iPhone 2.0. So Very Close, but No Cigar.

With the pomp and fanfare of THE BIG announcement from WWDC over, the iconic iPhone is all set for world domination, a la RAZR. The planets are aligned for Apple… 3G connectivity – check. Shockingly low price tag – check. Availability in 22 countries - check. Over the air download of content directly from iTunes – cheee… hang on?!

Rather unbelievably, the new iPhone does not provide access to the iTunes music store via 3G. I repeat. The new iPhone does NOT provide access to the iTunes music store via 3G. With the first iteration of the iPhone, there was a technological barrier, but not now. This impediment is clearly political.

The specific reasons for the limitation could be from one of two areas. First would be the record labels that have taken well documented issue with Apple’s hard line of 99 cents per download. It is possible that they have decided to push for tiered pricing for OTA downloads versus fixed Internet downloads. However, for the labels, the delivery vehicle is unlikely to be of great consequence. After all, they do not attempt to charge more for access via WiFi, why would 3G be any different?

It is more likely that the stumbling block in this case is the mobile operator. Mobile operators are going to be heavily subsidizing the cost of the new iPhone to make it hit the sub $200 price, with the flipside being an expected oil seam of data revenues in return. They have read the numbers, they know that iTunes is the largest music download site in the world. It is not surprising that they are prepared to fight tooth and nail for a slice of the action; it is not likely that they will get another opportunity.

MNOs have also market proven pricing models where the end user expects to be paying a premium for the convenience and spontaneity of OTA downloads. After all, aren’t music downloads just like ringtones and worth the same? Why drop music pricing if the market has shown that it is willing to shell out as much as $2.49 for a single tune?

Again, it comes down to the iTunes 99 cents per track. There is little wiggle-room at this price; margins are wafer thin already - there is simply not room for anyone else in a per track revenue share. But, from an end user perspective, 99 cents is critical. It is perceived as small change – just. As much as an impulse buy will sustain. A one cent increase would radically impact sales. Probably. And a specific 3G ‘tax’ levied for 3G iTunes access would almost certainly set a precedent that the record labels would pounce on.

Hence, the stalemate. Apple wants (needs?) to keep pricing as is, MNOs want a piece of the pie and hold the key to OTA downloads. It will be interesting to see who blinks first…