Unlocking the unlocked cell phone market
The Sony Ericsson W995a is packed with features, but at about $600 it may not provoke much of a clamoring among U.S. consumers.
(Credit: Sony Ericsson)Nokia and Sony Ericsson are targeting the U.S. with a new set of unlocked phones. But without hefty carrier subsidies, will they ever be able to crack the U.S. market?
There's no question that when it comes to features, Nokia and Sony Ericsson's new U.S.-ready phones can easily compete against the hottest new phones on the market.
Nokia's N97, a touch-screen phone that supports both 3G and Wi-Fi, has a 5-megapixel camera and 32GB of memory. It's a clear competitor to the new Apple iPhone 3G S and the Palm Pre.
The Sony Ericsson W995a, also a 3G and Wi-Fi enabled phone, comes with an 8.1-megapixel camera, a brilliant display screen, a good media player and features such as stereo Bluetooth, and GPS. In terms of features and functionality, this phone could easily compete with other high-end feature phones like the LG enV3, which is sold by Verizon Wireless or the Samsung Memoir T929, sold for T-Mobile USA's network.
But even though these phones may have the features to compete, they're not sold through a wireless operator, which means that they are not subsidized, making them too expensive for most mainstream customers. The N97's suggested retail price is $700, and Sony plans to start selling the W995a for $600.
Meanwhile AT&T charges $99 for the 8GB iPhone 3G, $199 for the 16GB iPhone 3GS, and $299 for the 32GB iPhone 3GS. In exchange for the subsidy, AT&T requires that customers sign a two-year service contract. The price of the service, which includes voice and data services, is a minimum of $70 per month. But regardless of whether a device is subsidized, users will have to purchase some kind of voice and/or data plan, depending on the type of device they buy.
"In the U.S. market, price is a huge factor in determining which phones people buy," said Will Stofego, an analyst with the market research firm IDC. "Why pay $500 or more for a phone when you can get an iPhone for $100? Of course you have to agree to the two-year service plan, but I think that's a trade-off most consumers are OK with."
Up until recently, unlocked phones--handsets that can be used on multiple carrier networks--were only available in "gray" markets where Americans bought phones from overseas. Now manufacturers are selling them on their Web sites, in their own retail stores, and through some big retail chains, such as Best Buy. Nokia has opened several retail stores in the U.S. And Sony Ericsson sells unlocked phones through Sony Electronic retail channels.
As part of their push to address the U.S. market, Nokia and Sony Ericsson are also making sure that the phones they sell in the U.S. operate in the frequency bands used by AT&T and T-Mobile, the two main GSM carriers in the U.S. While these operators have built GSM networks just like carriers in Europe and parts of Asia, not all GSM networks operate on the same frequency, which means that some unlocked GSM phones bought in Europe or Asia won't work in the U.S. on a GSM network.
Another benefit to buying a U.S.-friendly unlocked phone is that Sony Ericsson is now offering warranties for customers who buy their U.S. unlocked phones through a Sony retail channel. The company doesn't offer a warranty for phones designed for other countries and brought to the U.S. through the gray market.
Roadblocks for unlocked phones
Despite these efforts to create a stronger retail presence for these unlocked phones, the market remains small. In the U.S., only about 5 percent of the phones sold each year are unlocked and available from somewhere other than a carrier. This differs greatly from other markets. Worldwide, unlocked phones account for about 50 percent of phones sold. In Asia, about 80 percent of cell phones are sold independently of a carrier. And in Europe, roughly 70 percent of cell phones are sold unlocked.
There are several reasons for this difference. For one, two of the four big nationwide U.S. cell phone operators in the U.S. use CDMA, which does not use SIM cards that can be interchanged between phones. Most of the world's cell phone carriers use GSM, which does allow for SIM cards. And because people buy unlocked phones in order to swap out SIM cards to use on other carrier networks, phones made by manufacturers such as Nokia and Sony Ericsson, which have concentrated efforts on developing GSM phones, can only be used on two of the big four nationwide wireless networks in the U.S.: AT&T and T-Mobile.
Nokia's N97 features a touch screen, supports both 3G and Wi-Fi, and has a 5-megapixel camera and 32GB of memory. It'll set you back $700.
(Credit: Nokia)But the biggest reason that unlocked phones haven't taken off in the U.S. is that they are much more expensive to buy than locked phones that are subsidized and typically require a two-year service contract.
That said, Nokia and Sony Ericsson see opportunity in the U.S. market. And the consumers they're targeting are unlikely to be buying their first smartphone. Steve Medina, product and business manager for Sony Ericsson unlocked phones, says that unlocked phones in the U.S. appeal to a very niche market of tech-savvy consumers.
