Apple’s content strategy for the Middle East betrays its roots in hardware

Posted by rshields Friday, May 8th, 2009

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Apple’s iTunes Store and App Store are the envy of the digital-content industry. It would be fairly safe to say that wherever either has launched, it leads its market segment in number of downloads generated.

When examining the success of Apple’s App Store, many mobile-content-industry observers say Apple’s commercial stroke of genius was to secure a billing relationship with the mass market through its iTunes outlet long before it launched the App Store.

Such long-term thinking has effectively enabled Apple to outmaneuver many of the world’s major carrier groups, many of which were eager just to bask in the reflected glory of Apple’s box-office appeal by selling the iPhone. No other handset vendor has managed to persuade cellcos to enter such a deal – notably Nokia, which has had difficulty doing so with Ovi.

Apple has full control over billing for all mobile applications and music downloaded by iPhone users, who can download applications and content to their device over Wi-Fi or cellular networks without setting up a separate billing account with their cellcos. In many cases, the best many carriers can hope for is to sell their own applications through the App Store. Neither Apple nor its cellco partners are willing to say whether download revenues are divided between them, but you’d have to imagine that in such a scenario Apple would hold all the cards.

Middle East does not play Apple’s tune
There is no official iTunes Store in the Gulf states, surely meaning that vast swaths of the market for digital content, such as music tracks and videos, are underserved. This offers a glimmer of hope for regional cellcos looking to duke it out over digital-content sales. In the absence of an iTunes store, network operators could come up with their own offerings, which could also be accessed by iPhone users.

But why such a glaring omission from Apple’s global footprint, especially since the region’s oil-rich economies imbue it with vast spending potential? The answer is not clear, but one popular theory is that Apple’s digital-content strategy is closely linked to its hardware strategy. Industry insiders maintain that Apple’s digital-content arm is in operation merely to create a market for its premium hardware products and that in any area where it does not make vast profits from hardware sales it will neglect to offer an iTunes store.

The fact that Apple does not have any Apple-branded outlets in the Middle East – it works through a series of authorized regional resellers instead – suggests that the market is not a particularly lucrative one for the company. Be it because of regional governments’ protectionist policies or because Apple fails to strike a chord with users in the region (which is unlikely), the Middle East is not at the top of Apple’s list of priorities.

But with the launch of the iPhone in the region in the past nine months or so – in Jordan, Saudi Arabia and the UAE – Apple has been prompted to launch an App Store there, albeit without offering many Arabic-language applications. But for these launches, Apple lacked a prior billing relationship with the mass market, meaning that iPhone subscribers would have to sign up to an App Store account separately from buying the device from a cellco.

Globally, the iPhone is shipping in volumes that have far exceeded previous expectations, and the App Store is reaching download figures that few had deemed possible: The figure is at 1 billion and counting. But there have been disappointing reports about iPhone sales in the Middle East, according to market sources.

This might have something to do with the influx of gray-market iPhones via unofficial channels well in advance of the official launch of the device in the region. Whatever the cause, all of this adds weight to the theory that the Middle East is a tier-two market for Apple, a fact that has afforded other mobile content players – namely cellcos such as Etisalat and Mobily – the chance to muscle in on the digital-content market there.

Both Kuwait-based Zain and UAE-based Etisalat have recently upped the ante with their respective mobile content strategies. Etisalat signed a deal with Finnish handset manufacturer Nokia to enable its customers to access content – including maps, navigation and games – via the Ovi portal, in addition to the carrier’s own mobile content portal. The service is set to launch in the UAE in 2Q09 and be rolled out to other Etisalat operations in the Middle East and Africa in due course. Etisalat says it will initially support billing for Nokia’s Ovi Maps and N-Gage services through “an easy and convenient payment mechanism,” and subscribers are set to have the option of paying by credit card.

Equally, the Zain carrier group has signed an exclusive deal with Arabic music label Rotana to sell the record company’s content on its online and mobile portals, something that is sure to prove a winner with local audiences and might give them an edge over rival content merchants.

One more thing
But there is one more twist in the tale: Even though it is difficult for users based in the Middle East to access content on the iTunes store, there are ways for them to do so. And perhaps this is another measure of the market savvy possessed by Apple.

Users in the Middle East with credit cards registered elsewhere – such as the US or Europe – can buy content from the relevant country’s iTunes outlet even from the UAE or Saudi Arabia, for example. Given the fact that a large part of Apple’s target demographic in the Middle East has access to such credit cards, the potential for the company to generate revenues from its operations there is clear. The download figures generated by such users are difficult to establish and are therefore open to speculation.

Perhaps this is a reason why, despite the massive spending potential of many people in the Middle East, Apple is not in a hurry to open a Middle Eastern iTunes store.

ronan.shields@informa.com