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The iPhone  has sure brought a lot of whiners out of the woodwork. Today Sen. John Kerry joined them by publishing a blog post on the Save The Internet blog arguing against exclusivity of certain phones on some wireless networks. Yesterday, Kerry sent a letter to […]

iphones1The iPhone  has sure brought a lot of whiners out of the woodwork. Today Sen. John Kerry joined them by publishing a blog post on the Save The Internet blog arguing against exclusivity of certain phones on some wireless networks. Yesterday, Kerry sent a letter to the FCC in preparation for hearings scheduled tomorrow that called for investigation into exclusivity arrangements such as AT&T’s lock on the iPhone or Sprint’s six-month exclusive on the Pre, asking if those arrangements hurt consumers.

As an example, the letter asks if such deals result in a consumer not being able to use the full features on a device (for example, if a carrier prohibits tethering). Other concerns are whether these deals are becoming more common, and whether it stifles innovation in the handset market.

In March, I wrote about exclusivity arrangements, and questioned whether the government should get involved. I think that most consumers still have access to a variety of competitive devices on other networks. Plus, in most areas they can choose whatever cell phone provider they want and still have an array of devices to choose from. If you want an iPhone, you can get one in most places in the U.S. by signing up for AT&T’s network and forking over a few hundred dollars. These crusaders are confusing a lot of issues with complaints about exclusivity, associating it with higher prices for devices and net neutrality on wireless networksFrom a Free Press release:

“Consumers are outraged by both the high prices of new smartphones and the blocking of access to innovative features,” said Timothy Karr, campaign director of Free Press. “Senator Kerry is leading the fight on Capitol Hill to make walled wireless gardens a thing of the past. It’s time we opened up networks so we can access the wireless revolution at prices all Americans can afford.”

Say what? So far, there’s no guarantee that net neutrality will ever happen on wireless networks — mostly because wireless networks use spectrum that carriers purchased from the federal government, which in most cases (part of the 700 MHz block is an exception) has no open access regulations tied to it. To change the rules now alters the contract with carriers, and that’s a nasty precedent to set. If we want neutral wireless networks, building out white spaces or allocating more spectrum for other types of wireless broadband is the way to do it.

As for the high prices for these devices, I’m not sure what the beef is here. The iPhone is expensive because it’s a mini-computer, and because it’s a desirable object, Apple can charge a premium for it. My MacBook costs more than a Dell Inspiron, and both cost more than a cell phone. Thanks in part to its exclusivity, or at least the ability to lock the iPhone to its network, AT&T actually makes the iPhone cheaper for consumers by subsidizing it. So I think iPhone envy is causing a lot of people to lose their ability to think clearly about wireless broadband. That’s unfortunate, because it could be the method of access for rural Americans in the years to come.

  1. it’s not the government’s job to oversee private industry

    let the consumers decide what hurts or helps the consumers

    the wallet is the ballot box

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    1. Your comment is laughable. The free market only works when there are rules. Without proactive government intervention and oversight, we get abusive monopolies, and the public gets screwed.

      The wireless telecom market is the perfect example of an industry where it would appear that there is ample competition to ensure that the public is being well-served. Nothing could be further from the truth. For example, we have 4 overlapping national cell networks, but everyone still gets drop-outs here and there. Also, every carrier offers the same 5GB cap, for the exact same $60/mo. This is not how competition is supposed to work.

      A conservative view of the proper role of government states that the government should be there to address areas that the so-called free market cannot or will not. The wireless market in the US lags well behind the rest of the developed world. Like healthcare, we pay a lot more, and get a lot less. It seems like a perfect area for the government to step in and demand more. Access to information is a key to keeping America competitive. Since the free market is failing and is actively resisting innovation, the government should take action.

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      1. I absolutely agree and I appreciate reading a post that understands that free markets are flawed.

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  2. Stacy,

    Think you are missing the point here. Imagine if AT&T could not legally lock Apple into an exclusivity contract for the iPhone. Then, if Apple so chose to, it could offer the device on T-Mobile, or even make a CDMA version for Verizon.

    Then, instead of these carriers not competing on their actual service, and instead competing based on whatever cool new handset they locked up in an exclusive contract — they’d have to actually compete on what they sell: mobile service.

    Om complains — as have you — about AT&T’s readiness to handle the iPhone’s traffic. Imagine if the device was available on multiple carriers: “Come to T-Mobile, where the iPhone actually works in San Francisco and Austin.”

    Bottom line is, exclusivity is anti-competitive, because it allows the carriers to avoid head to head competition on the product that consumers pay for each month — the mobile service.

