Sprint’s Music Strategy – and one more thing…

Each carrier’s approach also speaks volumes about the personality of the different carriers – and yes, companies have personalities. Sprint has been the pioneer in mobile music in the United States. Its goal has been not just to drive music sales – a business that is marginal at best for every carrier involved – but to create a usage pattern that puts the mobile device in the center of consumers multi-media experience and therefore drive overall data usage. In that spirit, Sprint lowered it’s over-the-air (OTA) price per song from $2.50 to $0.99, when the record labels lowered their royalty demands, instead of improving razor thin profit margins. From an absolute profit contribution perspective, even the increased amount would have not yielded a meaningful impact on the business. Interestingly, from first glance it seems that consumer demand is inelastic, meaning that the reduction in price by 50% has yielded less than an off-setting amount of incremental business. I don’t think that Sprint is greatly disturbed by that short-term development and the overall goal of developing data as a macro-category. Considering that Sprint’s $12 CDMA data ARPU is about 50% above that the other wireless average, the strategy seems to be working.

Another area where Sprint is leading is in music discovery with the introduction of the Pandora service. Pandora asks the music preferences of consumers and builds a library of songs that are similar to the song or artist that the consumer finds appealing. This allows for cross selling opportunities with artists or songs that the consumer was not aware of. The apparent bottleneck is that Pandora’s input relies on the good judgment of about 50 expert musicians who break down each song into the components that the Pandora engine then uses to create the customized play list for each listener.

Another differentiator for Sprint is access to 50 national and 95 local radio stations streamed to the handset. This allows Sprint to package a music experience on the handset from stored songs on the phone, customized virtual radio stations from Pandora and the traditional stations that everyone is used to from tuning into the regular radio.

By being first to seize the opportunity and grabbing an early lead, Sprint is also working with first generation infrastructure. That means that Sprint, unlike Verizon Wireless, is right now not able to bundle ringtone, ringback tone, and full song downloads together. The bundling of these services is a major cross- and up-selling opportunity. I view the vanilla recommendation of another ringtone after I just purchased one the same way as I would view a restaurant that would offer me a main course of steak after I just had a main course of fish – offer me desert (or for that matter full song, ringback tone) and my chances of saying yes are much higher. I have no doubt that we will see this type of cross selling in the not so distant future. This is still early days…

And one more thing – the iPhone. All the expectations were fulfilled, well maybe not all of them. Yes, it is the Rolls-Royce of the wireless world with everything that comes with this moniker, even a $200 price cut has not changed this. For a change, there has been truth in advertising. The iPhone is one of the most beautiful and user friendly mobile devices. It is a terrific mobile devices – I deliberately do no call it a phone – for consumers who love data and data connectivity but do not truly need it. The aesthetic paramount of having a closed device with its sleek and elegant design, lead down the road to having no replaceable battery, which in turn causes insurmountable power constraints. This demanded to use the most power efficient air interface standard to be used – EDGE – which in turn makes accessing the internet less than “real.” If it would be a Ferrari, HSDPA would be the air interface with the trade-off that while going really fast, the gas tank would be perpetually empty. HSDPA would make the device would be even more infatuating and the battery would run out after an hour or two due to the high power demands of HSDPA, with consumers uttering and inventing expletives in an unprecedented fashion. So it was better to disappoint a little on the network side and please on the usability and design side. Is there room for improvement? Yes, of course like with every version 1.0 (or 1.02) device. I am convinced that Apple is working on an HSDPA device that will dramatically accelerate the air interface. Once HSDPA is in the device, I believe that the OTA iTunes that is now available on the just released iPods will also be released for the next generation iPhones. A more ubiquitous soft one step back-button and the outlook task list would be a nice start. The option of OTA synchronization of calendar and address book would be even better. Until there is Blackberry server or at least Exchange server support I would have a hard time recommending it as the only device for a business user. By the way, a 33% price cut infers to me that while the externally pronounced expectations might have been met, the internal expectations have probably been much higher. You don’t give up on $200 out of the goodness of your heart; you want to drive volume. The big question is if the price cut will actually increase demand or how many people are out there that had a $200 budget crunch to get a $600 device? In my opinion, if you are willing to spend $400 on a phone, the next $200 are not really a significant obstacle.

And as a footnote: The reactions to the FCC’s decision to mandate open access a few weeks ago was hilarious. The winners acted like the losers “We don’t really have anything to say about this,” and the losers acted like the winners “The Federal Communications Commission made real, if incomplete, progress for consumers this afternoon.” The wireless industry did not give up anything that it was not, grudgingly, willing to accept, whereas Google did not get the resale requirement it demanded in exchange for bidding. What is interesting is that this decision will shift innovation from the network to the device. Only time can tell how big the shift will be and if innovation is a zero sum game. The most important question is if Google will actually come to the floor and dance to the tune of more than $4.6 billion or if it will be pouting in Silicon Valley because it did not get everything it wanted. Well, the last thing Eric Schmidt said was “possibly.”