Apple's walled-garden offering is beating the operators at their own game

By Guillermo Escofet

You have to hand it to Apple. Although it was late to market on mobile, it is the industry outsider that has most wowed the mobile space since its debut a year ago.

It first created a sensation with the iPhone, which has become the handset that many veteran mobile-device makers are eager to copy. And it is now trying to claim a stake in the mobile-content and -applications market, through the launch last week of its App Store, alongside the new 3G iPhone.

Apple is eager to avoid the mistake it made in the desktop space, where it set the standard in computer design but saw Microsoft race ahead when its Windows operating system became the de facto platform for developers designing PC applications.

In the media-player arena, Apple married groundbreaking device design with an application – iTunes – that has become the web’s leading premium music- and video-download store, and it is that marriage that has ensured market dominance of the iPod.

The first version of the iPhone, launched last year, came installed with numerous applications that showed off the device’s cool capabilities, such as its touch-screen interface, rich graphics and motion-sensitive accelerometer technology. But it surprised and disappointed many observers by barring users from downloading applications to the device.

Apple never gave a satisfactory explanation as to why it did that. One reason appears to have been the fear of causing bugs on the iPhone operating system. Some believe, however, that Apple was trying to assuage operator fears that it wanted to compete with them on the mobile content front.

But no such scruples have held back Apple with its second iPhone offering, which not only enables downloads through the App Store but appears to have cut out operators from the value chain completely by billing downloads via iTunes, not users’ mobile bills.

Operators’ billing relationship with mobile users is seen as their strongest guarantee of customer ownership. So Apple is treading on sacrosanct territory by imposing an alternative way of paying for content and apps on its phones.

The possibility that Apple might have agreed to pay operators a small share of the revenue it will be making from App Store sales cannot be entirely dismissed – neither Apple nor operators have commented on the issue – but it looks unlikely.

Apple has a long way to go to catch up with other players in the mobile handset business – not least its old rival Microsoft – to become a leading magnet for mobile application providers. For example, about 18,000 applications have been developed for Microsoft’s Windows Mobile operating system. By comparison, the App Store featured only 500 applications when it was unveiled.

Nokia’s devices, meanwhile, are the handsets that developers most often design applications for. The Finnish giant’s huge share of the handset market ensures that content and application providers targeting the mass market put Nokia phones at the top of their list.

Nokia has also been the most aggressive of the traditional handset players on the content front, exemplified by the unveiling last year of its Ovi mobile Internet offering, combining music, games, location-based services and more.

But neither Nokia nor Microsoft – nor any other traditional player – has the head start that Apple has in digital-content downloads and payments, in the shape of iTunes. Nokia is hoping to bill for Ovi content through the operators. This is one of the things it is looking to secure in its Ovi partnership deals with the big carrier groups – not always successfully. Orange, for example, is enabling access to Nokia’s music store alongside its own on Orange-branded Ovi handsets but won’t allow downloads from the store to be charged on users’ phone bills.

Getting users to pay for content on their mobile via credit or debit card has proved difficult.

The iPhone, and iTunes for that matter, are still very niche compared with the market reach that cellcos and their billing systems have across the globe. But if iPhone sales continue to pick up pace, and if the handset continues to draw the interest of mobile-data-services enthusiasts, Apple could capture a large slice of the mobile content market – and all within its own walled garden.