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O2 is fighting hard to keep its exclusive deal for the iPhone in the UK, but this is raising questions over whether the UK carrier is sacrificing too much for the Apple handset. It has already rejected the Nokia N96, set to be one of the hottest smartphones of the pre-holiday buying season, and is set to turn down other devices and services such as Nokia Comes With Music. This is in addition to spending a huge portion of its customer acquisition budget on a single phone, at a time when consumer spending slowdown could hit margins anyway.

Although the small print of Apple's exclusive deals with operators such as O2 UK and AT&T have never been revealed, the contract with O2 is understood to last until 2012, but with the option to renegotiate before then - possibly opening the UK market up to a second iPhone carrier as early as one year from now. The renegotiation is likely to be triggered if Apple is dissatisfied with O2's sales, a situation that highlights the strong upper hand that the device maker gained in its early deals with operators. A spokesperson for O2 said: "We have a strong relationship with Apple and they are pleased with the sales of the iPhone to date."

So far, the iPhone 3G is performing well, even if this strong showing is coming at a high cost to O2. At its July launch, there were hiccups down to registration problems and stock shortages, but after that, sales reached a high of 50,000 per week in the first two full weeks, and are now averaging an estimated 27,000 sales a week. This is credited to a major print and TV advertising campaign that O2 has sustained for the full two months of the iPhone 3G's availability, and which it will continue to run in the build-up to Christmas.

Analysts estimate that the Apple phone has about 6% of the handset market in the UK, but the fact remains that weekly sales, though healthy, are falling - from 32,000 in early August to 27,000 now. O2 is now looking to its offer of prepaid iPhones, plus the pre-Christmas rush, to revive sales levels and keep Apple happy, sources indicate. The company is offering a prepaid iPhone 3G for £350 for the 8Gb model, and £400 for the 16Gb version, but these remain big ticket items amid the current consumer spending slowdown.

The other risk for O2 is that it feels forced to put most of its marketing efforts, for high end handsets, into one device, and that it is pressurized to turn down other attractive phones, in order not to divert potential customers from the iPhone. This dilemma also makes O2 hostile to mobile media services that may compete with its own branded offerings and applications associated with the iPhone. It is one of several UK carriers that have turned their backs on Nokia's Comes With Music service. O2's head of content, Antony Douglas, said in a recent interview: "We will keep an eye on it; if it is a huge success, we will renew our position. We will focus on existing services, but if Nokia does something compelling that is good for our customers, we will work with it."

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