It Could Be the End of the Cell Phone as We Know It
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It Could Be the End of the Cell Phone as We Know It
And I don’t feel fine.
Posted Tuesday, June 16, 2009 - 5:33pm
My cell phone needs to be euthanized. Chunks of its skin are missing from repeated abuse. It has been worn down to its skin where its paint hasn't already chipped away. Its keypad is so dysfunctional I can barely type straight.
Yet I continue to use it, handcuffed by the dilemma of how to replace it. See, I'm a relatively happy Verizon (VZ) customer, and Verizon doesn't have access to Palm's (PALM) Pre and Apple's (AAPL) iPhone—the two phones I'm most intrigued by. That's because those phones are exclusive to Sprint (S) and AT&T (ATT), respectively, locked within services of questionable quality.
And so I've waited, beholden to my Verizon loyalty but tempted by my touch-screen lust. Never, though, have I questioned the way the cell phone universe works. Wireless carriers pay extra money to have some phones exclusive to their service. Some consumers lose out in the process, but the companies win some revenue. It is what it is—smart business.
But now Congress is starting to wonder whether it's fair business. Four senators—Kerry, Wicker, Dorgan, and Klobuchar—have sent a letter to the FCC requesting an examination of the wireless industry and whether this whole exclusivity thing is kosher. And on Wednesday, the commerce committee is corralling a bunch of wireless execs and researchers in Washington. They'll chat about exclusivity and question whether it limits competition. It's the first step in what could be an unprecedented regulatory road; one that could result in major shake-ups inside the cell industry.
Congress is bringing this up now because rural cell phone companies have complained that exclusivity agreements are unfair to small carriers. When the national bullies have exclusive rights to a phone, the rural runts have to peddle inferior devices. I'd go into more detail, but it's not this article's concern. Congress is using the rural vs. national struggle as a Trojan horse to address exclusivity at a national level. The rural complaint could be used to prompt an exclusives ban from the FCC, one that would change the cell phone industry as we know it. Every cell carrier's business model would need to be remade. Mega-successes like the iPhone wouldn't be tied down to one service. Revenue would wither away from exclusive-reliant companies like AT&T. The carrier companies don't think that would be justified, nor do they want it to happen. Consumers—even ones saddled with crappy phones like me—would be wise to agree.
First, it's important to understand how the cell phone business works now. Companies offer two types of phones: generics and exclusives. Generics are like the Motorola (MOT) RAZR—a phone that's available on multiple carriers. Phone manufacturers—like, say, Motorola—can sell more phones this way, but they don't get paid the same kind of contract fees from the carriers since the phones aren't exclusive. Plus, they need to go through the hassle of building several different technologies into several different models of the same phone. AT&T and Verizon, for example, use two different kinds of cellular signals, so extra money, brainpower, and parts have to be fabricated to get a phone to work on two servers.
Exclusives, meanwhile, mainly live on the marquee. Think of these phones as Hollywood blockbusters—a company's success is largely defined by whether the heavily invested phones perform well. If they don't, you've got a dud that can derail an entire product line. The Pre (Sprint), iPhone (AT&T), and BlackBerry Storm (Verizon) are all examples. Here you've got the manufacturer working with the company to cater the phone to the company's services, oftentimes with the company kicking money into the development process. Sprint's spokesman told me that it contributed money—but wouldn't say how much—to the development of the Pre because it was an exclusive device. Therefore the company couldn't let it be a dud. There are unremarkable exclusives, certainly—the bottom tier of phones for every carrier usually has a few—but those don't bring in the same kind of data-plan revenue as the smart phone exclusives.
Which brings us to the senators' question: Should all phones be generics? Their concern is that having exclusives could limit competition in the marketplace. Which, by an economist's logic, makes sense. Fewer choices usually breed less competition. In Congress' ideal world, the iPhone would tally minutes on every cell carrier. So would the Pre and the Storm and the Instinct and the Bold. Cell phones for all!
