Thursday, August 24, 2006

Crippled Cell Phones

Here is an absolutely fascinating post I found on the UofC Law Faculty Blog by Professor Randy Picker regarding a new phone that Nokia is introducing that has integrated WiFi/VoIP capability. How awesome would it be to have a phone that can transition seamlessly between the CMRS (Commerical Mobile Retail Services, or cell phone) network and the Internet? Problem is, Nokia is disabling that feature in the US market (or is simply not including it in the phone at all--not clear how Nokia is going to roll this out), presumably because cell phone companies are concerned about the built-in competition it would engender.

Professor Picker asks why the European companies do not have the same concerns about the built-in competition. I would imagine the answer is that, if the companies were left as unregulated as companies in the US, the same thing would happen there.

I wonder whether market discipline will fix this problem. Usually, companies can come up with some bogus paternalistic reason why they have to restrict product choice (like "we are concerned for consumer safety" or "quality would suffer"), but here there is simply no good explanation. Perhaps cell phone companies will raise network security issues or something, but that would be silly.

Anyway, check out the blog post. And the comments are also worth the read.


Joe said...

Why are phones crippled in the US and not in Europe? Simple: in Europe consumers pay for phones and so they come with the features consumers want, in the US cellular service providers pay for phones and they also get the features they want (American consumers only pay indirectly for their phones via a tying arrangement). Well, that may be overstating things (market structures and service offers vary a great deal on both continents), but it's close enough to the truth to explain why the US gets crippled phones. European phone consumers are used to phone portability (and service portability). The SIM chips allow them to use a given phone with any service provider and a given service provider with any phone. In the US, by and large, you get your phone with your service and if you go to another serivce provider you get another phone. The phones are tied to the service. You can get around that, but you have to be a fairly sophisticated consumer to do so. In Europe, consumers control the phone market, here the service providers do. Consumers want WiFi, service providers want to kill VoIP.

Veritas ad Infinitum said...

Fair enough, Joe--but doesn't that just lead to the question why, in the US, consumers do not go out and buy unlocked phones? They are certainly available, but for some reason Americans are suckers for the "get a phone for free" scam--free meaning that you have to sign up for a two year contract, or something like that. I don't think it is a lack of consumer choice, but consumers seem to respond differently.

If I am understanding the story correctly, Nokia made the choice not to provide the WiFi/CMRS phone to the US market. To be sure, it could be doing that because most of its sales go to the cell phone providers, but how hard would it be to roll out the full-feature phone too?

Joe said...

There's no sales channel. As per the most recent figures I can find, the cellular handset market is split in half between service provider outlets and big retailers (WalMart, Best Buy). The service providers are obviously not going to sell the WiFi enabled phones. Here's a link to Best Buy's cell phone page. Browse through there and tell me how many phones you see that aren't tied to a service provider. I was hoping to find an article that breaks down how the US handset retail markets function, but couldn't come up with anything useful. But check out this Wired article (from 2003) on upcoming products, and note the various lines like:

-"For CDMA, you have to engineer the phone for the carrier," Nowak said.

-Motorola did not release the new phones' prices, which will be set by the individual carriers.

-Sprint said it has not yet determined the new Samsung phones' prices.

-Wireless carriers will determine pricing for the device, a RIM spokesman said.

The service providers dominate the sales channels...

Also, here's an interesting article comparing the handset market to the mainframe server market, explaining how the low retail cost subsidized by inflated service charges is a device to drive more frequent equipment turnover than the market would otherwise demand. It makes the point that if you don't get the subsidized phone, or if you don't replace it as frequently as possible you'll get screwed in these markets as you end up paying the hardware surcharge in your monthly bill anyway.

The article cites pre-paid phone plans as an out for consumers. I believe that's true in Europe, but I would be very curious to know how portable phones are among pre-paid plans in the US, and to what degree the phones suffer from service-provider lock-in (even GSM handsets can be SIM-locked). In any case there is clearly a difference in awareness of lock-in systems and how to bypass them as between US and European consumers.