Thursday, August 06, 2015

Apple Is Making a Mistake Passing up Wireless

An Apple MVNO could give Apple a stranglehold on the smartphone industry

Earlier this week, Business Insider reported that Apple (AAPL) was testing a mobile virtual network operator service, but the news apparently wasn’t exciting enough for Apple stock investors, as share prices dipped more than 2% that day.

The very next day, however, Reuters reported that BI’s claim was incorrect, and according to an Apple spokeswoman Apple isn’t planning a MVNO service.

It was a lose-lose situation for Apple: News that Apple was investigating becoming a MVNO may have elicited a mildly negative reaction from Wall Street, yet confirmation that AAPL was not considering the opportunity also had a negative impact, with shares closing down more than 3% following the Reuters story.

All told, between the (seemingly misinformed) Business Insider story and the (apparently confirmed) Reuters piece, AAPL stock dropped around 5%. Seems like Apple investors are divided on the issue.

What Is a MVNO?

Simply put, a mobile virtual network operator is a reseller of mobile services. These companies rent infrastructure, typically from one of the big dogs in the wireless industry — such as AT&T (T) or T-Mobile (TMUS) — and sell unused minutes and data bandwidth to the own customers.

Rates charged by MVNOs are usually less than those charged by the industry leaders, and this is what keeps them in business. There’s no loyalty when it comes to wireless service, so offering coverage on the same networks as the big dogs — but at a lower rate — is a powerful tool.

The MVNO market, however, is extremely competitive and volatile, as these virtual carriers must rely on the industry leaders to provide them with access to infrastructure as well as unused bandwidth and minutes. As you can imagine, the amount of excess data and minutes available fluctuates regularly, as does the price charged to MVNOs. This often results in variably priced plans and services.

It’s not unusual for smaller companies to cut available plans due to the unpredictable nature of being a MVNO, thus neutering the competitiveness of the business. Customers usually prefer predictability when it comes to their smartphones, so not knowing what next month’s service cost is a huge downside.

Apple Wireless Has a Nice Ring to It

The buzz surrounding Apple’s foray into the wireless arena has been short-lived. But consider for a moment the possibilities for Apple stock if management actually was considering an Apple Wireless MVNO.

Apple already has a massive stranglehold on the smartphone market, with 43.5% of U.S. wireless subscribers using an iteration of the iPhone. The company has developed a rather impressive ecosystem that keeps consumers buying Apple products. The wireless service itself, however, is one of the few places where Apple doesn’t maintain a presence.

An Apple MVNO, on the other hand, would essentially complete the circle, providing end-to-end Apple-based experiences: Consumers could purchase an iPhone from the Apple store, and get their phone service from Apple Wireless. At no point would AAPL lose control of the process to another tech company that has its own agenda and arrangements with competitors.

Granted, creating an MVNO would take time and money, but with nearly $35 billion in cash on the books and a quarterly net income of nearly $11 billion, it’s entirely doable. Essentially, management would just have to negotiate rates with existing wireless service providers for their excess bandwidth and unused minutes, and AAPL has plenty of purchasing power in that regard.

Considering that Google (GOOGL, GOOG) is perhaps Apple’s biggest competitor in the smartphone world, why wouldn’t AAPL management take every possible step toward becoming an integral part of the entire process?

In April, Google announced the creation of its own wireless network, called Fi. It would seem that Google management is more optimistic about the long-term viability and benefits of becoming an MVNO.

Bottom Line on Apple Wireless MVNO

After rumors surfaced that Apple was testing an MVNO service, and the subsequent quelling of those rumors by an AAPL spokeswoman to Reuters, Apple stock declined in both instances. So, while Wall Street’s take on the plausibility of an Apple Wireless MVNO arrangement in the future is unclear, the benefits of becoming an MVNO appear, on the surface at least, to be potentially significant.

In my opinion, Apple is giving up a great opportunity by not taking steps to become an MVNO and offer wireless service to its millions of iPhone users.

Article originally appeared on InvestorPlace (08/06/2015)

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