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The Globe and Mail

Once bitten by Apple, telcos warier with iPad

Guests play with the new Apple iPad during a special event in January, in San Francisco.

Justin Sullivan/2010 Getty Images

European telecom operators can't afford to miss out on selling Apple's new iPad but after their experience with the iPhone, they are warier of Apple's clout and want to protect networks and profits from the new gizmo's risks.

The iPhone's success makes the iPad a must-have for operators because it may revolutionize the tablet market, and because turning away the iPad risks future iPhone business with Apple.

But much has changed since mid-2007 when Europe's carriers, eager to differentiate themselves and boost usage of the mobile Internet, jockeyed for exclusive contracts to distribute the iPhone, often agreeing to tight restraints imposed by Apple on everything from handset subsidies to advertising.

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Now operators are taking a much more careful approach to try to ensure the iPad will really help them make money.

They want to prevent an iPhone redux where Apple captured most of the value -- not only by selling the device but also by hawking downloadable mobile software, games, and services through its Application Store -- reducing the role of the telecom operator to that of a simple data pipe.

"The operators are disenchanted with Apple," said Virginie Lazes, analyst with investment house Bryan Garnier. "They are starting to complain that they build and invest in the network yet they don't get a piece of the jackpot of mobile services."

As a result, European operators are tamping down expectations for the iPad as they begin to weigh the offers, contracts, and subsidies that they will offer with it.

For operators, the business case for the iPad is simply less attractive than for the iPhone or a smart phone because they won't earn revenues from voice calls or texting, say analysts and executives who requested anonymity because they were not authorized to speak about ongoing negotiations with Apple.

Nor is the iPad likely to be a competitive advantage for operators since Europe's tougher consumer protection laws make it tough for Apple to sign exclusive distribution deals here as they have in the United States with AT&T.

The iPad goes on sale in some European markets at the end of April.

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One way operators can protect their profits and networks would be not to subsidize the iPad as they have the iPhone.

Not only did Apple charge operators more for its iPhone than other smartphones, the California-based company also dictated how much operators had to subsidize the phone to consumers.

For example, France Telecom's exclusive contract required it to subsidize 310 euros of the 3G iPhone's 400-500 euro price, according to documents released when French regulators outlawed the iPhone exclusivity.

Such subsidies obviously boosted sales of the iPhone, yet weighed on the operator's profit margins.

Analysts say the iPad could be sold without a subsidy from telecom operators, in which case its sales are likely to be more modest than the iPhone and it could remain a niche product.

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Nils Katla, who heads Telenor's strategy in the Nordic region, said Telenor was interested in selling the iPad but was still debating how. "It's early in the development of netbooks and tablet PCs like the iPad, so we are in a phase of experimentation on prices and subsidies to find out what makes sense," Katla explained.

Operators are also trying to prise back more value from Apple by taking a slice of the mobile applications market, which Gartner estimates will grow three-fold to $29-billion in 2013.

France Telecom recently founded its own application store, while 24 carriers plan to create an open platform to deliver applications to all mobiles to better compete with Apple.

Thomas Husson, analyst at Forrester Research, said the iPad is symbolic of the key challenges facing operators today.

"They have to figure out how to charge for a wider array of connected devices, while defending their position in the value chain so as to prevent becoming a dumb pipe."


Another worry is that consumers could get addicted to using data-heavy services like streaming video while on the go, causing mobile networks to crack under the strain.

That risk is causing some telecom operators to question whether it makes sense to offer flat-fee unlimited data packages with the iPad, as many do with the iPhone.

"We have to be vigilant about our profit levels in a new category of product that we just don't know how people are going to use," said a telecom executive who manages a European operator's relationship with Apple.

Apple is putting out two versions of the iPad starting in late April in Europe -- the first one, which will work only over fixed Internet networks or Wifi, and a second one that will work on Wifi and over 3G mobile networks.

The pressure put on networks will depend on whether people use the device over mobile networks while they are out and about or more over Wifi at home.

The CEO of AT&T Inc. recently said that he thought most people would use the iPad over Wifi connections and not over mobile networks.

Other industry observers are not so sure. "The iPad has the potential to create havoc for carriers," said Craig Moffet, analyst at Bernstein Research. "The greatest fear of carriers is that people will actually use this device. With a screen nine times bigger than the iPhone, the amount of bandwidth you could consume streaming video is just enormous."

An executive at a European telecom operator said concerns over the iPad's strain on networks could lead it to re-examine its pricing policies and unlimited flat-fee data plans.

"We'll have to see whether this is a sustainable model," the person said. "There are limitations to what the network can handle obviously, even if we are confident we have ample capacity on ours."

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