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What Matters About The Apple iPhone

The big deal isn’t the iPhone itself, which is what the mainstream investment, gadget and tech media is focusing on. It’s the way that it will fundamentally challenge how carriers have coupled services with connectivity with a hardware distribution monopoly.

There never has been ‘net neutrality’ when it comes to mobile phone hardware. The Apple iPhone would be the first big test.

The new (rumored) iPhone will be sold (rumored) directly from Apple and (rumored) require the user to pull the GSM SIM card from their device (only T-Mobile or Cingular use GSM domestically) and insert it into the iPhone. No hardware manufacturer has ever tried this, instead they bend to the wishes and requests of the carriers in order to gain acceptance and distribution of their hardware by the carrier.

Apple’s decision comes as no surprise (see iPod Competition – a Fighting Retreat). Jobs himself was quoted in May of 2005 referring to the four largest wireless carriers as the ‘four orifices’, a graphic reference to how they control the distribution and use of mobile hardware on their networks. Walt Mossberg summarizes the effect well:

Cellphone carriers say one reason they keep tight control over what phones run on their networks is to protect the networks from harm and assure service quality for their subscribers.

But we’ve heard that before, and it wasn’t true then. Until the 1970s, when the government forced open the market, the old AT&T phone monopoly refused to let consumers buy phones and plug them into their home phone lines. You could only rent phones, and they had to be models made by an AT&T subsidiary. AT&T said the restriction protected the quality of the wired phone network. But, lo and behold, when the ban was lifted the phone network was just fine, even though consumers were plugging in millions of less expensive, more innovative phones.

Much effort has been expended by carriers to enter the content space by selling ringtones, games, music, useless wallpaper rubbish, etc. They control the user experience and subsequently control the revenue generating services.

If Apple does indeed attempt to distribute around the carriers, and is successful, they will usurp this capability and turn the wireless carriers into ‘dumb pipe providers’. This is the carriers worst nightmare, and I would expect them to push the limits of anti-competitive behavior to stop Apple.

It will be very interesting to see how the carriers respond.

Discussion

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  1. andrew,

    that’s precisely the point i was making in my post.

    Posted by Om | November 16, 2006, 7:23 PM
  2. I don’t see what the big deal is. Europe has had SIM free phones for ages. In fact in some countries SIM locking and bundling is prohibited. In Finland, for example, you can’t bundle a phone with connectivity unless it’s a 3G phone and even then all 3G phones are available SIM free.

    P.S. Thanks for a great blog! Keep up the good work.

    Posted by Zed | November 17, 2006, 4:24 AM
  3. You are right – it shouldn’t be a big deal. But the US carriers, with their legacy of non interoperable networks, are not accustomed to the interoperability of a GSM world.

    Posted by Andrew Schmitt | November 17, 2006, 8:34 AM
  4. Hopefully, Apple will force the carriers to see the light. They’ve been screwing customers too long with crippled hardware in an attempt to force the consumer to use their poorly designed services.

    Posted by Andrew Jacob | November 17, 2006, 2:23 PM
  5. Just one quick point of fact, Andrew. You note that there has never been “net neutrality” on mobile networks. In actuality, there has never been “net neutrality” on the internet, either. The internet, however, has remained much more “neutral” simply through consumer demand and ISPs taking into account the fact that anything else would cost them subscribers.

    For the record, full disclosure. I work with the Hands Off The Internet coalition. If you’re interested in what we’re about, feel free to follow my website link to our homepage. Thanks.

    Posted by Hands Off The Internet | November 17, 2006, 2:29 PM
  6. Andrew,

    What you seem to be forgetting is the huge amounts many operators spend subsiding phones so that we can buy them well below the price paid by them to the handset vendors. Motorola obviously does not sell the RAZR at 49$ or less !

    Presumably if Apple cannot come to an arrangement with the carriers, then there will be fewer people willing to fork out the full price for the iPhone. Quite frankly, if Apple cannot get the carriers to promote their phones, it will be bad for their potential sales..

    The main reason that operators try to keep control on the handsets they sell is to increase customer loyalty and reduce churn. Some even go further by having phones pre-installed with the carriers own look and feel (Vodafone Live, Orange Signature, etc). The basic service quality of the phone is assured to a certain extent by having to pass type approvals and certifications like GCF and CDG.

    Posted by Raj | November 20, 2006, 11:20 PM
  7. i wonder how much of the average GSM handset BOM is in licensing fees?

