Oct

9

Why are iPhones locked?

October 9, 2007 | 2 Comments | Joshua Gans

There has been much discussion over the past few weeks about the iPhone locking and unlocking issue. It began when Apple chose AT&T as its partner for the next two years. In the US, this meant that the iPhone would be locked and only accept SIM cards from AT&T. Then a few months after the launch of the iPhone hackers managed to unlock it allowing it accept any SIM cards; most notably ones from outside of the US. This would allow iPhones to work in Australia. However, shortly after this, Apple released a software update for the iPhone that caused the iPhone to become useless. That is, they didn’t just lock it again but turned it into a ‘brick.’ As the phones had been hacked, their warranty was void. Not surprisingly, users were not happy (although competitors like Nokia were).

At the same time, other hackers were putting all sorts of other programs on the iPhone. These were programs valued but Apple did not support them. The same software upgrade has destroyed the ability to put 3rd Party Applications on an iPhone.

All this is important because unlocking or putting on 3rd party applications is not illegal.

Finally, there are issues with the iPod Touch. This was tauted as an iPhone without the Phone but it is far from that. It has WiFi but no email program. Its calendar doesn’t allow you to enter anything. And it doesn’t appear to have the typing recognition except for Google searches. It could easily have been more but Apple have chosen it to be less.

Contrast this with what Apple has done in computers and with AppleTV. By definition, computers are ‘hacked’ and users are allowed to put on software. For AppleTV, the same has occured but Apple has not stopped it. (Although Apple Australia still make it look a bit like you can watch movies and even television programs in Australia (there is a disclaimer at the bottom), which you can’t unless it is hacked).

So to begin, it is important to consider who would want to unlock an iPhone. The cost of this is that some features don’t work such as AT&T’s visual voicemail. But given no other phone has that, being able to get the rest of the iPhone’s features, can be a motivator. Second, you avoid AT&T. This, actually, isn’t as big a deal for US customers but it would be for international customers. Hence, that is the likely source of demand for unlocked iPhones. Given that, at the moment, that is all new market for Apple, it is a puzzle why they might stop it given that it is unlikely to be an issue for the US market.

So the obvious answer as to why all this is happening is not Apple but its telecoms partners such as AT&T. Locking prevents competition and gives them exclusivity. Taking features from the iPhone to prevent 3rd party applications such as Skype or similarly from the iPod Touch for email similarly protects AT&T from competition.

But why do this? What are Apple getting out of it? Two things. First, they get a revenue stream from the carriers. This presumably allows them to sell iPhones for less. Second, AT&T and others spend lots of money upgrading their systems so that something like visual voicemail will work. The demand exclusivity, ruthlessly enforced, as consideration for this investment.

But the question is: could Apple have protected those investments without engaging in a war on its customers? Let’s suppose that Apple thought that without visual voicemail, it would have no iPhone sales. In this case, it would require some investment in the network. It could pay for that investment but might be worried about the real cost and it may not be a once-off but require maintenance. The alternative is that it could pay AT&T a share of revenue from iPhone sales until say, enough customers had signed on to AT&T so that the investment paid for itself. This would add to the price of the iPhone but then would cause it to drop once the threshold was reached (sound familiar?). Finally, it could shield AT&T from competition based on the iPhone. Of course, given our assumption, this would only be a threat should others make a similar investment in visual voice mail. But given that AT&T required protection from competition to prevent this, that threat would surely not eventuate. So I am left to conclude that if visual voicemail was so important, locking iPhones was very unimportant.

Now what if visual voicemail is not that critical. In this case, there is a threat from competition as other carriers can get iPhone customers without making the visual voicemail investment; leaving AT&T to compete solely on the basis of the value that investment gives customers. Sounds both fair and efficient. So locking iPhones gives AT&T more. It ties the visual voicemail to the other iPhone features — they are sold as a bundle rather than separately. So there is a loss in consumer value as consumers pay more for visual voicemail than they would value it as a stand-alone service. But if that was the only way to justify that investment, surely there is a loss in overall value? Apple would have been better off giving AT&T exclusivity on visual voicemail access and technology while letting customers choose what is best for them. If it wanted to it could then compensate AT&T by giving them a rebate for every iPhone customer not subscribing to visual voicemail in order to underwrite AT&T’s risk.

Of course, this might have some adverse impacts on competition. For instance, AT&T would not price as aggressively as it knew a rebate might be coming but it would still be pricing more aggressively than the current exclusive arrangement. In any case, if that price is part of the arrangement, then it could be part of a rebate arrangement too.

My point is that there is more than one way to ‘skin a cat.’ It seems to me that Apple did not have to give AT&T exclusivity to get the investments needed and that there would have been a big upside to being freer on this. What the real story is, I have no idea.

Finally, I note that this might be an issue as Apple expands across the world. Apparently, locking phones may not be possible in France. In this situation, an international iPhone purchase option may become available but, in turn, would this too be blocked by Apple’s deal with AT&T? All very complicated and far more messy than the ‘one button does it all’ philosophy that usually guides Apple. We have reason to be disappointed in how this has currently turned out.



Comments

2 Responses to “Why are iPhones locked?”

  1. google » Why are iPhones locked? on October 9th, 2007 11:47 am

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  2. iPhones are locked for a reason « They didn’t get this username before me! on October 10th, 2007 11:24 am

    [...] Uncategorized pcpcword 11:24 Why are iPhones locked? Joshua Gans knows why they shouldn’t be. [...]