This would completely change the way that cell phone carriers make a living. As of now, exclusives are a carrier's killer app: the one thing that can entice a consumer to switch cell phone services. The iPhone is estimated to have brought in 2.5 million new customers a year to AT&T. When you consider the minimum plan is $70, that's a pretty good revenue stream. If exclusives are eliminated, those customers would have less reason to switch—decisions would have to be made based on price and quality of service. And more stagnant customers mean less growth potential for the companies, which means unhappy shareholders.
But as consumer-friendly as it is, the senators have it wrong. It's not as if exclusives actually limit competition and innovation. They just make it more of a pain in the ass for consumers to get a phone they want. Cell phone manufacturers are innovating just fine already. Since the original iPhone was released, we've had all manner of smartphones and new operating systems created by a host of different companies. And if the issue is with the creativity of the carriers, a question for the senators: Really, what can they innovate? And even if they could get wacky with their price structure and signal strength, how would an all-generic slate help those goals? The reality is that competition already exists in the cell phone market. The FCC doesn't need to artificially stimulate it.
Unsurprisingly, the wireless industry agrees, but it doesn't quite seem to know how to express it. While e-mailing with a Verizon rep, he offered this analogy (emphasis and sic his):
Competition guarantees choice. You go shopping—maybe to the Piggly Wiggly, maybe to Whole Foods. Plenty of choices: meats, canned goods, fruits, veggies. But should the Federal Food Commission require both stores to offer the exact same selection of, say, exotic fruits? Should it require the makers of the iPineapple to have distribution to both stores? So competition guarantees choice—but maybe not every exact choice from every distributor ... because then that leades to the opposite of choice.
Except, as I wrote to him, his analogy is imperfect. Staying within the same universe of discourse, I'll extend it like so: The senators aren't asking the FCC to require, say, Verizon and AT&T to both carry the iPhone. Just that they both have the option to. They don't want one fruit stand in particular to be allowed to have a contract with apple farmers that then restricts apples from also being sold at a different fruit stand. That's where the senators are concerned: that if only one stand is allowed to sell apples, the market won't create new kinds of fruit to compete for apple consumers.
The industry's other talking point is that an all-generic slate would spike costs. The Sprint spokesman told me that the company subsidizes the cost of its exclusives more than its generics. For example, a Pre actually costs $550 and is subsidized down to $200 if a Sprint customer signs up for a two-year contract. Similarly, an iPhone is $600 originally and subsidized down to $200 with a two-year contract. The phone companies can afford all these rebates because they've hooked you in for two years on an expensive plan for an exclusive phone—they know you won't want to go anywhere else, so they're comfortable giving you some incentive to sign up.
Sprint's guy told me that they—and, he predicts, the rest of the industry—would be less likely to subsidize vigorously if the phones weren't exclusives. His logic—which I'm not sure I buy—rests on the blockbuster model. The carriers are more likely to incentivize if they need a phone that they're invested in to be a success. Perhaps, but then wouldn't carriers compete to have the biggest iPhone subsidies? That kind of competition would bring prices back down toward exclusives-era levels. Some costs may rise, yes, but it certainly wouldn't be drastic. The wireless industry is better off sticking to the we-already-have-competition argument.
So, how likely is it that the FCC will mandate an all-generic era? Unclear. The commission doesn't even have a commissioner yet; unbelievably, he's still going through the confirmation process. On an issue as high-profile as this one, it's reasonable to assume that the FCC will wait for its new leader to decide whether to take action. So it could be a while.
But there is some precedent for the FCC to get involved. Back in 2003, it mandated that wireless carriers allow customers to keep their cell numbers when they switched carriers. The carriers opposed the mandate because it would make customers more likely to switch services.
Sound familiar?
Photo of mushroom cloud by Department of Energy/Retorfile RF/Getty Images.
