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Can anyone break the carriers’ choke hold on the cellphone market?

Chicago (IL) – I was astounded when the cellular carriers sent Dell’s prototype “iPhone-killer” back to the drawing board.
I do get it though … carriers need differentiating products in a crowded market. Still, shouldn’t the handset makers be designing the handsets and not the other way
around? I mean, so long as the device works, what do the carriers care? Isn’t there a chocolate and vanilla option for this very reason?

Instead of being an intelligent interplay of device makers and
service providers, the cellphone market is constantly revolving around
carriers. While Apple (and only Apple) has had some success re-writing
these “rules of the business”, even Apple’s had to bend now and then to accept
subsidies and obligatory service contracts in order to expand the
iPhone 3G into 80 countries. Still, this leaves a big question: If Apple didn’t succeed in changing how
the cellphone market operates, can anyone put an end to carriers’
stranglehold business practices?

Contrary to what the carriers would have you believe, it is they
(not the cellphone makers) designing handset features. As a result,
buying the smartphone you want often forces you to switch to a specific
network and sign pricey service contracts. And only iPhone
differentiated itself from day one in a big enough way to justify making the switch for many.

While Apple’s early
dealings with AT&T broke the industry’s outdated business conceptions,
a quick reality check paints not so rosy a picture. For example, carriers still have
the power to reject Dell’s phone, and non-AT&T users still can’t get
the iPhone 3G in a no-commit form. It’s either their way or the highway, and given people’s desire to have things … they’ve got us.

Carriers control retail points and networks

It’s
hard to see the light at the end of a long tunnel when carriers control
both retails points and networks, essentially reducing the handset
makers to dumb contract manufacturers saying, “Yes, sir. Yes, sir.” And you really can’t blame the phone makers
either for complying because otherwise their phones would never reach the market.
While some phone makers have their own brick-and-mortar stores, the vast
majority of cellphones in the U.S. are still sold by carriers, locked into
each network.

Owning the networks and having the unique
ability to recoup upfront subsidies through contractual monthly service fees have enabled carriers to control the entire market from top to bottom — all the time. And it’s because of subsidies that we can get a high-end smartphone (like
RIM’s Blackberry Storm, Apple’s iPhone or Google’s Android G1) for $199
with mid- and
low-range handsets usually selling for $99 or less, or even being given away free of
charge — provided we agree to a pricey 2-year service contract.

I
wouldn’t complain on this subject had carriers provided both subsidized and no-commit
options for all phones they’re offering. That would seem to be a fair
consumer proposal, but it seems the carriers aren’t interested in being fair … just in making money.


CARRIERS CONTROL RETAIL POINTS AND NETWORKS
It’s hard for phone makers not to bend to carriers’ whim because carriers own cellphone networks and brick-and-mortar stores where phones are sold.

Read on the next page:  Apple vs carriers, no-commit iPhone on March 26, Conclusion

Apple vs carriers

When Apple first described the iPhone to carrier execs, AT&T was immediately
sold without even seeing the phone. The carrier even agreed to adapt
its network to enable iPhone’s Visual Voicemail
feature and accepted the unheard-of revenue
sharing scheme. For the first time ever for any carrier, a handset
maker (Apple) would get an estimated 30% of service revenues collected
from iPhone subscribers. In exchange,
Apple had to give AT&T multi-year exclusive distribution rights for
the U.S. — which Apple reluctantly did.

But
many foreign carriers resented the idea of sharing revenue with Apple, so the
iPhone maker eventually opted into common subsidies scheme. With it
came an attractive $199 price point and the 2-year service contract
requirement. Such a combo raises the total
cost of ownership (hardware + service) to nearly $2000. Carriers are
exploiting this model whenever they can, excluding countries like Italy
where carriers were required by law to offer the iPhone 3G with a no-commit
option as well.

No-commitment iPhone 3G comes March for $599?

Rumors
suggest AT&T will start offering a no-commit iPhone 3G this
coming Thursday. Models will be priced at $599 and $699
for 8GB and 16GB respectively, and will be limited to one unit per line.
Additionally, an
iPhone data plan will be required if the device is activated on the
AT&T
network.

While the no-commit option will enable you to walk from the AT&T
store with iPhone 3G without having to sign a service agreement or
activated the handset in-store, there is a catch? AT&T is restricting its no-commit pricing to existing customers
only. This addresses those wishing to add a line, purchase another iPhone 3G as a gift, or perform an
upgrade of their first-gen model.


$599 NO-COMMIT IPHONE COMES THURSDAY?
A leaked internal AT&T presentation suggests $599 and $699 iPhone
3G 8GB and 16GB models will be arriving March 26. The limited offering allows
existing AT&T customers to get the iPhone 3G without committing to a
2-year service agreement or in-store activation. This sales scheme enables use on rival
networks.
Source: Boy Genius Report

Conclusion: Carriers still hamper innovation

The limited
sales model for iPhone 3G and the rejection of Dell’s phone both send a clear
signal: He who controls the network dictates the market.

This monopoly position results
in too many compromises when purchasing a smartphone. The iPhone 3G,
BlackBerry Storm and Google Android are all sold exclusively by AT&T, Verizon and T-Mobile respectively, and there’s no way around
this fact. I can understand how carriers leverage such exclusive
distribution deals to lure subscribers over from rivals, but what bugs me is how
this severely limits innovation. In the end, we the consumer are paying the price not only in limited functionality but also in decreased smartphone abilities.

The fact that handset makers today only design the features carriers want is just another example of stifling
innovation (if not halting it altogether).

While I wouldn’t hold my breath for a Verizon-compatible
iPhone just yet, the expiration of Apple’s multi-year deal with AT&T will
likely bring the iPhone that “just works” over to all networks. It
remains to be seen if this potential can force other carriers to offer
smartphones with no-commit options to all users — not just those who are already on
their network.

For now, buying the latest smartphone gizmo locks you
into a network and a service contract you probably don’t want. But in the end it’s their game and they’re holding all the marbles. The individual dissenter here or there won’t make a dent, and so long as people en masse want to purchase whatever plan they extend, innovation will continue be stifled and our pockets will be emptied.


THE USUAL SUSPECTS
High-end
smartphones are still offered on an exclusive basis, forcing consumers
to switch networks just to get the phone they want. Will the letter of
the law ever deem this business practices as illegal efforts
plotted to lock us into service contracts and networks we don’t want?
Picture above (from left to right): T-Mobile’ Android G1, AT&T’s
iPhone, Verizon’s BlackBerry Storm and Palm Pre. The latter is slated
for June 30 arrival, likely exclusively via Verizon, too!