    Posted by Justin Shaffer | November 21, 2006, 3:36 PM
  8. Licensing fees for GSM are far less than that for CDMA. To state that Qualcomm is despised by mobile operators is an understatement. Sprint’s recent announcement to cap off new investment in CDMA technology is just one example of an exodus from CDMA technology. VIVO, which is the number one mobile operator in Brazil is another and have announced plans to migrate all 30 million of their subscribers from CDMA to GSM.

    I think that Apple can succeed in their ability to sell a non-subsidized phone. I believe the single largest advantage Apple has going for them is that they have established a well-known and accepted price of $300 for an iPod without any cell phone capabilities at all. Suppose that Apple offers me an iPodCell $400. That means that the cell phone component costs me just $100. That seems like a good value proposition.

    The problem Motorola / Nokia / Samsung / Sony Ericsson / LG have is that I can’t buy an iTunesRAZR / E61 / Carbon / Walkman phone / Chocolate without the cell phone component. And I’m not sure what I’d pay for that functionality. Probably close to zero.

    BTW – Apple will not be the first. Samsung is quietly selling the Black Carbon on their website:
    http://www.samsung.com/Products/MobilePhones/Globalphones/SGH_D900ZKAUSA.asp
    There is a big marketing push for this product worldwide – there are large billboards announcing their Black Carbon lineup in major metros in Asia, Europe and South America right now. Interestingly, I haven’t seen any of these ads stateside. Maybe it is because they know the American public won’t spring 4 bills for an unsubsidized feature phone, even if it is half the thickness of an L2 SLVR.

    It will be interesting to see if Americans will spend $400 for an iPod with a phone interface. I believe we will.

    Albert

    Posted by Albert Lew | November 22, 2006, 1:30 PM
  9. Palm is also selling unlocked versions of their new PDA phone for a $200 premium.

    I also think that what emerges will be different that what people expect. Perhaps this is an iPod with Wifi, and VoIP capabilities. That would fit the description on an iPhone.

    Posted by Andrew Schmitt | November 22, 2006, 3:00 PM
  10. Note that in Belgium too (in addition to Finland mentioned above) carriers cannot lock phones to a single network and the recent ruling in the USA on DMCA copyright exemptions means its not a DMCA violation to unlock a phone. So perhaps unlocked phones + separate SIMs will become the norm in USA too soon.

    http://news.yahoo.com/s/ap/20061123/ap_on_hi_te/digital_copyright

    Justin:
    An unlocked basic phone (Nokia/color) in Belgium costs about 60 Euros, a prepay SIM, about 20 euros including taxes. So without subsidy they’re still dirt cheap. So subsidy can’t be used as the excuse to continue the practice of lock in.

    Posted by DongLoy | November 23, 2006, 7:35 AM
  11. Hi Dong,

    When I was in Brazil earlier this month, I was told that you can get a prepaid Nokia phone for the equivalent of $40 US dollars. Now that is cheap!

    Albert

    Posted by Albert Lew | November 23, 2006, 1:52 PM
  12. I would like to know if this phone will be a triband or not. I also think that they are making a mistake with 4 or 8GB it should be 80GB besides the phone you would have a nice Ipod. I think this phone look nice but for a travelor it would not be good if you can only use one phone company.

    Posted by jan | January 9, 2007, 6:49 PM
  13. The phone is quad band – 850 / 900 / 1800 / 1900. Cingular has great coverage all over the world – I have used their service with my quad band SLVR L2 nearly 20 countries in Europe, Asia, South America, and of course here in the US. The roaming charges are very expensive, but phone shops in Europe can “unlock” your phone, and then you can use the local mobile companies’ SIM cards. This is a general problem with US GSM carriers and is not limited to Cingular or the iPhone.

    To me, the four glaring technology omissions (in order) are:

    HSDPA – Cingular is rolling this out right now and has decent coverage near tier 1 city centers in the US. Download speeds for email are finally comparable to 1xEV-DO from Sprint and Verizon.

    Microsoft Office document editing and PDF viewing. This won’t hurt phone sales volume, but it will be a deal killer for enterprise users.

    iTunes over the air. Well, I guess you wouldn’t want to do this without HSDPA…

    SD slot. Not a big omission if you get the 8GB version, I suppose. BTW, if Apple included a HD, then this phone would be a non-starter from a price / form factor / price standpoint. Just take a look at the HD camera phones that came out recently and bombed.

    Albert

    Posted by Albert Lew | January 10, 2007, 7:15 PM
  14. Apple phone? You mean Apple announced a phone? :)

    Posted by Andrew Schmitt | January 10, 2007, 7:44 PM