The cellular landscape has always been faced with a fundamental challenge: the handset. Specifically, who owns it, who dictates what happens on it, and who enforces those rules. In December, the U.S. copyright office made a statement of significance that went largely unnoticed: Customers should be able to keep their handsets provided they have "unlocked" the phone themselves.
This presents a problem for service providers and consumers alike. From the providers' standpoint, they have heavily subsidized the phone at the time of activation. In essence, that free handset you received was purchased by the carrier and paid back through margins you create as your contract burns out. That margin is protected by the infamous early-termination penalty, ensuring that the carrier recoups the majority of the device cost if you bow out early. On the consumer side, the free phone is great, but certain functions or capabilities of the device will be limited, depending on which carrier you purchase from. It will also be "locked" into that carrier's network only.
My summary of this quandary is simple: No carrier wants to be the "dumb pipe," but every carrier wants to be the only pipe. This is a classic example of having your cake and eating it many times over. In return for a low-cost or no-cost device, your experience will be limited to carrier-specific content and functional limitations. The industry knows what the next 10 years will look like, and much of the future revenues will come from data and content. These are high-margin, low-delivery-cost products and services that will continue to drive profitability as voice pricing continues to decline. From a carrier's standpoint, wouldn't it be great to make sure that you bought that content from them exclusively? That's exactly the situation that exists today. Yes, there are exceptions. Yes, there are workarounds. But, by and large, this is the business model. Some providers have expressed their opinions on this, stating that the industry offers a fiercely competitive marketplace for consumers, and that if they don't like what one has to offer, there are others to select. That is true. As I look across the offers from the Tier 1 players, however, I'm not seeing a whole lot that looks different. So I think a fair assessment would be that consumers are faced with a competitive choice of walled gardens. The assumed nightmare scenario for many providers would be an unlocked device with broadband, Wi-Fi, Bluetooth and media capabilities surfing the Web and using mobile VoIP such as Skype. The provider is reduced at that point to delivering bandwidth. All in all, it's not a bad gig if you can get it, but it does not offer the margins or profitability levels that selling songs, movies, portal access and ringtones can deliver. Wall Street still dictates or influences what some of this market will look like in years to come, and this is a big part of that.
This issue will continue to play itself out in the next few years -- and I think new technology alternatives will have a major say in how it turns out. I'm a big WiMAX fan, but I'm also an interoperability fan. Consumers and enterprises are much more savvy than the industry gives them credit for being, and I'm positive that demand and expectation will outweigh any margin arguments. The consumer voice almost always leads to reform, and that voice is getting louder and louder every day. Many enterprise clients ask me for my opinion on this subject because many of them have embedded users in Europe and Asia. Should I be pushing for a better strategy around the hardware? Should we be looking at sourcing handsets elsewhere? The short answer is yes, and just as in the consumer world, you have to push. Until the demand outweighs the argument, nothing will change. I understand the carrier argument, and based on the model that exists today, they have a financial quandary in equipment. But I hope they realize there's a much greater opportunity looming -- not to be a dumb pipe, or the only pipe, but to be a smarter pipe. Offer your content, enable the users, and give them a solid, quality experience -- I'll be waiting first in line.
About the author
Michael Voellinger is widely respected as one of the nation's top technology strategists and is considered to be a thought leader in telecommunications. With more than 10 years of experience, Michael's analysis of security risk mitigation, compliance, and the convergence of telecommunications has been continually sought out by leading corporations, government and financial institutions. Michael's commentary has appeared in The Wall Street Journal, The New York Times, Investors Business Daily, Smartmoney.com and CNN Money, as well as numerous industry publications.