iPad Economics 101

The iPad is not the elusive “second side” of the telco business model.  Nevertheless the economics of the deal between Apple and at&t can be used as a primary example of the types of new business models that CFO’s of service providers need to consider experimenting with in order to replace the long, slow decline of their fixed-line businesses.  It also can serve as a model of how to work with other device manufacturers in the future.

When the iPad was announced on January 27th of this year with a $30 USD per month pre-paid fee for unlimited data usage, my initial thought was that someone had made a mistake.  I personally was expecting the amount to be in the $45 - $65 range, which is in line with what carriers currently charge for unlimited laptop data connections.  How could a service provider hope to turn a profit on $30 per month when you had to take into account the additional amount of traffic that the network will need to carry?

But then I began to think about it and you see there really are some material differences between the what I’ll call the “iPad model” and both the current service provider pre-paid and post-paid models.  First, there will be no device subsidies.  That isn’t a misprint.  According to at&t they will not be giving Apple any subsidies for the iPad device.  Second, no revenue share agreements.  Unlike the initial iPhone agreements, 100% of the revenue belongs to the service provider. 

….BUT WAIT THERE’S MORE!!!

The $30 per month is pre-paid by the end-user and paid via credit card.  From a cash flow perspective the two best words a CFO can hear are “pre” and “paid.”  Because it must be paid via credit card, there is also little to no credit risk for the service provider.  Customers will also set-up and activate their accounts on-line and will not receive a monthly bill.

In other words…there are $0 acquisition costs…there is $0 set-up cost…there is $0 credit risk…and there is $0 billing costs.  (And yes I do expect a few comments saying why the costs are greater than $0…I realize $0 is an exaggeration, but not by that much.)

While I do not think that at $30 per month, pre-paid or not, will cause any carrier to substantially increase their annual financial expectations.  If at&t has forecast the usage right, ie – most usage will be done at home and/or in areas with wi-fi networks, the $30 unlimited plan may be sustainable.

But regardless if the price is too high or too low, it is a pretty bold experiment in my book.  I do not view this as part of the service provider’s normal pre-paid business.  This is a fundamental change for both the service provider as well as the device manufacturers.  Will it work, I don’t know.  But I can’t think of a better place to start than with the “cool new thing” from Apple.