Apple breaks the rules

When Apple CEO Steve Jobs unveiled the iPhone earlier this month at MacWorld, he projected 10 million sales of the sleek new device in 2008 — an extremely bold prediction, considering the phone will retail between $500 and $700. Even more bold is Jobs' strategy for getting those phones into 10 million pairs of hands. Instead of saturating the market with what is expected to be the most exciting handset since Motorola's RAZR, Apple is keeping a tight leash on distribution. With a single carrier contract in the U.S. — albeit with the largest operator — and only a few retail channels, Apple isn't exactly shoving the phone in people's faces. Jobs isn't bringing the iPhone to you. He wants you to come to the iPhone.

Most hot new phones start out with a period of exclusivity at launch, and Cingular (now AT&T), as the country's largest carrier — and a more globally palatable GSM provider to boot — often lands those deals. The RAZR went up on Cingular's network first, but before long, Motorola had the RAZR in every color and technology on every carrier's network in the U.S., if not worldwide. Apple and Cingular won't say how long their exclusivity agreement lasts, but it will certainly be longer than a few months past the iPhone's June sales launch. At the Consumer Electronics Show, Glen Lurie, Cingular's president of national distribution, said that Cingular has multi-year rights to future U.S. iPhone releases — presumably meaning Apple can't release a CDMA version of the handset and sell it to Sprint and Verizon Wireless. If you want the iPhone, you sign a two-year contract with Cingular. No exceptions.

That exclusivity is a huge coup for Cingular. It has a lock on the most hotly anticipated handset for the foreseeable future, a phone that bears the iconic brand of the iPod and comes with Apple's enormous marketing power. But Cingular isn't running away with the farm. It had to make concessions to land its sweetheart deal, a fact that Lurie is fully willing to concede. “We knew we were going to have to bend and change who we are,” Lurie said. “But Apple had to bend, too.”

The deal turns the U.S.'s traditional relationship of carrier dominating handset provider on its head. Although Cingular and its competitors are used to dictating terms to handset providers, because they control the distribution channels in the U.S., Cingular is in the odd position of having Apple dictate terms to it.

“Apple has much more control of its destiny than other OEM could have with Cingular because Apple brings something to the relationship no other OEM can bring, a community of iPod users,” said Seamus McAteer, chief product architect and senior analyst for M:Metrics. “Will Cingular have much control over the customer experience on the iPhone? I highly doubt it. But it got an iconic brand.”

Apple controls all distribution for the iPhone, and in the U.S., that means it will be sold in its Apple stores, on its Web site and through the stores and Web site of its partner Cingular. The price is non-negotiable, and Cingular can't subsidize the handsets, allowing Apple to keep its famous control over iPod price points, avoiding the general tendency for prices of all consumer electronics, handsets included, to plummet after the first year of release.