Tuesday, July 17, 2007
Unlocking the cell phone market
A recent article on open device access to the 700MHz band raised several discussions about whether or not increased competition in the mobile services layer would increase competition in the mobile carrier layer. Google's presence in the bidders is seen as an attempt to increase the number of non-network provider shareholders. This can be viewed as an attempt to increase competition in the MVNO space. Several comments were left behind about retail pricing models not technological divides being the problem with consumer retail cell phone sales in the US.
There is a major flaw in the argument that current pricing models are capping the market. The presumption is the end-user is the market with the network provider and the handset manufacturer competing for the sale. In Europe, with a standardized network protocol, this may be the case. However, in the US, the various network providers have carved small monopolies styled after the Baby Bells; localized carriers with limited service areas carrying a specific set of phones. Unlike AT&T, these network carriers were not seen as having to comply with the Carterphone ruling and were allowed, implicitly or explicitly, to restrict interoperability of these handsets. Even with modern protocols, phone "locking" still restricts phones to specific networks in spite of the inbuilt capability to utilize multiple protocols. In some cases, the handsets are additionally modified to remove or restrict capabilities provided by the manufacturer.
How does this fit in with retail pricing and end-user markets? The connection should be fairly clear; in the absence for the end-user to freely choose a handset from a manufacturer and use it on any available provider's network, the end-user is not the consumer in the transaction. The end-user is limited to a selection of now national mini-monopolies offering identical services with handsets limited to that subset chosen by each provider. The market is solely a transaction between the handset manufacturer and the network provider.
The handset manufacturers compete in a global market, with the US providers requirements being only a part of their custom. The special requirements of the US providers limits the variety of devices the manufacturers are willing to create for the market, further limited by the inability to directly market to end-users because of subsidies used by the providers to market extended contracts. While MSRP for a US handset may be high, the cost to the network provider is much lower, just as in any retail transaction. When paired with the ability to amortize that wholesale cost over a guaranteed contracted income, the network provider can take a $200 MSRP device and offer it at no direct cost to the end-user, knowing the margin on the 2 year contract at minimum service levels more than pays for the wholesale cost.
This is how the mini-monopolies like it and the reason no competitive retail can get a foothold in selling US handsets. There is a business in retailing "unlocked" phones which also takes advantage of high MSRP prices. These business will sell non-subsidized phones under MSRP, but most certainly above wholesale costs. This is however niche retail at best. If there was a real competitive market, Apple's iPhone would not be an exclusive single provider gizmo. Even with the star draw of the Apple brand that allowed Apple to retain complete design control, only exclusive carrier deals are being struck. This is the reality of the marketplace, or lack thereof. The control is in the monopoly network carrier hands, the handset makers are unwilling to push too hard for little gain in a small market segment, and the end-user is left with crippled, dated, and incompatible hardware and services.
There is a major flaw in the argument that current pricing models are capping the market. The presumption is the end-user is the market with the network provider and the handset manufacturer competing for the sale. In Europe, with a standardized network protocol, this may be the case. However, in the US, the various network providers have carved small monopolies styled after the Baby Bells; localized carriers with limited service areas carrying a specific set of phones. Unlike AT&T, these network carriers were not seen as having to comply with the Carterphone ruling and were allowed, implicitly or explicitly, to restrict interoperability of these handsets. Even with modern protocols, phone "locking" still restricts phones to specific networks in spite of the inbuilt capability to utilize multiple protocols. In some cases, the handsets are additionally modified to remove or restrict capabilities provided by the manufacturer.
How does this fit in with retail pricing and end-user markets? The connection should be fairly clear; in the absence for the end-user to freely choose a handset from a manufacturer and use it on any available provider's network, the end-user is not the consumer in the transaction. The end-user is limited to a selection of now national mini-monopolies offering identical services with handsets limited to that subset chosen by each provider. The market is solely a transaction between the handset manufacturer and the network provider.
The handset manufacturers compete in a global market, with the US providers requirements being only a part of their custom. The special requirements of the US providers limits the variety of devices the manufacturers are willing to create for the market, further limited by the inability to directly market to end-users because of subsidies used by the providers to market extended contracts. While MSRP for a US handset may be high, the cost to the network provider is much lower, just as in any retail transaction. When paired with the ability to amortize that wholesale cost over a guaranteed contracted income, the network provider can take a $200 MSRP device and offer it at no direct cost to the end-user, knowing the margin on the 2 year contract at minimum service levels more than pays for the wholesale cost.
This is how the mini-monopolies like it and the reason no competitive retail can get a foothold in selling US handsets. There is a business in retailing "unlocked" phones which also takes advantage of high MSRP prices. These business will sell non-subsidized phones under MSRP, but most certainly above wholesale costs. This is however niche retail at best. If there was a real competitive market, Apple's iPhone would not be an exclusive single provider gizmo. Even with the star draw of the Apple brand that allowed Apple to retain complete design control, only exclusive carrier deals are being struck. This is the reality of the marketplace, or lack thereof. The control is in the monopoly network carrier hands, the handset makers are unwilling to push too hard for little gain in a small market segment, and the end-user is left with crippled, dated, and incompatible hardware and services.
