Hold the phone!

For those of you are thinking of buying an iPhone, you would probably do well to wait until Christmas it seems. The exclusivity agreement between Telefonica-O2 and Apple is set to expire in the next few months, which could lead to an all-out price-war in time for the festive season. As the exclusivity is removed, it should make the market more contestable, and the price should fall.

Unsurprisingly, with this significant barrier to entry to new competition, Telefonica has reaped huge benefits from the exclusivity agreement, locking in high-value customers for the long term. Some analysts estimate that the iPhone accounted for 100% of O2’s growth in the U.K. last year, and without it, its sales would likely have been flat, in line with rival Vodafone’s.

The main reason why Apple would like to break the bond between itself and O2 (aside from making the competition authorities happier) would be to get more people to buy the iPhone and thereby get a bigger, steady stream of revenues. Furthermore the majority of loyal Apple fanatics (who had the highly inelastic demand and were willing to pay the higher-than-normal price for exclusivity) have now already bought it. In some sense, Apple have benefited as much as they were going to from the “scarcity factor” -  “Exclusivity is a legacy from their initial go-to-market strategy, which they have now moved away from.” From O2’s perspective, it also highlights the importance of having to always stay one step ahead of the game, and keeping a dynamic competitive edge on your rivals – O2 themselves have already moved onto obtain exclusivity on the Palm Pre.

France’s Competition Council already removed the exclusivity agreement Apple had with France Telecom, citing it as anti-competitive. The CC took the view that this exclusivity was likely to “restrict competition in the supply of mobile telephony services due to its duration (5 years) and the fact that it covered a particularly attractive product supplied by an undertaking which, although not dominant, enjoyed significant market power in the supply of mobile handsets”. And it seems like the U.S competition authorities are looking to follow suit.

But aside from all that, more importantly, it means us price elastic customers can now sit back and look forward to finally seeing some competition in the iPhone market; and hopefully find a nice present in our Christmas stockings in a few months time!

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