Daniel Eran Dilger
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10 FAS: 2 – The iPhone’s Anti-Competitive AT&T Contract

Daniel Eran Dilger
It isn’t just tech analysts who have jumped on invented iPhone scandals. The second scandal managed–as many scandals do–to erupt within the US Congress.

Fake Apple Scandal 2: the iPhone’s Anti-Competitive AT&T Contract!
Earlier this month, in order to indicate how plugged in they were to issues facing consumers, members of the House Telecommunications Subcommittee complained in a meeting referred to as “the iPhone hearing,” about AT&T linking the iPhone to an exclusive service contract and imposing the threat of a high termination fee.

Those involved seemed unaware the the problems they observed were not new to the iPhone, and could really best be blamed on Congress itself. Also missing was a rational solution that would not just treat a few symptoms of the US Mobile Flu epidemic, but cure the nation’s telecommunications overall ailments.

I’ve earlier pointed out that nearly every familiar and popular phone–from the Motorola RAZR to the Palm Treo to the LG Chocolate–not only started out at or above the iPhone’s $500 price, but similarly debuted as exclusively tied to a specific service provider. What follows is the real problem in the US mobile market, and a solution.

[Congress Slams AT&T Over iPhone Contract, Fees – Free Press]
[Kevin Chang, iSuppli and The iPhone Nano Myth]


The Problems with Mobiles.
It is indeed true that the iPhone is only available with an AT&T contract, and that users stuck in their own long term contracts with rival providers may be charged hefty fines to obtain the iPhone.

It’s also true that once signed to AT&T, an iPhone user would not only face that ugly $175 early termination fee to leave, but would also run into the problem of having nowhere else to take their new iPhone.

That problem however is only the tip of the iceberg that is the American mobile system. It really has nothing to do with the iPhone, and everything to do with how the nation’s mobile business was and is regulated. That problem lies with Congress and the FCC.

Even without the legal contracts that stifle competition within the mobile phone industry, there are technical problems that prevent users from taking any phone to any carrier.

[How AT&T Picked Up the iPhone: A Brief History of Mobiles]

More American than America.
A more ideal scenario for consumers would be more like Europe, where users buy a phone from one of many vendors in a competitive market, then choose a service plan from one of many mobile providers in a similarly competitive market.

Consumers would not only pay less for service, but would have access to fancier phones with more features. Americans would be more productive, and the companies offering the best products and services would be rewarded with the most profits. That is, supposedly, the American Way.

Unfortunately, the actual American Way in the mobile world is that users are routinely presented with false and deceptive advertising, are baited into signing anti-consumer and anti-competitive contracts, and end up with shoddy third rate phones, some of the world’s highest service fees, and embarrassingly backward wireless mobile networks that trail those deployed in many developing countries. How did this happen?

You Know, Like Our Healthcare.
As it turns out, our mobile problems are the fault of a false free market. In a true free market, competition is encouraged and innovation thrives. All of that innovation causes prices to drop as businesses become more efficient through the exercise of competition.

Innovation within free markets has also delivered an endless parade of advancing technology. As products and services get both better and cheaper, it’s not only good for consumers, but good for the economy as well.

Few people would find any of that controversial. The disagreement begins when determining how to best deliver a free market. The truth is that some businesses commonly forget that competition is in their own best interest, and often try to prevent direct competition so they don’t have to work as hard. In the long term, this is disastrous for both those businesses and consumers.

Companies afraid of a free market aspire to create a market where only they are free. They insist that the only way to create and foster innovation is for the government to allow them to do anything without regulation. The problem is that an undisciplined market ends up as disappointing and troubled as an undisciplined child. Left to do what they want, companies will almost invariably make bad choices that destroy their own future.

[Why Microsoft Can’t Compete With iTunes]

L’Industry Terrible.
From the drug companies who insisted on their freedom to sell thalidomide in the US, to our health care system that wants unfettered rights to reap record profits while denying Americans access to necessary treatment, companies–in a childlike fashion–tend to demand to follow their own short term interests and hate being told no by the government.

US telecommunications providers insisted on the unrestricted right to deploy the cheapest mobile networks possible, leaving two of the top four US cell networks with a system wholly incompatible with the the other two, as well as incompatible with much of the rest of the world.

That short term demand for market freedom has resulted in a far more expensive market problem: the US is now plagued by vendor incompatibility and subsequently, significant barriers to competition. The mobile market is very much not free, nor is it competitive in a healthy or functional way.

Europe Cooperates, the US Splinters.
Congress was afraid to act in the same way as Europe had in the late 80s, when a standard set of mobile networking technologies, called GSM, were developed to serve the nations represented by the EU.

The US had just broken up the national phone company, the Ma Bell that had pioneered telephony for seven decades. A free market created by dividing AT&T into the Baby Bells appeared to be a good solution, but without any oversight, Americans were left at the mercy of whatever portion of the old AT&T their geographic region was assigned. The result was a bit like selling off US Interstate highways to a bunch of toll road profiteers.

The original mobile phone system developed by AT&T was eventually replaced by a patchwork of incompatible technologies. At the same time, mobile companies further restricted competition by employing tactics they’d learned in selling long distance service.

The Phone System

[Unlocking the iPhone: The GSM SIM and Activation]

Landlines to Mobiles: Telecom Learns Anti-Competitive Tricks.
After AT&T was broken up, the market for long distance calls was indeed exposed to competition, resulting in lower prices and more advertising.

