I’ve been thinking about Apple’s relationship to mobile carriers, and the related question of whether their overall marketshare matters for a while. I’m going to take a little time now to outline the evolution of my thinking, and the conclusions I’ve drawn.

It started when I realized how Apple was going to use iCloud to tie OS X and iOS apps together to provide a seamless, pervasive computing environment, which I finally got around to writing about last fall. That led to the realization that although iCloud was designed to be as efficient as possible when moving data around between devices, it was still bringing Apple into conflict with mobile carriers.  Apple was moving towards a future where fast connectivity was always available at the same time the carriers were raising prices and eliminating unlimited data plans.

One of the big innovations of the original iPhone is that Apple “owned” the customer relationship. Yes, people paid AT&T for service, and many people bought their iPhones from AT&T, but Apple controlled the phone, Apple provided the support, and the software updates, and AT&T could not load up the iPhone with their logos or crummy apps. This was unprecedented, and it scared the carriers, and drove them into the arms of Android. Nevertheless, the carriers still held an important piece of territory: your phone number. Numbers are portable, but as long as people are making phone calls and using SMS, its hard to switch carriers often.

However, we’ve seen a rise in services that bypass the carriers. GoogleVoice gives you a carrier independent phone number for SMS and phone calls. Apple FaceTime can use an email address as an identifier, and now, so does Messages, their SMS substitute. Add to those other services, like Skype, Viber, Ping and TextFree. The carriers are slowly but surely being marginalized, but for the time being, they are still in a position to dictate prices, because hardware subsidies and the accompanying service contracts inhibit the formation of a truly competitive marketplace. It’s clear to me though, something is going to have to give.

I think Republic Wireless may be a sign of things to come. Republic offers mobile phone and data service without a contract for $19/month. To take advantage of the service, you need to spend $200 on phone with a special version of the Android operating system that routes voice calls over WiFi when available. When WiFi isn’t available, they use Sprint’s network. It isn’t hard to imagine Apple moving towards something similar.

In broad outline, I think Apple’s goal is to ensure that the mobile carriers are unable to pose a challenge to Apple’s vision for the products and services they want to offer their users. Ideally, they would disappear from the customer’s view all together, becoming suppliers to Apple. How Apple achieves this remains to be seen, but I think the ingredients are:

• Apple has lots of capital, and they use that capital to gain a favored position with suppliers to ensure that they have a ready supply of key inputs, like flash memory,  high resolution screens, and bleeding edge manufacturing tooling, while depriving competitors of access.
• Mobile carriers need a lot of capital.
• Second-tier mobile carriers, like Sprint and T-mobile, risk going out of business if they can’t bring in enough revenue to do the network upgrades they need to stay competitive.  This is why Sprint sells service to carriers like Republic Wireless.
• T-mobile doesn’t yet have the iPhone in the US.
• Moore’s law can manifest itself in improvements to price, performance, and power-consumption. So far, much of the progress in the smartphone industry has been channeled towards improving performance. I think we may be reaching a point of diminishing returns, performance-wise.  This may push down pricing to the point that carrier-subsidies are less and less relevant.

However, since I started writing this post, there have been some new developments, which I’ll post about separately.