Gadget’s reliance on fast networks a double-edged sword

Apple’s iPhone 5, which can only access the fastest mobile networks on specific airwaves, is prompting disadvantaged carriers in Europe to cut prices for handsets from rivals such as Samsung Electronics.

The iPhone 5, which went on sale yesterday, will connect to 4G wireless networks in Europe that run on an 1,800-megahertz band, favoring carriers who have a network attuned to that frequency, including Germany’s Deutsche Telekom AG and its British EE venture with France Telecom SA. Vodafone Group and Telefonica SA’s O2 unit will only be able to offer the iPhone 5 on their slower 3G networks.

The restrictions of Apple’s newly released handset will “push Vodafone and many other European operators harder into the arms of Samsung,” especially as the Korean company’s popular Galaxy line of phones includes a 4G version that is compatible with their networks, said Robin Bienenstock, a London-based analyst for Sanford C Bernstein.

With the iPhone 5 predicted by analysts to become the fastest-selling technology gadget in history, subsidies and promotions will help operators that only offer the device on slower networks to keep customers. Vodafone lost its top spot in the U.K. to O2 after failing to win the exclusive rights to the first iPhone in 2007. The device became Telefonica’s best-selling phone ever, and two-thirds of the clients coming to its U.K. network were poached from rivals.

Upgrade discount

O2 plans to offer iPhone 5 customers with a long-term contract the chance to upgrade to a 4G phone once the operator’s own 4G service is available, according to Telefonica spokesman Simon Lloyd. The carrier will chip in 10 percent of the cost of buying out the contract and pay the taxes, he said.

The new networks, based on long-term evolution technology, allow users to watch videos, stream music or perform other data-intensive tasks at a faster speed. EE, the largest mobile-phone operator in the U.K., said this week that the new 4G service is five times faster than what is currently available.

Samsung vaulted to the top of the global smartphone market by introducing a variety of Galaxy models using Google’s Android software. While the iPhone is the most popular smartphone, Android is more widely used, showing up in devices from Samsung to HTC.

Samsung said this month that sales of its latest Galaxy S3, which has a bigger screen than the iPhone 5 and also works with 4G networks based on different frequencies, topped 20 million units. Nokia Oyj unveiled a lineup of Lumia models this month with the most recent Microsoft Windows Phone software, aiming to win back market share with better camera and mapping technology.

Question of subsidies

“The question for operators now becomes, in the near term, how sticky is Apple’s software versus the better speeds of the Samsung Galaxy, and what size subsidies will be put behind this,” Bienenstock said.

Vodafone and O2 offer 4G devices from Samsung, LG Electronics and HTC that are able to run on the operator’s 4G networks based on frequencies other than the 1,800-megahertz band.

In the U.K., EE said on Sept. 11 it will start the service and give pricing details in coming weeks. The U.K. auction of 800 megahertz and 2,600 megahertz frequencies is set to begin later this year, allowing a general rollout of faster data services in 2013, regulator Ofcom has said.

Vodafone has opposed EE’s move to start 4G services ahead of an upcoming auction of frequencies, saying it was “shocked” by Ofcom’s approval of the service, which creates a “competitive distortion.”

Competitive pricing

“We’ll have to work a bit harder and we’ll have to work with other devices,” Vodafone Chief Financial Officer Andy Halford said last week. “We’ll be looking at the pricing and competitiveness of those devices.”

To be sure, EE’s LTE network isn’t widely available -- rolling out in 16 British cities by Christmas -- and as the first entrant in the U.K., the burden will fall on them to introduce customers to the new technology and market its benefits, said Gyanee Dewnarain, a London-based analyst at researcher Gartner.

“They’ll have to do the work to educate the mass market,” Dewnarain said. “The mass market doesn’t have a clue what LTE is.” By the time they do, Vodafone may be ready to offer its own service, she said.

Bloomberg, Yonhap