To many, the Apple (AAPL) iPhone is the ultimate wireless device — a seductive blend of technology, function and dead-on cool, all wrapped into a sleek package.
To others, it’s a glaring example of what’s wrong with the U.S. wireless industry in general.
“The iPhone offers superior technology, but public policies in this country allow (Apple) to chain that technology to one massive company, AT&T (T), rather than allow consumers to make the choices they want,” charges Josh Silver, co-founder of Free Press, a consumer advocacy group. His latest campaign — “Free the iPhone” — promotes an open Internet and consumer-friendly public policies for mobile devices. The website (www.freetheiphone.org) has resulted in “tens of thousands of supporting petitions,” he says.
Silver says his beef isn’t with the iPhone per se. Other U.S. carriers do the same thing with the devices they sell. But the iPhone, he says, “is a great example of how badly broken our media system is in this country.”
For starters, he notes, would-be iPhone users must sign a two-year contract, or contract extension, with AT&T, the sole U.S. distributor. Owners can access the Internet only via AT&T’s network, unless they happen to be in range of a Wi-Fi hot spot. And the iPhone works only with software sold by Apple and AT&T.
Though it is touted as a “global phone,” the iPhone is locked, so using it overseas requires paying extra for an international calling plan with — you guessed it — AT&T.
Such handcuffs are common in the U.S. wireless industry. Other big carriers, including Verizon Wireless and Sprint, impose similar restrictions, says Chris Murphy of Consumers Union. “Consumers have no bargaining power against these wireless terms that carriers can dictate. It’s a take-it-or-leave-it proposition.”
Murphy says carriers use a variety of tricks to keep wireless subscribers on a short leash, including:
•Restrictive service contracts. Most contracts bar customers from sideloading third-party software applications from their PCs onto wireless devices. Carriers rarely enforce that fine print, but they could, he says. Sideloading can also void the device’s warranty.
•Crippled phones. Some carriers disable handset features — such as free Wi-Fi capability — that compete with their fee-based services. Handset makers are at the mercy of carriers, so they strip out features as requested.
•Subsidized phones. Carriers use discounts on most new cellphones to justify requiring long-term contracts. Early termination fees can run $175 or more. Carriers say they need lengthy commitments to recoup their upfront costs.
•Locked phones. In the USA, most cellphones are sold “locked,” meaning a phone works only with the carrier that supplied it. If you switch carriers, you may have to just toss your handset — even if it’s an unsubsidized $599 iPhone — and buy a new one.
Asia, Europe have more options
The situation is different outside the USA. In Asia and Europe, cellphones are routinely sold unlocked, so consumers can buy any device and load it up with as many software applications as they desire. Each carrier provides an electronic “SIM card” which, when slipped into a phone, configures it for that network. Changing wireless carriers requires inserting a new card — not buying a new phone.
On the plus side, the U.S. system gives Americans super-cheap phones. Contracts help stabilize carrier revenue; that, in turn, helps keep monthly service prices cheap. On the downside, U.S. cellphones are not as feature-rich as phones in other parts of the world, says Muzib Khan, vice president of management and engineering for phone maker Samsung.
To keep costs low, manufacturers tend to “build to the lowest common denominator” for the U.S. market. That’s why there isn’t much variety here, he says. To blur the lack of features on U.S. devices, carriers tout ringtones, face plates and slim design — “things that one could say probably aren’t very useful,” Kahn says.
Because U.S. consumers pay so little for their phones, Khan says, they aren’t as “motivated” to learn how to use them properly. As a result, he says, they don’t get all the benefits.
“It’s an endless loop,” Samsung’s engineering chief says. “Until some changes are made, (U.S. consumers) will be in that loop forever.”
In other countries, consumers tend to pay full retail — $300 to $500 — for the handset, but they also get high-octane phones: DSL-fast Internet browsing, downloading and real-time media streaming, to name just a few features. High-resolution cameras are common. Ditto for Google mapping and touch-screens.