Comments
Terrible Reasoning
The comments so far have been great, much better than Mr. Matlin's article. I can't help but think that he has some personal interest in seeing service carrier profits continue. He accepts all the industry arguments without really trying to determine if its BS or not and of course it is. I've known for a long time that in Europe the whole market is setup much differently. For instance, not only does any phone work on any service but you can have more than one service provider on the same phone, and choose between the two depending what type of call you wish to make. So, maybe one carrier gives great international rates and one has super low data/texting rates. Anyway, I just wanted to say this is a piss poor article that is poorly researched. Couldn't the author have looked at maybe one other country that already has rules about exclusivity agreements? Instead he just speculates and repeats BS from AT&T.
The funny thing is that he makes an argument that undermines his position. If the only way that service providers can differentiate is through the fancy phones then what value are they delivering to consumers? The phones are made by 3rd part tech companies. The Service Providers have no incentive to actually provide good services. Instead their only incentive is to pay some 3rd party to make a fancier exclusive phone for them? How the hell is that good for anyone but the service providers? Don't we want our service providers to compete on quality of service rather than who can convince Apple to let them release the next Iphone?
Death of Cell Phones?
Not the End Of The Cell Phone As We Know It June 18, 2009 To: Mr. Chadwick Matlin, The Big Money Dear Mr. Matlin, Your blog on the future of the cell phone business on June 16, 2009 deserves a response. I have elected to offer mine. I am struck by the generous helping of platitudes, self evident bits of doggerel and apologetic arguments which plague your article. You have squandered a great opportunity to assert your (and my) outrage at what is arguably one of the biggest (and ongoing) government assisted ripoffs of the public that comes to mind. Please find a few examples (in italics) found in your article illustrating my point (and my responses) below: Some consumers lose out in the process, but the companies win some revenue. Some?? How about all. It is what it is—smart business. But now Congress is starting to wonder whether it's fair business. What on earth would cause Congress to come to this conclusion? Well with Congress one can never be sure but some members have directed their overwhelming pique about the longstanding practice of exclusives into a letter to the Federal Communications commission. How bold indeed! This letter sent by ranking members of the Commerce Subcommittee on Communications, Technology, and the Internet expresses “concern” that exclusives might limit competition in the marketplace. Really?? Where have these vigilant watchdogs of public interest been since commercial wireless communication services emerged? Probably out spending the campaign contributions lavished on them by lobbyists of these very industries who urged them to tread softly about reigning in this common but profitable (and unethical) restraint of trade. But now Congress is starting to wonder whether it's fair business. Four senators—Kerry, Wicker, Dorgan, and Klobuchar to the FCC requesting an examination of the wireless industry and whether this whole exclusivity thing is kosher. Plus, they need to go through the hassle of building several different technologies into several different models of the same phone. AT&T and Verizon, for example, use two different kinds of cellular signals, so extra money, brainpower, and parts have to be fabricated to get a phone to work on two servers. If these companies are so innovative why do they need “exclusive” agreements with cell phone mfg’s to remain competitive? It is getting harder to distinguish these jerks from your garden variety monopoly. And your statement that they are required to “go through the hassle” of making the phones work with more than one server. Holy Cow! What a tough assignment for all those techies to tackle. Not to mention all the extra cost which could eat into the bottom line simply for the sake of true competition. This argument [whether it is yours or theirs] is pure and unadulterated garbage. Any business student knows that overhead costs (including taxes) are passed onto consumers but how much easier it is to guarantee profits when you limit all possible product choices except yours and in the process restrict access to other products your competitor may be offering which may be better. That this is all tied to profits and greed is never given quite enough emphasis in what may have been meant as an evenhanded discussion of this shameful practice but more often than not takes on the tone of a blatant apology for these industry miscreants. Father, forgive them; for they do not know what they are doing." And they cast lots, dividing up His garments among themselves. Luke 23:34 Fewer choices usually breed less competition. This one is my favorite. .Doesn’t anybody ever edit your commentaries? Like monopolies are supposed to foster innovation and lower prices! Would you please tell me what school of economics