Apple and Mobile Service Providers Should Cooperate

Once again it looks like companies in their rush for profits will be forgetting the most important group: the consumer. Apple and Motorola's move to bring iTunes to mobile phones is facing the entrenchment of mobile service providers (MSPs). Faced with a lack of interoperability and variant pricing schemes, consumers are ripe to be screwed in this equation.

As far as consumers are concerned, there are a few things that would make for the ideal music set-up between their computers, their mobiles, and any other devices like the iPod. First, there should be interoperability. Music bought on the computer should be playable on a mobile phone, and vice versa, via an utterly effortless synchronization between the various devices. Second, pricing should be universal. If it's 99 cents in one place, it should be 99 cents in another.

MSPs, however, think they will be able to reap the greatest profits by screwing consumers and charging premium prices of up to $3 per song for songs which will only be playable on their own mobile phones. Assuming market share can be increased by meeting these consumer demands, this creates a prisoners' dilemma for the MSPs in which the interests of consumers and MSPs are the exact inverse of each other, as illustrated in the table below.

		MSPs Group A
		Team up with computer-based DMS	Create own mobile-based DMS
MSPs Group B	Team up with computer-based DMS	I Less profit for both A and B	II Least profit for A Most profit for B
	Create own mobile-based DMS	III Most profit for A Least profit for B	IV More profit for both A and B

MSPs are best served if they all use their own DMSs. They will all be able to charge monopolistic premiums to music because there is a demand for music on mobile phones and they would be the only provider for the music on their own phones. (I think their justification of the premium per song in the $2 or $3 pricing schemes as a convenience premium is a load of crap. It's clearly just a company abusing their position as the monopolistic supplier to a market.)

MSPs will be least served if they all team up with existing DMSs as this will mean that at least some of their potential profits will have to be pushed over to these existing DMSs.

However, when starting out in quadrant IV, as seems to be what is about to happen, there is a strong attraction to defect, or begin working with an existing DMS, realistically speaking this means the iTunes Music Store and iTunes. The company that defects will have the advantage of satisfying consumers demands and will thereby draw a greater portion of the market and suck consumers away from quadrant IV. Thus, in quadrant II, group B (the defectors in this case) get the most benefit, while in quadrant III, group A gets the defectors' benefit.

Should this happen, companies at the losing end of the defection will gradually defect themselves, until they've all defected and find themselves in the quadrant I situation.

This looks to be exactly what is beginning to happen.

With Verizon, Sprint and Cingular protesting Apple's distribution model, the remaining US-based major wireless carriers include Nextel and T-Mobile. Of the two, insiders believe the latter is the most likely candidate to adopt the phone and drive its customers to iTunes rather than build its own music store.

Should T-Mobile defect as expected, expect further defections over time.

Apple should do all it can to encourage such defections. One logical way to do this is to offer a generous cut of profits from all downloads that occur over the MPSs' networks. Various other contractual terms could be worked out on a business-to-business basis. The iTunes Music Store's current pricing model could easily remain the same and be spread to the mobile-based downloads. This would hardly seem likely to hurt MSPs, as MSPs "could end up lowering their prices to $1 a song and still make more profit than Apple does."

Apple should definitely stick with it's traditional lack of complication for consumers. From the consumers point of view, they would be indifferent as to where they buy the songs. The prices will be the same regardless of where purchased and songs would be synced.