Phone companies had to find and retain customers in a very competitive market. The best way to do this was by signing users up to long term contracts.

Nagging phone calls asking users to switch their long distance carrier were only outmatched by mailing users $100 checks as an incentive to switch. Because all the phone companies were competing over a commodity–long distance minutes were basically all the same–there was little left to differentiate each competitor.

As cell phones became increasingly popular and common, the fight to win over long distance customers began to migrate into the mobile business. Again, mobile service was a bit of a commodity; providers could boast about call clarity, signal coverage, and reliability, but there wasn’t really that much difference between carriers that mattered to consumers.

All of the mobile carriers tend to skimp on customer service, making them all equally noxious to consumers. The only way to retain customers was to sign them into long term contracts.

[The Road to VoIP: The Empire Strikes Out]
[The Road to VoIP: Paved with Bad Intentions]

Fraudulent Mobile Marketing.
The best way to get a consumer to sign a long contract has been to dangle the illusion of a low priced phone in front of them. Who thinks about signing a $1000 – 3000 commitment when all they see in advertising is that the phone being offered is free or nearly free?

This is one of the real issues Congress should be addressing. It’s illegal to offer credit without disclosing the interest and associated fees charged. Why can mobile companies deceive with banners offering two RAZRs for $50, when the real cost of using those two mobiles involves thousands of dollars?

Long term mobile contracts exist to support the mobile phone subsidy shell game used to sign new buyers up with the aforementioned fraudulent advertising. They also attempt to limit competitive pressure to prevent the telecom companies from having to spend big money to fight over new customers, only to lose them in a month or two. That makes mobile contracts essential to service providers’ offering lower prices.

Cheap RAZR

[Cellphone Envy Lays Motorola Low – New York Times]
[Apple’s Secret iPhone Application Business Model : The Mobile Phone Subsidy Shell Game]

The High Cost of Being Cheap.
Congress can’t simply decree an end to these contracts; doing so would do little to open up competitive pressure anyway. That’s because Congress allowed the supposedly free market to poke itself in the eye by building out incompatible systems that appeared to be cheaper in their deployment costs.

My AT&T contract isn’t what is keeping me from taking my iPhone to Verizon or Sprint; it simply wouldn’t work on their CDMA2000 networks, just as those providers’ mobile phones won’t work on AT&T or T-Mobile’s GSM networks, or in Europe.

In the 1940s, the FCC spared the country a rival format war in TV broadcasting by decreeing that NTSC would be the nation’s color format. The market has since wasted a decade and millions of dollars in sorting out rival HDTV formats, and has wasted billions building out incompatible GSM and CDMA2000 networks.

If the FCC had standardized on GSM as a mobile technology framework, competition could have worked to build more efficient implementations, rather than inventing an entirely different wheel.

Interoperability is essential to open markets and competition. There’s no easy fix for America’s mobile networks, but there are solutions.

[Format Wars in Home Theater]

Solutions for a Better Mobile Market.
The witch hunt over the iPhone’s mobile contracts is a bit of a canard. Rather than fretting about the iPhone and AT&T’s contract, members of the House Telecommunications Subcommittee would do better to examine the problems they can address:

Pass “truth in advertising” legislation for mobile providers and phones sold in the US. Clearly present in a standardized way what features specific phones offer, what features are locked out to enrich providers’ own interests, and what the true cost of the phone plus its service plan is.

Armed with competitive information, consumers would see that the iPhone is cheaper overall compared to other smartphones on the market because Apple could negotiate competitive service plans with AT&T. Without an exclusive provider, Apple could not have done this. Contracts themselves aren’t necessarily anti-competitive.

Specify minimum interoperability requirements for phones that favor pro-competitive, pro-consumer, open formats and protocols. Perhaps Congress isn’t the group that should be choosing which standards are best, but it should designate an experts group to define interoperable standards, and at least advise consumers about whether a specific phone or provider supports its recommendations. This should include:

  • WiFi networking support.
  • Bluetooth profiles supported.
  • Support for standard USB and perhaps SyncML.
  • Instant messaging and VoIP support for Jabber XMPP and SIP.
  • Standard, open HTML email support.
  • Standards-based web browser support.
  • Ability to use PDF and Open Document formats.
  • Ability to play standard DRM free media and podcasts.

Slapping a standardized label on phones and service plans would at least inform consumers of what they’re getting into before they sign a contract.

Nutrition Facts
If Congress really wants to sort out the mobile mess created during the 90s, it should work at opening up the nations’ airwaves to increased competition, rather than allocating the spectrum to companies without any demand that they compete in a fair and open market in return.

Recognize that net neutrality is at the core of any free market in networking. The network carriers need to be carriers, not fiefdoms of control acting out roles as modern day robber barons, exacting exorbitant tolls from merchants who have already paid them for the right to use their river.

Today’s broadband providers will likely eventually be replaced by ubiquitous wireless data service. If the US continues to allow companies to build out multibillion dollar mobile networks without regard for interoperability and compatibility, it can’t blame the mess that continues to unravel upon Apple’s iPhone.

What it can and should do is consult industry professionals in the working groups of international standards bodies, rather than continuing to take bribes and advice from the mobile companies that built the embarrassing mess this country is currently stuck with.

The next fake Apple scandal is even more scandalous… and even more fake.

10 Fake Apple Scandals: 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

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