    And as for no net neutrality on wireless networks, think again. All wireless carriers, regardless of the 700MHz auction conditions, are subject to Section 332 of the 1996 Act, which subjects them back to Title II, importantly, Sections 201 and 202 which deal with non-discrimination. This, and other sections of the Act, give the Commission the clear authority to enforce neutrality in two-way communications networks — something that was the law of the land that existed well before the 700MHz auction.

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    1. Stacey Higginbotham Tuesday, June 16, 2009

      Bill, thanks for the relevant statute on wireless net neutrality. I’ll check that out. It’s something I’ve been trying to engage people on for a while. I’m at a loss as to how to enforce net neutrality on a carrier that has legitimate worries about delivering a quality service within the constraints of a limited wireless network.

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    2. Bill,

      Your economic argument fails on its face. If Apple chooses to sell their product under any conditions that a sufficient number of consumers do not find acceptable, then it will fail. There is plenty of competition in the market, which negates the anti-competitive nature of your argument. Your argument would have to presuppose all products were subject to the same service restrictions or that the iPhone were the only product on the market. Whether it is defined as anti-competitive by legislation is irrelevant to the economic argument.

      Legislation can be drawn up in most any form, but our economic system thrives because of competition, not in the absence of it. Such legislation in the end stifles innovation by definition in that it makes it much more difficult for a vendor to either recoup costs or front-load profits enough to sustain the product as competitors answer. It is ludicrous and more than a little juvenile to assert that everyone should be able to dictate terms to any company (a great picture of America where 100% of our economy is selling crap to each other that is made in other countries by companies that have moved their to avoid such silliness).

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    3. Well put ! Amen !

      Only question to you: The reason Apple went for an AT&T exclusive was freedom. So that they could do things like the iTunes ringtones and the AppStore. Pre went to Sprint for free marketing dollars. I like the fact that the appstore is unshackled from AT&T which would have made a mess of it. How does the government allow Apple to get that kind of concessions if it does not agree to exclusivity? How does Pre get free marketing spend (needed for a struggling company like Palm)

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      1. Apple went to AT&T for freedom? Hardly. By taking money from AT&T, Apple has given control of the iPhone over to AT&T. Why do you think the iPhone can’t do VoIP or Sling over 3G? They limit podcast downloads over 3G, too. Apple is also supporting tethering in the 3.0 firmware… but not on AT&T.

        Windows Mobile, on the other hand, doesn’t suffer from any of those restrictions. Sure, it’s a terrible OS, but since Microsoft doesn’t have any deals with the carriers, the carriers don’t get veto-power over how you use your phone. Tethering (via ICS) is always free, and you can use Skype over 3G.

        Bottom-line: When handset manufacturers team up with carriers, the carriers get control, the handset makers get money, but the consumer loses.

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  3. Obama and the congress are rewriting all kinds of contracts, why not these. We used to be a nation of contracts and laws, today our leaders believe they can do anything they want under the guise of protecting America or the World. Your details are well founded and I’m sure researched. I’m afraid you have not accounted for the arrogance of this government.

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    1. I think you may be slightly misinformed as to why the current administration is rewriting “all kinds of contracts”. I think it has less to do with their desire to steal your freedom and take over the world and more to do with helping America stay afloat in a time of economic distress.

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  4. I think it is unfortunate that your spell checker doesn’t work….

    “That’s unfortuante, because it could be the method of access for rural Americans in the years to come.”

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  5. Usually Named Tuesday, June 16, 2009

    Bill, are you willing to pay the unsubsidized price of an iPhone? Most consumers aren’t.

    That’s just how the US wireless market is. Apple tried to fight it when they first released the original iPhone, but the volumes didn’t jump until they introduced the 3G and its $199 price point.

    In any case, Apple was free to not sign an exclusive arrangement with AT&T. There was nothing that would have kept Apple from doing the same thing that RIM is doing with it’s gaggle of Blackberries. However, to get AT&T to develop certain things (like Visual Voicemail), they felt it was the best deal they could get.

    All this whining about being locked into AT&T is stupid. Just don’t buy the stupid device. You’re not entitled to anything.

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    1. Lets look at some cost numbers.

      The ipod touch costs 300 dollars (when the iphone 3g launched and costed 200 dollars with contract). The touch is basically an iPhone without a 3g chip, mic and a proximity sensor. The most expensive components of the iphone are in the ipod touch.

      At the same time, the no commitment price of the iPhone 8GB was $599 ( http://tech.yahoo.com/blog/patterson/23890 )

      The MP3 player market is free and competitive. The wireless market is restricted and not. Because of the difference in the markets, the cost difference is 300 dollars ! or put another way, I could get 2 ipod touches for the cost of a retail iPhone.

