Mark Ritson on branding: iPhone strategy: no longer a grey area

unprecedented 15% of the operator's revenues from each user. Apple
repeated the arrangement with O2 in the UK and Orange in France.

But this ground-breaking strategy also created the perfect conditions
for a parallel or 'grey' market. This middle ground, between a brand's
official 'white' sales channels and the clearly illegal black market in
counterfeit or stolen goods, offers genuine products through
non-official channels.

Within hours of launch, the internet was awash with offers of unlocked
iPhones that would work with any SIM. It is estimated that a quarter of
the 5m iPhones sold to date have been through the grey market - more
than four times the number officially sold in Europe. But it's not
surprising when you review the factors that turned the iPhone into the
perfect grey-market product.

First there was Apple's attempt to maintain exclusivity. Using a single
operator in each market ensured maximum control of the offer to the
consumer, but it also increased the potential for grey-market activity.
The more control a company tries to exert over the way its brand is
retailed, the more likely grey markets are to emerge.

The product's international rollout was also a factor. The company
wanted to stagger the launch, partly because of the limited number of
handsets that were initially made available to consumers and partly to
maximise the impact in each country. With today's global markets,
however, it is almost impossible to prevent consumers in one market from
accessing a product in another.

Apple's international marketing strategy also attempted to extract
different prices from different countries. Again, this makes sense in
theory, but grey markets flourish in the spaces between different
prices. The currency fluctuations of the past 12 months made this
situation even more attractive as iPhones became better value to Asian
grey-market entrepreneurs, who were buying them in US dollars but
selling them on in Chinese Yuan.

Apple also encouraged the grey market by using multiple retail channels.
If it had allowed consumers to buy the phone only through operator
channels, where a fixed 18-month contract would have been a stipulation
for purchase, the grey market would have been restricted. So why did
Apple insist its stores would also sell the iPhone, thus enabling
consumers to get the handset without an operator contract?

The straightforward answer is that Apple wanted to showcase the sexy new
phone in its own stores to drive sales and ensure brand consistency. The
more suspicious marketer might also suggest that it wanted a bit of
grey-market action to boost sales and spread its uber-cool, premium
status around the world.

Whatever the reasons, with the iPhone's price now set to drop and the
number of operators and international markets set to expand, the grey
market is about to be replaced by the white.

- Mark Ritson is an associate professor of marketing and consultant to
some of the world's leading brands

30 SECONDS ON ... GREY-MARKET SALES OF THE IPHONE

- Some reports suggest that many grey-market sellers were buying their
iPhones direct from the Chinese factories that manufacture the device -
a different, but equally common, source of grey-market products.

- In an attempt to curb grey-market sales, Apple limits the number of
iPhones a consumer can buy.

- It has also attempted to limit the grey market by offering a series of
software updates that added new features to the handset. When owners of
iPhones bought on the grey market tried to download the updates, the
software locked the phones, rendering them useless.

- Apple has a goal of selling 10m iPhones by the end of 2008. While
grey-market sales count in the tally, the loss of subsequent share of
sales from network usage on the approved mobile network could cost Apple
up to $500m (£253m) in lost revenues.