iPhone, Market Saturation, and Switching Costs

I recall when the iPhone hit the market and my more well-heeled friends started showing off their newest toy from Apple as we smoked a cigar (or three) at Signature Cigars in Washington, DC. To be perfectly honest, I was a little envious of their new toys. At the time I was using a Blackberry as my primary telecommunications device and for all of its functions: I never called it a toy. It was a tool.

There is quite a bit of discussion in the trades and blogosphere about Apple releasing a CDMA version or the iPhone in 2010 when their exclusive deal with AT&T expires. Whether this is real or merely hype being put forth by Apple for a better negotiation position, it does highlight a large number of individuals who’d like to own an iPhone would it not mean cancelling their current wireless plan and signing onto a horrendously expensive AT&T plan.

I understand that the pricing strategy is part of mutual back-scratching exercise between Apple and AT&T. That AT&T has been able to maintain this price point for over two years in the face of completion from Palm and Blackberry is nothing short of amazing. Although, I do note that AT&T seems to be softening their rate structure and recently hinted at a $10 per month decrease in the phone service.

Market forces are, however, at work. First of all we may be reaching a point where the market is already saturated with these nifty devices and their owners are locked into a phone and a program which features a financial penalty should they leave the plan. That is where the issue of Switching Costs comes in. The phone companies have done a superb job of making it financially painful to shift from one carrier to another, even in the case of the iPhone where the produce is so much hotter and desired than the work-a-day phone provided by Verizon, T Mobile and Sprint. But, what if there weren’t any switching costs? What if the iPhone were available on all the major carriers? Would you buy?

As I sit here today I have a LG Voyager which I purchased about a year ago when it first hit the market for about $200 – it was as close as I could come to an iPhone without having to cash in my 401k to buy my way out of the Verizon contract. It is a good device, but not a great device. Would I buy an iPhone if they were available on the Verizon network: Hell yes.

I don’t think that I am alone in thinking that the rumor of Apple giving up their exclusive deal with AT&T is more than rumor. Apple has a lot more to gain in moving their product into adjacent carriers than does AT&T who’d have to give up the farm to keep the iPhone exclusive for another two or three years.

It was a big deal recently when the iPhone wasn’t the top selling phone. This was due primarily to Blackberry offering a two-for-one deal on their phone. Just think about that: for the iPhone to be nudged (just barely) from its #1 position its primary competitor had to give away one phone with every one purchased. Imagine how many more devices, and market saturation Apple would enjoy were it not hamstringed by its shotgun wedding to ATT.

Bottom line: Switching costs remain too steep for many individuals to buy the iPhone. Opening iPhone to Verizon, T Mobile and Sprint is the next logical step for Mr. Jobs and the uber-nerd-millionaires at Apple.