iPhone: joining the subsidized pack

While the masses praise Apple for the new iPhone 3G, one should remain mindful that this release is actually a giant step backwards for the US cellular industry. Let me be clear, the iPhone 3G is another stunning design encapsulating new, cool features into a superior form factor. The problem is not the handset itself. The problem is the way that the handset will be marketed and sold.

Previously, Apple garnered praise for championing the movement to a more open mobile ecosystem. But, since that time, Apple has continuously acquiesced to the pressure from AT&T to play by the carrier-centric rules of the game. Yes, as has been explained in an earlier posting, the carriers in the US rule the mobile world with an iron fist.

While professing to support consumer-benefiting progress, the carriers have no intention whatsoever of actually loosening their tight grip on consumers. But, let’s not let the consumer off the hook too easily. US consumers are suckers for anything “cheap” or “free”, to their own peril. This deadly combination results in the continued practice of carriers subsidizing handset sales in exchange for consumers signing up for long-term contracts. From that point on, the consumer has no real option to switch carriers and therefore the carriers have no real incentive to improve their offerings, or provide new and innovative services.

Remember the old rhyme:

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.

Except, in our case, for the want of a free cell phone, the whole US mobile kingdom is lost.. or, at least, is 2 generations behind mobile service in Asia.

Missing the Point: wireless carrier regulation bills

Today, Senator Mark Pryor introduced a bill to regulate the wireless carriers. As the RCR Wireless News article points out, the Pryor bill is backed by the wireless industry and will compete for backing with a bill introduced a mere 10 days ago by Senators Jay Rockefeller and Amy Klobuchar.

Consumer advocates are backing the Rockefeller-Klobuchar bill. The wireless industry is backing the Pryor bill. Both bills have good and bad points. Since the Rockefeller-Klobuchar bill arrived first, let’s start there. This piece of legislation would require the carriers to make their bills more transparent. The authors claim that carriers are mislabeling as governmental and regulatory fees what should just be considered standard operating costs and paid for in the normal monthly plan pricing. If anyone has actually reviewed their cell phone bills, they would probably agree that some clarity and “truth in billing” would be helpful.

The Pryor bill would put the FCC in charge of policing the wireless industry, and would close the current loophole that allows for each state to impose its own regulations. This is important because consumers and businesses should expect the same level of service no matter what state they are calling from. Allowing the states to impose their own regulations can only lead to fragmented, unequal service throughout the country.

So, what are the problems with the bills? With the Pryor bill, too little is imposed on the industry in terms of “truth in billing” and other consumer protections. With the Rockefeller-Klubochar, the FCC will investigate cell phone “locking,” which is a pointless and unnecessary study.

Here’s why cell phones are currently locked and why contracts call for $250 early termination fees: with the carriers subsidizing consumer phone purchases, acquisition costs are $300-$400 per customer. If a new customer signs up for a $40 per month plan, that’s an 8-10 month break even period. The carriers shouldn’t be expected to subsidize handset costs and then not be allowed to lock in customers.

Now, I’m not saying that the carriers should be allowed to lock in customers. I’m saying that everyone is looking at this from the wrong point of view. The aspect that nobody is talking about here is the power that the carriers wield with the handset manufacturers. If the handset was unbundled from the service, the whole ecosystem would prosper.

Of course, each group would gain something and give up something. Consumers would gain freedom to shop around for the handset of their choice, the service plan that best meets their needs, and would be able to switch when their needs change or a competitor in the market provides a better value proposition. But, consumers would have to pay full price for the handset. This is the common model in Europe, but the American consumer is spoiled by cheap handsets. Sorry consumers, you gotta give to get.

The carriers would reduce their acquisition costs. This would allow them to focus more on the service instead of misusing their money by paying for handsets that consumers have shown they are willing to pay for themselves, if the product is right. (See iPhone) But, carriers would then have to compete with each other more fiercely on service, which means an increased investment in innovation. And, the carriers would have to give up on the idea of locking in consumers with two-year contracts. That won’t be justified.

What also wouldn’t be justified is the carriers’ stranglehold on what services are delivered on the cell networks. Consumers in the US have been deprived of innovative new services that are commonplace in Asia and Europe. It’s time that the Democratically led Congress starts addressing the real issue: Wireless Net Neutrality. Isn’t the wireless industry clamoring for less regulation? Now’s the time for the carriers to walk the walk.