handed you such insight? If exclusives are eliminated, those customers would have less reason to switch—decisions would have to be made based on price and quality of service. This is my nominee for Best Bromide.. Gee if we’re not careful we might spark an epidemic of real capitalism and free enterprise here wouldn’t we? I don’t know your age and do not wish to be patronizing but I sense that you may be too young to remember when the Bell System was successfully broken up because it was considered a “monopoly”. Well, yes it was a monopoly of sorts but it was of the benign variety and considered by many to be the caretaker of what had become an essential service just like electricity. Furthermore it was highly regulated and designed to provide the consumer with the best possible product for the money. It was a rock solid company with services which were either free or reasonably priced. You borrowed their equipment for life. For conservative investors to own a few shares of AT&T stock was considered the soundest of investment strategies because they were long term. They would always be there. In light of recent events it seems they might have been on to something. Sorry for this slight digression. The Bell System might have seemed dull but for all it’s critics and foibles employed some of the brightest people on the planet including Bell Labs which produced several Nobel prize winners which shows they suffered neither from lack of talent nor innovation. However, influential observers in private industry (and from within ATT itself) recognized that the potential profits in the communication industry were just too massive to be wasted on a monolithic public utility. Not surprisingly there were plenty of others lining up to grab (some might say steal) this free golden goose for their own profit. The Justice Department obliged these “visionaries” and broke up Ma Bell supposedly to spur competition and innovation and to reduce bureaucracy and costs. It is my contention that the break up of Ma Bell was little more than a massive giveaway to private interests clothed in the flawed argument that innovation and competition would ensue. In reality nothing has been further from the truth. It is difficult to compare this to the anti trust action against Standard Oil which really was a monopoly whose breakup was welcomed by the public. By the way do you think there is more or less competition in the oil industry because of it? On the other hand I was not so happy about the break up of ATT. To be perfectly honest I worked for Western Electric (a subsidiary of ATT) at the time and I lost my job because of the break up but I was skeptical anyway. But let me ask you an easier question. When do you remember your phone (or cable) bill not going up since ATT was converted into the so called Baby Bells and forced to divest itself of the Yellow Pages? What a Byzantine nightmare it is to find information these days. How many phone books must you have at your fingertips to find a business in your town? Two? Three? Or more for even moderately sized cities. Can you even find your business in the hodgepodge of 3rd party directories that have sprung up in the aftermath of this grand experiment called wireless communications. And as a business owner in which one do you advertise? One? Two? All of them? How do you know which directory your potential customers have on their desk or in their home? So to reach the maximum number of customers on line and in print your advertising budget has now tripled from what it might be with just one universal book. Not every business can afford the costs of having an internet presence and seldom does the general public have instant internet access to search business or resident listings when at home or on the road. Have you tried to dial an operator to get information from your carrier lately? A common service that once was free is now just another very lucrative revenue source. Some carriers bill up to $7.50 per request. In light of these facts would you kindly point out the benefits and savings our new, improved, highly competitive and efficient phone service provides here. It seems that at every point in the search for information your trusty free enterprise business is there to charge you a fee. It never used to be this difficult or expensive to find the necessary information to conduct one’s daily life. Nor should it be. What would Ma Bell have done? Are most of the “horns & whistle” features offered on phones these days even that necessary? Probably not. Contrary to popular belief most of the buying public are just looking for reliable, quality phone service at a reasonable price. Forget GPS, 12Mb cameras, texting, PC synching. Leave that stuff for those who can’t survive without the latest everything. Just give me a phone that doesn’t drop calls in buildings and allows me to stay in touch whether in mountains or metropolises. Nothing more. Ask a provider why your call keeps dropping? Well, Sir, that is a fairly sparsely populated area and we can’t justify building another tower in there until we get 1000 new customers who we can gouge for the expense of installing one you so our best estimate is that you will be experiencing dropped calls for another two years. We are so sorry. I did not make this up. Verizon actually told