AT&T and the iPhone

Martin Peers, in the Wall Street Journal's Heard on the Street column, has a thought-provoking story about AT&T's relationship with Apple. The article questions whether AT&T has actually benefited financially from its exclusive iPhone service relationship. The article rightfully points out that it's not a no-brainer; it's unclear as to whether the costs outweigh the benefits. More importantly, though, this example provides a good lesson in the dynamics of strategic partnerships. Here are two questions to consider:

First, you must ask: Why did Apple negotiate an exclusive arrangement? One key reason is control. They understand that the service providers had a lot of power in the traditional relationship with phone manufacturers, particularly here in the U.S. Apple did not want to cede that power to the service providers; they wanted to very carefully control the customer experience, particularly as people bought and/or serviced their phones. Apple rightfully wanted to protect their brand equity.

Second, you might ask: Who has the power in this new partnership? Whenever firms enter into a partnership, alliance, or joint venture, you can and should assess the extent to which one party has the ability to appropriate more of the returns generated by this collaborative effort. It's not hard to see that Apple has the upper hand here, and therefore, it's not surprising that AT&T would realize less of the financial benefit. Apple, after all, could select from among multiple options as it chose its partner; therefore, that provided the firm leverage in negotiating this relationship. Moreover, Apple had the scarce asset going into this partnership. Scarcity provides value.