My recent posting about the Apple v Omnifone challenge was met with a mild dose of flame—that's what you get if you write about Apple (or Linux) in anything but a positive way. Thanks for the attention. Anyway, I was making a point, and it is worth revisiting it, given that I got a critical fact wrong. I took the details of Omnifone's pricing from the BBC, which incorrectly quoted a weekly charge as a monthly charge. $4.00 a month (about $50 per year) is clearly quite different to $4 per week ($200 per year).

This alters my expectation of the consumer response significantly, but not my conclusion (that Omnifone will likely break Apple's current music monopoly). I expect many consumers to think that $200 per year is too high, but I don't think all of them will. Neither do I buy the argument that the rental model for music cannot work. I expect most existing users of iTunes and iPods, to simply continue as they are, either ignoring the mobile phone as a music player or buying an iPhone (as I will probably do). But the truth is that in total this does not amount to a particularly large number.

The estimate for the number of iTunes/iPod users is in the region of 27 million. (There's definitely more than 27 million iPods in use, but many users, like myself, have more than one iPod—about 70 million have been sold over 5 years ). These numbers are dwarfed by the number of mobile phone users, which is about 2.5 billion.

There seems to be a naive belief among some Apple enthusiasts that Apple will steal the mobile phone market out from under the noses of Nokia, Sony Ericsson, Motorola, Samsung, Sanyo et al—and that all of the carriers will sit there watching it happen (and watch their revenues from video and music services vanish). It isn't going to happen. The view from within the mobile industry is more along the lines of "Apple has done something really interesting with the iPhone which has raised the competitive stakes among the handset manufacturers". The carriers, who dominate the industry, have only two major business goals (in mature markets):

1. to raise the revenue from each individual subscriber (by offering more profitable services).
2. to increase the number of subscribers.

For the sake of the second of these goals, carriers will happily do deals with Apple. It makes good sense because the carrier does not have to subsidise the handset itself and because a number of people who are not currently their customers will undoubtedly buy the iPhone. But the carriers that do such deals will insist on exclusive deals (like the US carrier Cingular got for a 5 year period, reportedly).

Why exclusive?

Well if they don't get exclusive deals then the carrier won't win new subscribers. As regards a handset, the iPhone is destined not to generate revenue on the sale of music or video for the carrier so it is likely to generate less revenue than other handsets.

Apple, for its part, will probably want a deal with the largest carrier in any territory to maximise the sale of its iPhone. It will surely be able to get such a deal in most markets, because of the customer switching it will generate. Apple has done extremely well to get itself into a situation no other handset vendor could hope for. You have to hand it to Steve Jobs. And I have little doubt that Apple will meet or even exceed its initial sales target of 10 million iPhones in its first year. But even if it achieves 20 million sales by the end of 2008 (way beyond its target), its subscriber base will still be only about 0.8% of the market.

Now consider the Omnifone position. Currently its software can play on about 75 percent of handsets, but actually the figure will move closer to 100 percent in time. It has the technology to do the porting (and as I pointed out it can do most new ports in a few hours (including testing). Omnifone's share of the mobile market depends on the number of carriers that choose to take the service. Right now it has a potential customer base of 690 million, but this will undoubtedly rise towards the 1 billion figure very quickly. Omnifone's MusicStation is likely to become the dominant music client on mobile phones. (In 2006 about 200 million mobile phones that could play music were shipped—far more than the number of iPods. But with Omnifone's MusicStation the number grows dramatically. Nearly all mobile phones will be able to play music.)

If you live in North America, just bear in mind that North America is about 1–2 years behind Europe in mobile phone usage and about 2–3 years behind the Far East. As regards music on mobile phones, in the UK, for example, about 27 percent of 3G mobile users download music to their phones (source Telephia) with 10 percent buying over the air from an operator's site.

So the question as regards Omnifone is whether the mobile users will find the fees acceptable. Now bear in mind that many mobile phone users expect to pay nothing or very little for a handset—and they switch handsets on average every 18 months. This is habitual and driven to some degree by the fact the handset arrangement is tied to the phone deal and the handsets improve (like PCs) every couple of years.

So on the one hand you have the iPhone (cool device, costs $500 and you buy the new music you want) against Omnifone (any mobile phone, probably free, plus $200 per year, all the music you can eat plus no cost for data transfer, plus a free player on the Mac or the PC). So is that an even contest or does it favor Apple?

Actually it doesn't matter, because that isn't going to be the contest. Most mobile users have no intention of buying a mobile phone. Omnifone won't compete with Apple, in any meaningful way, it will compete with other ways of getting music on a mobile phone. Apple's iPhone is akin to (but likely to be more successful than) the Blackberry, which has about 5 million users world wide. Apple most likely will get tens of millions of users worldwide, eventually.

But if Omnifone gets even a miniscule percentage of the mobile market (say 1 or 2 percent) it will break Apple's music monopoly. There will be two credible providers in the music market, rather than one.

And I'll be surprised it if doesn't. Here's why. If the carriers and music industry discover that the Omnifone price point is damping down demand, they will push for the price to be reduced or for different download arrangements. The carriers spent billions buying their mobile licenses and spent even more billions building their 3G networks. They did it all for music, video and games and they are not going to let the market slip away.

There was a great deal of response to my last article that insisted that a rental model for music will never work. I think otherwise. Digital music is just software of a kind and eventually all software markets will be dominated by rental models. The market for video already is and ultimately the music market will probably be bundled with the video market. The music would probably already be a rental market if the level of music theft weren't so high.