Apple Chief Executive Steve Jobs has a problem: He's taken Apple into the phone business with the iPhone. Yet he has to rely on partners such as AT&T and Starbucks to provide the wireless connections he needs to make those phones useful. For a control freak like Jobs, that's not a pleasant situation.
The solution: For a few billion dollars, Apple could get into the phone business itself, buying the spectrum it needs to offer not just voice service for all those iPhone users, but to build the broadband wireless links it needs to offer next generation, network-centric computing, communications and entertainment. Little wonder, then, rumors have cropped up that Jobs is eyeing a bid for a prime piece of wireless spectrum due to be auctioned off by the U.S. government this January.
So will he do it? Not a chance.
Yes, Apple has the money. The minimum bid for the spectrum is $4.6 billion. The winning bid could be twice that. With $13.8 billion in cash and short-term investments, Apple can certainly afford it. "It would certainly be classic Apple in terms of 'We're going to take care of the entire experience from soup to nuts,'" says Crawford Del Prete, senior vice president at tech-market researcher IDC.
Yet Del Prete and other Apple watchers just don't buy it. Take a look at MetroPCS, the most successful of the upstart phone companies. Sure, it's profitable. But the phone business requires a big investment in hard assets, rather than just intellectual property. MetroPCS, the most successful of the upstart phone companies is profitable. But in 2006, MetroPCS was only able to wring just $53.8 million in profits out of $4.2 billion in assets, according to Chicago-based investment researcher Morningstar, for a ratio of 1.3 per cent. By contrast, Apple enjoyed a return on its assets of 14.48 per cent.
Moreover, the hassles of the phone business could make a mess of more than just Apple's business model. "[You've got] billing issues, activation issues, quality of signal issues, all that kind of messy stuff that's out of your control even if you own it," says Endpoint Technologies President Roger Kay. "Why would they want in?"
And while Steve Jobs has proved he can build a hot handset, with iPhone sales hitting the one-million mark this week, less than three months after its introduction on June 29--spending billions on a wireless network would leave Apple without an exit strategy if the iPhone stalls. Motorola's fortunes soared when it introduced the slim, stylish Razr handset in 2004 for $500, with a two-year contract. Just three years later, the Razr is yesterday's model, going for just $50 with a two-year contract. Motorola has struggled to find a fresh hit, and its shares have fallen 27.8 per cent over the past year.
Jobs also lacks the kind of connections in the communications business that made Apple's foray into digital media successful. Jobs has been a force in Hollywood for more than two decades as head of Pixar Entertainment animation studio, which was bought by Disney for $7.4 billion in 2006. Jobs hasn't been a player in the telecommunications world and would be shouldering a big risk by tiptoeing into that industry. "It would be a pretty big leap from trying to figure out how to partner around the world to we're going to do it ourselves," Del Prete says.
That could be a problem, since whoever wins January's spectrum auction will need to keep their wits about them. Thanks to lobbying from entrepreneurs and tech companies such as Google, the spectrum is encumbered with some unique rules. The so-called open access rules mean whoever runs the spectrum will have to keep the network open to companies peddling all kinds of devices. Sure, Apple could pay billions buying the spectrum itself. But it could also simply piggyback off the network of whoever buys it.
A slightly more likely option: Some form of joint venture or consortium that could bid for the bandwidth. "Even that would strike me as being pretty far from their existing business model," says IDC's Del Prete.
Or Steve Jobs will find someone to do the heavy lifting for him. If Google made a serious play for the wireless spectrum, the search company could sell ads to subsidize a service that Apple's customers could connect to. Or Apple and Google could partner with an upstart carrier willing to take on a big chunk of debt to grab the spectrum. Either way, Jobs gets a tidy solution to a very messy problem.