We've heard this one before, but Business Insider is reporting that Apple (NASDAQ:AAPL) is currently testing out a mobile virtual network operator, or MVNO, service of its own in the U.S., while simultaneously discussing similar arrangements with European wireless carriers. MVNOs are quite common throughout the world, where smaller companies lease wireless capacity on a wholesale basis and resell that service to consumers under their own brands.
This is a storyline that's resurfaced several times over the years, yet hasn't come to fruition. Here's why it still doesn't make sense.
It only sounds good on paper
For starters, let's acknowledge why an Apple wireless service intuitively might initially sound like a good idea. After all, Apple is a huge fan of vertical integration. Apple did its part fueling speculation when it released Apple SIM last year, which features the ability to dynamically switch wireless service on the go (although Apple SIM is only available on iPads and AT&T locks the SIM down if the device is activated on its network).
Having an Apple-branded wireless service to complement iPhones and cellular iPads to deliver data sounds tempting, because Apple could seemingly enjoy a greater portion of the value chain. The original iPhone did wonders wrestling power away from the carriers, inevitably giving all OEMs greater say in what devices they should build. Relegating carriers to back-end service providers could potentially strengthen Apple's position even further.
Apple is also known for excellent customer service, while wireless carriers are decidedly not. Incidentally, therein lies the rub.
Brand new risk
Remember when the original iPhone launched exclusively on AT&T in the U.S., and Ma Bell's network simply couldn't keep up with the onslaught of iPhone users? For years, the iPhone was the butt of many jokes, as the device was derided for constantly dropping calls. Because the device was exclusive, it wasn't immediately clear who was to blame because you couldn't compare the iPhone's performance on other networks. Naturally, the two companies pointed fingers at one another; but the point is that poor network performance tarnished the iPhone's image in the early years, even if it wasn't Apple's fault.
MVNOs sometimes get lower network priority during times of peak traffic and high network congestion, so there's a hypothetical scenario where a carrier-branded iPhone user could get better performance than an MVNO-branded iPhone user. It would look pretty bad if that MVNO were Apple, and its Apple wireless service was delivering worse performance than the carriers that Apple is trying to free you from. However, it would certainly be conceivable that Apple would leverage its significant weight in negotiating a better deal than the run-of-the-mill MVNO.
Still, even beyond network prioritization concerns, Apple would bear risks to its brand related to the performance of the networks, and it might not be worth the trouble. It would be rather uncharacteristic for the Mac maker to stick its logo on a service that it's not providing directly.
Is Google setting a precedent?
Apple filed a patent nearly a decade ago for "dynamic carrier selection," which is pretty much exactly what it sounds like. The company came up with a method of switching cellular networks on the fly depending on which one was offering the best performance at the time. If that sounds familiar, that's because Google is using a similar method for its Project Fi that launched in April. The search giant's initiative primarily uses Wi-Fi calling, complemented by T-Mobile and Sprint for LTE when no Wi-Fi network is around.
In typical Google fashion, Project Fi is a trial that's available by invite only right now. It also only works on one phone currently, the Nexus 6. But Nexus phones have never been big sellers; they're mostly purchased by Android enthusiasts looking for an unadulterated version of the operating system. Apple's scale of iPhone users would be massive.
Becoming an MVNO simply isn't a good business
Most importantly, the economics of the MVNO model simply aren't very good. There's a reason why there are countless failed MVNOs -- (you're forgiven if you don't remember the Disney MVNO, because the House of Mouse has also tried its best to forget the episode) -- and it's not because they make too much money. Quite the contrary, margins are razor thin because the service is largely commoditized. The whole reason why carriers like to lease out wholesale capacity is because they don't have to deal with sales or service, but they're happy to add subscribers.
The only potential wild card here is the idea that Apple has come up with some revolutionary model to becoming an MVNO; but even with all of its strength, there's not much it can do because all that network infrastructure belongs to the carriers, letting them call the shots. It's also not realistic for Apple to ink MVNO deals all over the world.
For what it's worth, Apple has directly denied the storyline, saying it has not discussed, and is not planning, any type of MVNO service. That's more than the customary "no comment" or utter silence that's heard from Cupertino, which is a good thing.
Evan Niu, CFA owns shares of Apple and Walt Disney. The Motley Fool recommends and owns shares of Apple, Google (A shares), Google (C shares), and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.