Apple Inc. (Nasdaq: AAPL) may have needed a network operator partner to help bring the iPhone to the British public, but it's clear who is calling the shots in the device manufacturer's relationship with O2 (UK) Ltd. , Britain's biggest mobile operator with nearly 18 million customers.

The partnership was announced this morning at the Apple store in Regent Street, London, which was closed to the public while more than 100 national, consumer, trade, and TV journalists listened to Apple CEO Steve Jobs and O2 UK's CEO Matthew Key praise each others' companies. The press corps were then given the chance to play with the iPhone device, which can connect to a GSM or a WiFi network. (See iPhone Invades UK.)

That left some frustrated shoppers outside in the cold, wondering why the shop was so busy but they weren't allowed in. (See Slideshow: iPhone Hits London .)

They weren't the only frustrated ones, though. Neither Jobs nor Key would respond to questions about the financial relationship between the two firms, or how long the exclusive U.K. deal lasts initially. It's also unclear how many iPhones will be available, or just how many customers O2 is hoping to steal from its rivals, Vodafone UK , Orange UK , T-Mobile (UK) , and 3 .

Jobs also declined to comment on any other European markets. "I'm here to talk about the U.K.," he said.

Jobs did, though, have plenty to say about O2. He claims Apple chose the Telefónica SA (NYSE: TEF)-owned operator as its partner, having talked to all of the U.K.'s operators, "because it's the one we feel we could work with the best. It wasn't an economic choice -- it was a cultural choice." He also admits he may have hurt the feelings of some of O2's competitors.

That "cultural" fit gives Apple a major role in the relationship with the customer, something the mobile operators are used to controlling.

iTunes activation
Once a customer pays £269 (US$536) (including taxes) to buy the iPhone -- which is basically a mini Apple Mac, an iPod, and a GSM phone rolled into one -- the device isn't activated in-store. Instead, the customer goes home with the iPhone, which comes pre-installed with an O2 SIM card, hooks it up to their PC or Apple Mac, and visits the iTunes online music store. The iTunes store will recognize that the connected device is an iPhone, instead of an iPod, and enable the customer to choose a service package, pay for it, and activate the device, making it ready to use for voice calls, texting, email, and browsing the Internet using the device's touch screen.

The U.K. iPhone does not come with any O2 branding. The only reference to O2 on the device is in the top left-hand corner of the screen, and only when the device is connected to the U.K. operator's network.

IDC analyst Paolo Pescatore believes this relationship "shows where the real power [in the mobile market] lies. It's not with the operators," it's with the device companies, he says.

"O2 is giving up a lot with this deal. There is no O2 branding, and Apple is managing the activation and the upgrades," adds Pescatore.

So what is O2's role? And what is it doing to support the iPhone?

O2's iPhone role
The operator may not be in the customer's face (which will likely be glued to the iPhone screen 24x7 anyway), but it's performing a lot of the all-important leg work.

The iPhone will connect to its GSM network to make and receive voice calls, and connect to its EDGE network for data services, such as browsing the Internet. EDGE (Enhanced Data for GSM Evolution) is a 2.5G technology that can deliver downlink data speeds of 384 kbit/s, which O2's Key says delivers a "perfectly reasonable experience." Where EDGE isn't available, a slower (maximum 128 kbit/s) GPRS connection can be used.

But O2 is still building out its EDGE capabilities. Key says that by the November launch, only 30 percent of his network will be EDGE-enabled, and that the company will build out from there. He declined to comment on how much capital expenditure is needed to upgrade the GSM network.

But there's no guarantee that O2 will upgrade its entire network with EDGE capabilities. Light Reading has learned that O2 aims to reach 40 percent EDGE coverage by Christmas and then base further rollout decisions on customer usage data.

Rolling out EDGE in the major cities (much of London is already completed) may be enough for O2, because it believes much of the data service usage (two of every three data connections, O2 estimates) will be done using WiFi connections in the home, or office, or at public hotspots. That's why the operator has struck a deal for iPhone users to connect to the 7,500 public WLAN hotspots operated in the U.K. by WiFi specialist The Cloud .

O2 is also setting up a 1,000-strong customer support center just for iPhone users.

Why not 3G?
But EDGE isn't as fast as 3G, so why not build a 3G version of the iPhone to enhance the device's data services?

Jobs says it's all about battery power consumption. "3G chipsets work well, but they're power hogs. The iPhone has a battery life of about eight hours [talking time], but a 3G phone has a battery life of only two to three hours. We don't want people to be afraid to use their iPhone because their battery might run out," notes Jobs, who hopes 3G chipsets might meet Apple's needs by the end of 2008.

In the meantime, "EDGE works really well for most applications… The one thing you'd like to go faster is the Internet. That's why we've built in WiFi connectivity as an alternative. WiFi is faster than any 3G network, and we feel that's the best solution just now."

One analyst, though, feels 3G isn't even an issue. "It doesn't matter whether it's a 3G device or not," says mobile device and wireless industry expert Ben Wood of CCS Insight . "This is a lifestyle choice. The iPhone is a fashion item," says Wood, who expects to see gadget freaks sleeping outside the Apple store through the night of November.

Wood also feels the price won't scare off the sort of customers O2 is hoping to attract. "This is a great opportunity for O2. This will attract high-spend customers, and there aren't many chances for land grab [in that market demographic] these days. You either drop your trousers on price, or you sell the iPhone" if you want to steal top-end customers away from rival operators, says Wood.

The analyst also believes the iPhone's introduction will be good not just for O2, but for the whole U.K. mobile market. "This will be a good Christmas for everyone," reckons Wood, as rival device manufacturers such as Nokia Corp. (NYSE: NOK) launch rival devices into the market.

Jobs warned potential U.K. customers not to expect a repeat of the price cut iPhone users in the U.S. experienced any time soon. (See iPhone Price Cut.)

"There are no plans to change the pricing, but it will go down in the future, because prices always go down. There are always new models being launched and price reductions on old models. We're working on the next iPhone, and the iPhone after that, and we're thinking about the one after that," teased Jobs.

— Ray Le Maistre, International News Editor, Light Reading