me this once. I would look for a new carrier except I had to sign a 2 yr. “contract” with them and they want $250 to get out of it. Could this be another galloping case of illegal restraint of trade not yet addressed by those Congressmen or is it just “smart business”?. Again. What would Ma Bell have done? That’s easy. They would build another tower and I would have no increase in my bill and my dropped call problems would disappear. What’s not to like about that? This overreaching race for profits at public expense reminds me of the wrongheaded proposal made by the newly minted USPS during the 1970’s which wanted to tack an additional $0.02-$0.03 onto the regular price of the new self adhesive stamps. This idea was rightly and soundly shot down. A similar argument can be made for Amtrack service. If the bureaucrats (egged on by the automobile industry) had had their way Amtrak would be a distant memory. Ironically Amtrak is now carrying more passengers than ever and where are the automobile companies? But again I digress. Suffice it to say that there are some services and enterprises that should be considered essential and always available to the public at low cost in a civilized society. If public services cut a little into private enterprise consider it the price of living in an enlightened society. Can you say Universal Health Care? The scurrilous argument that the free market is the answer to all our problems is a fable and the glaring repercussions of that fallacy are reflected by the nefarious deeds of the villains on Wall Street. Greed operating under the banner of public good is a powerful narcotic. When will we ever kick the habit? I cannot close without wondering why you did not immediately challenge the specious contention made by one of your sources (Sprint in this case) that exclusives are necessary so the cutting edge $600 phone can be offered to their customer for just $200. First of all I wonder how the hell it can cost $200! I often remind myself how grateful I am for these people. Who wrote this drivel? You or the lobbyist?. The fact is these phone products are obscenely overpriced to begin with most being manufactured in China for pennies. For example Verizon will be only too happy to sell you a car charger for your phone for about $25. I can buy one on line for about $3. The only difference is the Verizon model might have Verizon on it. They both have Made in China on them and might have been made in the same plant. These people don’t do business with the champions of human rights abuses and exploitation of labor for nothing. They would pass some of these enormous profits along to you but that would cut into their obscene compensation packages. I’ll bet that most of the outsourced customer service representatives sitting in New Delhi working for less than minimum wage cannot afford one of those phones at the unbelievable low price of $300. The same illogical argument is used by the cable industry. They say, “Just look what we are offering you!. We have just added 10 more channels for your viewing pleasure so now you get a whopping 500 channels for only $100 a month. This means you now subscribe to 490 more channels than you can ever watch or need. And all for only $100/mo. Great deal, Huh? That’s only a 10% rate increase from last month. You calculate that if you watched each channel for one hour allowing for 8 hrs of sleep each day that you could go for over a month. I’ll just switch you say. Sorry pardner, not so fast. Didn’t you realize that the cable companies have successively carved your city up into exclusive territories so your cable company territory is off limits to it’s competitors. This is much like gerrymandering only without the voting privileges. Another example of the free enterprise ethic with local government assistance hard at work saving you coin. . Finally to your credit I see some redeeming aspects to your post. The quote, “His logic—which I'm not sure I buy—rests on the blockbuster model.” gives me hope that you are not an obsequious ass kisser. My parting thought is that profit and not for profit entities with government funding can live comfortably side by side in a capitalistic society. Be assured that Socialism is a distant cousin of this healthy union. desertmonkey Tucson, AZ
Competition for Carriers
This article makes a mistake in considering competition for hardware makers. When considering the American mobile phone market, it's the carriers that need competition. Enabling the FCC to ban exclusivity contracts would level the playing field for providers, resulting in greater competition. After consolidating from a dozen carriers to 3 or 4, consumers sorely need this.
These agreements are, indeed, anti-competitive. Would we allow Intel to only sell chips to Dell? Why let Apple only sell to AT&T? Wouldn't mobile phone service reach a more competitive price point if T-mobile carried iPhones?
cell phone freedom
This commentary was off track. Phones and computers are becoming one. I should own my phone/computer and decide from whom I want to get service. Let the antiquated model go. The phones have been cracked anyway.
Phone companies should pay attention to their service and compete on that alone. Maybe then we can catch up with the rest of the world in terms of the quality of our signals!
