrier is more concerned about ARPU (Average Revenue per User) rather than which handset to carry. But handsets are the primary draw to lure in subscribers. Apple positioned the iPhone in the sweet spot for AT&T by signing an exclusive contract and allowing AT&T to set its own terms for end users. Subscribers were forced to carry a pricier data plan with a 2-yr contract.

      Breakdown of Costs & Revenue for Carrier* 2007 2008 2009
      Average Handset Subsidy per User -$200    
      Average Annual Revenue per User $345 $828 $345
      Lifetime Value of a Subscriber $828    

      * Note: Based on a data plan with a monthly fee of $69.00 and a 2 year contract starting July-1st 2007 and terminating on July 1st 2009.

      Even with $200 subsidy for each iPhone sold, the carrier (AT&T) stands to make money over the 2-yrs lifetime of the customer (see table above). It is a “Win-Win” situation for both Apple and the carrier.

      4. Switching Costs – The use of Complementors:

      Apple launched the iPhone Applications platform allowing handset users to customize and harness the full potential of their handsets using third party applications. Here again Apple allowed application developers full control on what apps to develop, how to price them and whom to target.

      In the process Apple managed to create switching costs for both carriers and end-users.

      Appendix: Why did Apple choose AT&T as an exclusive carrier over others ?

      An exclusive contract with AT&T allows Apple to sell the handset at a higher price and register higher revenues even at the expense of losing some market from the other carriers. The strategy makes sense when you have a superior product, weak competition and skimming prices.



        1. With an exclusive contract, Apple can capture 5% of the subscriber base at AT&T and sell the handset at $299 (8GB) to the carriers.
        2. With an non-exclusive contract Apple can capture 2% of the subscriber base at each of the carriers (AT&T, Verizon, Sprint) and 1% with T-Mobile. Handsets will be sold to each of the carriers at $149


              • FierceWireless – The wireless industry daily monitor
              • SEC Filings for AT&T, Verizon, Sprint