Should the iPhone be exclusive?

Larry sends us this question:
Don't you think that the world would be a better place if smartphone manufacturers would allow their phones to be unlocked and useable with any service provider? The problem with iPhone is that it can only be used with AT&T. My experience with AT&T is that there are many places in this country where their cell service is not available. Other carriers have better coverage. But by only allowing the iPhone to be available through one carrier precludes me from owning one. That's why I have the Motorola Droid. It's usable nearly every place life takes me. Do you think there should be laws passed, similar to anti-monopoly laws that would open the marketplace to a more beneficial level playing field for users?

Brian's reply:
I'm with Larry all the way up until his very last sentence. I think the deal struck between Apple (maker of the iPhone) and AT&T is pretty silly. Imagine if Henry Ford and Alfred P. Sloan had spent their time negotiating agreements whereby you could only drive a Ford or a Buick on certain roads, but not on all the rest. If they'd been that ridiculous, then today, all Americans would be driving Packards or some other vehicle.

Exclusivity makes a little bit of sense up-front: Instead of building phones to work on America's two segregated cellular networks, Apple only had to focus on one (the GSM band). The agreement drew a lot of users to AT&T Wireless who probably would have shopped around otherwise, and that allowed Apple to split the costs of marketing and promoting the phone with a single dedicated partner that had all kinds of incentive to make the product work.

And it's not as though Apple and AT&T were the first to strike an exclusive deal. Cell phones are subsidized heavily by the wireless-service companies, who pay for some of the cost of the phone in order to lock customers into (usually) two-year contracts with hefty fees for early termination.

But the exclusive agreement undoubtedly cost AT&T a lot of customers in places -- like rural Iowa, for instance -- where GSM coverage is lousy. Geographically speaking, AT&T's 3G network (their broadband Internet data service) covers perhaps 5% of the entire state, and excludes Mason City, Waterloo/Cedar Falls, Dubuque, and Sioux City, among other major cities. No problem if you never leave metro Des Moines. A big problem if you plan to hit a football game at any one of the three state schools and want to stream anything to your iPhone when you get there.

The answer to this problem, though, isn't more government regulation. The market has already solved the problem, just as Larry has discovered: Competitors to the iPhone -- some of which are probably even better than the iPhone -- are available, and they work on networks everywhere. I took a vacation in December and was able to get Internet access on my phone both on the cruise ship and walking around places like Grand Cayman, using a Palm Centro. A friend who also went on the trip got nothing from his AT&T iPhone. Now, maybe you want to be cut off from your e-mail while on vacation. But I'm a partner in a business, and I can't be unreachable for that long. So I'll never be a customer of a wireless network that doesn't allow me to travel freely. I still want a smartphone, though, so I represent a ready-made market for smart wireless providers and phone makers. And there are a lot of us.

Why do I oppose government intervention in this market? Because I think it's costly, intrusive, and ineffective:

  • Costly, because you may recall the days when Ma Bell had a government-regulated monopoly on phone service. You got a rotary-dial phone and you paid mightily for long-distance service. All of the real innovation in telecommunications has happened ever since government got out of the day-to-day regulation of telephone service. Ma Bell never gave you text messaging, free voice mail and call waiting, or wireless 3G service, did she?
  • Intrusive, because we all instinctively seem to want everyone else to be regulated, but never ourselves. That's because we recognize the harm of over-regulation when we pay the costs, but we tend to ignore it when we think someone else is paying. For instance, if I told you that the government was going to regulate what chair and microphone I had to use on the WHO Radio Wise Guys, you probably wouldn't care. But if I told you that the government was going to regulate which presets you could use on your car stereo and which stations had to be programmed in, you'd probably revolt. If I were running a wireless-service company or a phone manufacturer, I wouldn't want government telling me what deals I could cut any more than I want them telling me how to run a radio show.
  • Ineffective, because Apple has been down this road before. They had a choice in the 1980s to allow open development on their computer platform, or to try to control the operating system and the manufacturing of the computers themselves. Microsoft, on the other hand, licensed its operating system to any manufacturer who would pay for it, and allowed programmers to build as many useful tools around their OS as wanted to. Microsoft controls a crushing share of the OS market today. Opening up to different computer manufacturers and outside programmers did far more to allow Microsoft to become a near-monopolist than trying to tightly control the system, like Apple did. In other words, we shouldn't be surprised if we look back ten or twenty years from now and marvel at how dumb it was for Apple to go with an exclusive deal with AT&T, as 85% of us end up using smartphones built on some other platform.
So, do I think Apple's exclusivity deal is a loser over the long-term? You bet. I think the smarter business move for them would have been to offer a CDMA version of the iPhone and a GSM version, and offer unlocked versions to the public and non-exclusive deals to every wireless provider who would've wanted it. In some parallel universe where they followed that path, 90% of us are using iPhones and everyone's wondering why the government isn't breaking Apple's monopoly on the smartphone market. I much prefer this version of reality.

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This page contains a single entry by Brian Gongol published on February 10, 2010 6:01 PM.

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