SDD
AT&T Service
How could this article have ignored the biggest problem with the iPhone: AT&T's atrocious signal and service quality? AT&T is dependent on exclusive contracts because its service is legendarily awful. Chadwick should talk to his friends with AT&T service; I owned an iPhone for one week and gave it up because I get NO AT&T in my house, and I live two miles for a major and geeked up city on the west coast. Verizon? No signal issues whatsoever.
Yes, if you're in "the" spot where AT&T signals are available, then fine. Walk half a block to a dead spot? Tough.
Comments for Sound Economics
Your comments speak of the economic unfairness of the domestic cell industry. We're paying too much? More competition is needed? Obvious observations. But peel this onion back a bit..
The R&D for the current cell technology and network throughout North America was built with Billions of dollars of investment money by the core providers. If you were one of their investors would you happily hand over the rights to a smaller provider with little to no blood in the game, so they can compress margins? America's innovation is based on handsomely rewarding those that create newer and better services that consumers want. I'm also unhappy with my cell bill but my reaction is to only maintain core services..
Let's keep our eye on the ball here.
Your true power and vehicle to effect change to their unfair pricing policies and structures is right in front of you.. are you paying for an unlimited data plan? dont' do it! stop your friends from doing it! Uniting as consumers will dictate the marketplace.
Your blaming the author of this article is nothing short of shooting the messenger and weakens your argument.
pricing
In theory, if the companies were no longer incentivized to subsidize the cost of new blockbuster phones (iPhone, Storm, Pre, etc...), then initial purchase costs of the hardware itself would go up for the consumer. However, because the carriers no longer have to continue subsidizing to the extent that they did, then they compete on better signal strength, customer service, etc...or compete on price. Monthly service plans would actually begin to drop again, where we might again see 500 minutes again for 39.99 (instead of Verizon's & AT&T's 450), or 450 minutes for $34.99 ($5/mo is $120 over the life of a 2 year contract, which would be paid by the consumer up front based on the phone they want.
Oh, and not to mention, if carrier subsidies discontinued, it would have a competitive (i.e. downward push) effect on the iphone vs storm vs. pre, as well as generics. Good for consumers! And, maybe, this would incentivize the adoption of one type of wireless radio signal (Verizon phones won't work on AT&T network) to that the phones themselves ARE interchangeable (just like our phone NUMBER). Again, it removes the relationships between the manufacturer and carrier. Are there roads that only toyotas can drive on? No. All roads are universal. A toyota can drive, as can a Chevy. We are free to make our choice, but both are capable. And we also have the choice of putting in Chevron, BP, or Mobil gas. But we are not REQUIRED to. Disrupt the relationship, and you'll get more pure competition better for the consumer.
No doubt. Current system run by pirates, stiffle innovation
Q: How can you tell if you have crappy cell phone service?
A: Simple. Do you live in the US ? Then you have crappy phone service.
There was a time when the old AT&T, the one that had a virtual monopoly on all home phones in America, argued that we should only buy our phone and our phone service from them. It was an argument that benefited the company at the cost of high prices and virtually no innovation for the consumer. Things haven't really changed that much.
Here is the dirty little secret of the cell phone industry. You and I and everyone in the U.S. are paying roughly 100 times what we should be paying for cell phone service, and at least 1000 times what we should be paying for text messaging and data connections!
Why do you think AT&T prohibits you from buying their (overpriced) data service only and running a VOIP application on your iPhone, and skipping the voice plan? More money for them. Out of your pocket.
Cell phone service should be based on the more efficient VOIP, or Voice over Internet Protocal, that allows you to make cheap international calls over Skype.
Consumers should be able to buy a wireless connection (data packet) service from one company at utility pricing and their telephone service from any of a thousand competing companies. Think of the relationship between your home internet provider and Vonage.
And of course, consumers should be able to buy their handset from any company they want. If Chadwick Matlin were to look overseas, where the consumers buy their phone upfront unstead of indenturing themselves to one cell phone company for two years, he would see innovation.
Sadly, Chadwick Matlin, does not even know what innovation is.