The iPhone in Europe: Lost in Translation

Apple's U.S. blockbuster isn't a hit across the Atlantic. How will it fare elsewhere?

When Apple's iPhone first went on sale in Europe six months ago, hopes were high that the device would be just as big a hit there as it had been in the U.S. But analysts are now raising concerns that the iPhone may not translate as well overseas, with sales sluggish in Europe because of the device's high price and strong competition from Nokia (NOK) and others. "Our research indicates that European shipments to date have been far below [expectations]," says analyst Richard Windsor of Nomura Securities (NMR).

As in the U.S., Apple (AAPL) cut exclusive deals in Europe so only one wireless carrier has the right to distribute the device in each country. It has three such contracts so far, with Britain's O2, France's Orange (FTE), and Germany's T-Mobile (DT). Strategy Analytics, a Newton (Mass.) consulting firm, estimates the three carriers sold a combined 350,000 iPhones in the fourth quarter last year, short of the consultancy's forecast of 500,000. It also estimates sales in the first quarter of 2008 dropped to 300,000. (There were 2 million iPhones sold last year in the U.S., where AT&T (T) is the sole carrier.)

Mixed Signals
Apple and the three European car­riers have not disclosed up-to-date sales figures, and the company declined to comment on European sales. The carriers all have said they are happy with demand for the device. In February, O2 said the iPhone had helped attract customers in the fourth quarter and declared it "the fastest-selling device that we have ever had in the U.K." Steve Alder, O2's iPhone director in Britain, says the device has helped the carrier gain ground against competitors, with 60% of iPhone customers new to O2.

Still, the iPhone's price has been an issue. Most phones in Europe are heavily subsidized, and customers can get even some high-end models for free. The iPhone had not been subsidized, selling for $600 or more with a 12- or 24-month service contract. In the past two weeks, however, two carriers have reduced the price for the iPhone. On Apr. 15, O2 dropped the price of the iPhone with 8 gigabytes of storage by 37%, to £169, or $332. That follows T-Mobile's move to lower the cost of the 8GB model by as much as 75%, to $156. Some analysts say the cuts may be designed to clear out inventories before Apple introduces a higher-speed iPhone, expected in June.

A New Approach?
The Cupertino (Calif.) company drives a hard bargain with its wireless partners, which may make them reluctant to subsidize the iPhone. It takes a cut of the revenue that wireless operators collect for voice and data services each month, something no other phone­maker is believed to get. Strategy Analytics estimates Apple gets $5 to $20 per month for each customer from its wireless partners.

Apple hasn't signed any deals internationally since the three in Europe last year, and it may have a tough time getting the same terms in some markets. On Apr. 12, Wang Jianzhou, chief executive of China Mobile (CHL), said he's interested in a deal with Apple. But the world's largest mobile carrier is balking at sharing its voice revenues, says Flora Wu, a senior analyst at Beijing consulting firm BDA. China Mobile declined comment.

Apple's experience in Europe raises questions about the iPhone's prospects around the world. The company has said it wants to sell 10 million units by the end of 2008. But Apple may need to change its business model to reach that target, perhaps by moving to nonexclusive contracts or giving up its cut of service revenues. The company may make less money off each iPhone, but it could sell many more. "If they really want to be successful in this market, they had better [change]," says Shiv K. Bakhshi, director of mobile research and devices at research firm IDC.

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