Bill Plummer, a vice president with Nokia (NOK), the world’s largest handset maker, says U.S. consumers are getting shortchanged. “American consumers have less choice in terms of the devices.”
Plummer adds: “They also have less choice in terms of services and applications they can take advantage of with these devices” — a nod to U.S. carriers’ tendency to block applications — such as Skype, a pioneer in Internet calling — that they don’t approve or sell.
Europe’s wireless free-for-all didn’t happen by accident. National governments issued edicts that effectively forced carriers to adopt consumer-friendly practices and a common technical standard (known as “GSM”). Consumers still have the option of subsidized phones by signing contracts — but it’s not a requirement for service.
FCC should step in, many say
The Federal Communications Commission, which has broad sway over telecommunications regulation in the USA, so far has taken a hands-off approach to wireless. That made sense 20 years ago when cellphones were a niche market. Now that they are ubiquitous, however, the FCC should step in, say applications companies such as Skype and other groups including Consumers Union.
FCC Chairman Kevin Martin demurs on whether more regulation is needed, but he admits to some frustrations. “Some innovative services are not becoming as available in the United States as they are abroad,” Martin says. “That is a trend I am concerned about.”
Take Wi-Fi. Martin says it could make faster mobile broadband mainstream — one reason it’s being deployed fast around the world. U.S. carriers, however, have been slow to roll out the technology, which competes with their pricier broadband offerings. Wi-Fi “appears to be stultified in its deployment here,” Martin says sternly.
To help address those issues, the FCC recently imposed an “open device” requirement on a choice chunk of broadband airwaves due to be auctioned off Jan. 16. This 700-megahertz spectrum is being vacated by TV broadcasters in their digital switchover. Signals in this range can penetrate walls and other obstacles, making them ideal for mobile broadband.
The upshot: Winning bidders will have to let customers use any wireless device and any applications they desire on the networks they build using these licenses. Expected bidders include AT&T, Verizon Wireless (VZ) and Google (GOOG).
The FCC’s initiative is the beginning of what could become a full-blown revolution for the U.S. wireless business, says Moe Tanabian, a principal with Interactive Broadband Consulting Group. “The business model of locking phones will fade,” he predicts.
The driver, he believes, will be U.S. consumers. Once they get a taste of freedom in the mobile broadband market, Tanabian thinks there’ll be no turning back. “Complete freedom in the wireless domain will happen, it’s just a matter of when,” he says.
“The carriers are going to have to change over the next five to six years,” Tanabian says. “If they don’t, they’re out.”
Less choice but lower rates
Jim Cicconi, an AT&T senior executive vice president, takes issue with the suggestion that Europe’s wireless market is friendlier to consumers. In the USA, service fees “are one-half to one-third cheaper.” Devices are also dirt cheap. Those who don’t want to sign a contract can always sign up for a “prepaid” plan, he adds.
“You don’t have to scratch your head a lot to figure out why the people prefer” the USA’s wireless model, Cicconi says.
Once a contract has been fulfilled, Cicconi says AT&T will “gladly unlock” a customer’s phone, if requested.
Plummer, the Nokia executive, says he can understand why U.S. carriers felt the need to control the customer experience in the early days of wireless. But not now.
“There was a point in time when we all needed training wheels for the fixed Internet,” Plummer says. “We left that behind well over a decade ago. Consumers should have a choice of device, a choice of network that they want to attach to and the right to pick the applications and content that they want to benefit from.”
Hoping to nudge that shift along, perhaps, Nokia now sells unlocked phones in its superstore in Chicago and is quickly expanding its unlocked line to independent retail outlets nationwide. (To use these phones, consumers must get a “SIM” card from every carrier they plan to use.)
Plummer says the move is a nod to the changing nature of wireless in general, and to the likely future of the business in the USA in particular.
“We think consumers should be able to make their own decisions” about devices and applications, he says flatly. “Nokia devices are developed for the global audience, and the U.S. consumer is a member of that global audience.”