      When markets are so uncompetitive and inefficient, it is usually the role of the governments to regulate them to ensure free and fair competition.

      I am not entitled to a cheap iPhone. But it is in our best interests to have a free and fair market.

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      1. Usually Named Wednesday, June 17, 2009

        This is a ridiculous comment. How are you defining the market?

        You are also making a rookie mistake. The cost of the components does not (and should not) drive pricing. Cost comes into play when you determine margins, but the market sets the price.

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      2. Usually Named Wednesday, June 17, 2009

        This is a ridiculous comment. How are you defining the market?

        You are also making a rookie mistake. The cost of the components does not (and should not) drive pricing. Cost comes into play when you determine margins, but the market sets the price.

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    2. Bill Dollar Monday, June 22, 2009

      You make the common mistake of conflating handset exclusivity contracts, with handset subsidies. Ending exclusivity does not in any way mean ending device subsidies.

      In fact, it’s the exact opposite. Without exclusivity contracts between the device manufacturer and the wireless carriers, carriers would be forced to compete on service as well as device subsidies. AT&T might sell the 3G for $99 with a 2-year contract, while T-Mobile would try to lure customers with a $50 price point.

      Once again, ending the anti-competitive practice of handset exclusivity sets the competitive forces free, on service quality, and on device subsidies.

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  6. [...] post: Sen. Kerry Wants Wants His iPhone Unlocked Easy Way to Make Money from [...]

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  7. I’m not sure what the beef is here. The iPhone is expensive because it’s a mini-computer, and because it’s a desirable object, Apple can charge a premium for it. My MacBook costs more than a Dell Inspiron, and both cost more than a cell phone.

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  8. I’m curious about why unsubsidized cell phones are so expensive in general. Why does Apple charge roughly $600 for an iPhone, when it’s perfectly content to sell iPod Touches for $220. I expect the difference in cost to manufacture the two is maybe $20 at most for the cell radio, bigger battery, and relevant licensing. Why is the acceptable margin on a Touch 40%, and the mark-up on a iPhone is 300%?

    I’m not just singling out Apple here, either. Nokia demands the same sorts of margins as well, and consequently sells almost nono of their phones into the US market. Also, recent tear-downs of the Palm Pre put the unit cost at well under $200, yet the MSRP is $850. (I’m sure Sprint isn’t subsidizing that large amount, but the principle is th same.)

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    1. I’m not sure on how it is done but I’m guessing that it comes down to the retail mark up. The carrier is waving the mark up for the commitment of a 2 year contract. It’s like the old joke, Two bulls are on top of a hill. They are father and son. In the valley below is a huge herd of cows. The Son say to the father, “Dad let’s run down there and mate with one of those cows.” The father replies, “No son, Let’s walk down there and mate with all of them.” I cleaned it up a bit but you get the idea, the carrier is betting on the long money with the contract stating that if the customer breaks the agreement they will pay the balance of the phone. It’s a win/win situation for the carrier.

      If the customer doesn’t want to enter a contract they will have to pay the full retail mark up but can leave the carrier any time they wish and owe nothing. Guess what most do? Also you have to consider rebates and the fact that it allows the company to hold on to money and use it for capitol until they send out the rebate check. With sprint it about 6weeks. If you sell 1,000,000 phones and rebate $100 on each that’s $100,000,000 you can hold on to for a short time. Also there will be a number of voided rebates and people who simply forget to mail the thing in.

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  9. ilovedessert Tuesday, June 16, 2009

    I would gladly pay more for an Iphone or a Palm Pre, if I could use them on Verizon. My G/F, my Mom, and my G/F’s parents are all on the same Verizon bill. It is MUCH cheaper for all of us this way, (we get a corp discount for all of us, due to my G/F’s job),

    I have only had Palm smart phones, (my forth model), I would love to get the Pre or an Iphone, but that will not happen until Verizon gets either. Frankly I had ATT years ago and their service, (both coverage and especially customer serivce), is was GOD awful and Sprint’s was worse.

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  10. Steve Hartzog Wednesday, June 17, 2009

    Huh? The issue is that wireless carriers force an additional test on phone makers to be compatible with their network. Then they form exclusivity agreements that tie a particular device to a particular network for all time. This is poppycock. Wake up people! Europe at least does this right. Buy ANY phone at ANY store… use on ANY network… with ANY plan (if you so choose to sign up for one) or pay-as-you-go (much more common). The US is woefully locked by the big oligopoly wireless companies… and the government is supporting this. Kudo\’s to Sen. Kerry for seeing what is common sense to the rest of the world.

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