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Saturday, August 02, 2008, 07:00 am PT (10:00 am ET)

Telecoms fight for the right to party with iPhone 3G

Apple's iPhone 3G is exciting more than just tech-savvy consumers wanting to play with the latest gadget. Worldwide, mobile service providers are fighting tooth and nail for the right to sell the new iPhone because of its ability to attract new customers and sell them on data service plans, which providers have previously found to be a difficult sell.

Tough times for a rough market

According to Strategy Analytics, 1.12 billion mobile phones were sold last year, and 1.24 billion are expected to be sold this year. Forecasted growth of phones in general has slowed slightly due to difficult economic conditions worldwide. Intense competition between phone makers has also taken its toll on the weakest handset manufacturers.

Nokia has held onto the lead with its 38.8% share of the world's phonesets in 2007, while Samsung came in at second place with a 14.3% share. A lack of compelling new phones models from third place Motorola caused the company to slip dramatically down to a 14.1% share; it was hit particularly hard in the fourth quarter. Fourth place Sony Ericsson has also slipped downward to 9.2%. LG rounded out fifth place with a 7.2% share.

Apple's share of all phones sold worldwide last year was just 0.6%, but that represents more than half of what Steve Jobs originally outlined as Apple's goal for the end of 2008: a 1% share of the entire market. Apple's share of all phones sold is a misleading metric however, because the demand for more sophisticated phone units is rapidly outpacing the growth of mobile phones in general

Eyes on where the puck will be

While Strategy Analytics has pegged the overall phone market cooling from 12% growth in 2007 to just 10% expansion in 2008, smartphone sales are expected to continue their rapid ascent, with Gartner forecasting growth of 42% this year.

Incidentally, those growth numbers parallel the difference in growth between Apple's white hot Mac sales and the tepid PC market in general. Just as Apple has left the high volume but low profit commodity PC market for Dell and HP to fight over, it has similarly targeted the smartphone market exclusively, leaving mass market, lower profit "feature phone" sales to Nokia, Samsung, Motorola, Sony Ericsson, and LG.

In the US market, the iPhone rapidly carved out a 27% share of smartphone sales within its first few months. Worldwide, Apple's launch of the iPhone 3G has promised to further muscle into the high growth smartphone market, with providers fighting over regional rights to sell the new phone.

Fighting for exclusive rights

Last year, AT&T signed a deal with Apple for exclusive rights to sell the iPhone in the US market through 2009. On Thursday, USATODAY reported that the company extended its contract with Apple for an additional year through 2010, an endorsement of the iPhone's impact on AT&T's growth and profits.

Similar exclusive deals were signed in Europe. For example, Telefónica's O2 is believed to hold an exclusive contract on iPhone sales in the UK through 2012, according to a report by The Guardian.

These exclusive deals are actually being sought out by the telecoms themselves; Apple is understood to have an escape clause written into its contracts which will allow it to terminate the deals if "it does not think the phone is being marketed successfully," according to the Guardian.

The reason that mobile providers are fighting for exclusive access to the iPhone (or trying to buck against exclusive access by rivals) is that the iPhone is a hot seller that has the power to pull subscribers from other companies. Now that most users already have a phone, the goal has shifted toward nabbing customers from rivals rather than trying to recruit entirely new users.

The race toward smartphones

Further, the holy grail of the mobile industry is to sell data service on top of basic voice access, since this results in double the revenue for the same number of subscribers. Mobile providers have had a hard time marketing their data services, but the simplicity of the iPhone's network-savvy Maps, Mail and the mobile Safari web browser sells data plans hand over fist.

Simpler feature phones from Nokia, Samsung and others, which make up the majority of thier sales, don't sell these profitable data plans so mobile providers are subsequently less excited about selling them to consumers. Since most phones are sold by the mobile providers, this has a huge impact on where phone sales are headed.

Stealing rival provider's feature phone subscribers and upgrading them to an iPhone with a data plan is the ultimate win, as it erodes the competition while substantially boosting profits. In order to make this happen, providers are willing to heavily subsidize the iPhone 3G, paying Apple upfront in order drop the hardware entry price for consumers. That in turn erases the remaining allure of cheaper feature phones, pushing consumers toward smartphones even more rapidly.

On page 2 of 2: L'Eggo my Eggo; and Apple's partnerships mean automatic sales.