"Unlocked phones aren't for every consumer," he said. "They are really for the phone junkies; the geeks. It might seem crazy to some people that someone would drop $600 or $700 on a phone. But you'd be surprised at how many actually do."
Medina said a lot of the people buying unlocked phones either frequently travel internationally, or they have lived in Europe and Asia where people typically buy unlocked phones at full retail price. For these consumers, Medina says the benefits of an unlocked phone far outweigh the hefty price tag.
Swapping SIM cards
The biggest benefit of an unlocked phone is that users can simply pop in SIM card to get service. And unlike GSM phones bought through U.S. operators, these phones don't require a special unlock code to be able to swap SIM cards.
Medina says that's an important distinction, because when wireless subscribers from AT&T and T-Mobile unlock their phones, the locking software is still on the phone. The code that is used to unlock the device simply overrides that software. What this means is that when phones are updated, they can be relocked, forcing consumers to once again override the lock code.
Another big benefit of buying an unlocked phone is that all the features that the manufacturer has included on the phone will work. U.S. cell phone carriers sometimes disable some functionality on phones that they sell. And with many phones, they often integrate their own software and branding onto the phone.
But as Medina points out, unlocked phones are not for everyone. Aside from the cost, unlocked phones are often more difficult to set up. Users must configure their messaging functions and Internet functionality on their phones. Phones sold through carriers are already pre-configured for these functions.
And when a carrier upgrades its network and sends out an automated update to phones on the network, unlocked users must handle the updates on their own. And if there is ever a problem with the phone or the service, an AT&T or T-Mobile service representative may not be able to help because he or she isn't trained to deal with these specific phones.
While Sony Ericsson's Medina acknowledges that it's unlikely that the unlocked market will grow with respect to the overall cell phone market in the U.S. right now, he believes that eventually more U.S. consumers will buy unlocked phones.
"We believe that at some point, the U.S. market will become more like the European and Asian markets where unlocked phones are the norm," he said. "The U.S. wireless market will eventually evolve from a carrier-led market to one that is more open. And consumers will select a phone and then select a carrier."
But as long as mobile phone carriers continue to subsidize handsets, most consumers will opt for a subsidized phone rather than paying for a non-subsidized phone.
"The problem in the U.S. is that people have been trained to buy on price," Stofega said.
Government intervention looming?
But not all hope is lost for Sony Ericsson and Nokia in their quest to crack open the unlocked cell phone market in the U.S. These companies may get a little help from the government. Congress and the Federal Communications Commission are already investigating exclusive deals made between wireless carriers and handset makers. And some officials are even questioning the carrier practice of disabling certain features.
It's difficult to say if either the FCC or Congress will actually do something to limit this practice, which could help open up the unlocked market. While a move like this would certainly increase choice for consumers, it could also drive up costs for consumers. Given this consequences and the fact that the phone companies have a strong lobbying organization in Washington, it seems unlikely that government intervention will happen any time soon.
That said, the government has imposed unpopular rules on the phone companies previously. For example, wireless phone companies are now required to allow consumers to take their phone numbers with them when they switch carriers, which was a move that was initially highly unpopular with carriers.
The best solution for cracking the unlocked phone market is for phone manufacturers to develop new business models that will keep consumer costs low, but still reward carriers and phone manufacturers. Medina suggests that Sony Ericsson could subsidize the cost of its phones by charging for mobile games and applications. This is a model that has worked well in the game console market. And there are already indications that consumers are hungry for mobile applications. The success of Apple's App Store is proof of that.
But again price is a big factor in the success of such a plan. Through the App Store, consumers are already being conditioned to get applications for free or for 99 cents.
"Right now unlocked phones will likely not appeal to the mainstream market," Sony Ericsson's Medina admits. "Whenever you have a subsidized model, it is always going to be cheaper to buy a subsidized product. But there are different ways to address this, and we think right now we have a strong offering for hard core cell phone enthusiasts, who want the flexibility of an unlocked phone. But we are also looking at other revenue streams to subsidize unlocked phones."
Marguerite Reardon has been a CNET News reporter since 2004, covering cell phone services, broadband, citywide Wi-Fi, the Net neutrality debate, as well as the ongoing consolidation of the phone companies. E-mail Maggie. 
One of the downsides to the unsubsidized phones is that if you don't have a regular monthly plan with one of the major providers, you likely won't be able to use all the features on your phone. Right now, it still looks to me like the unlocked market is going to be dominated by cheaper "no frills" type phones. Paying $700 for a Nokia with lots of features and then not being able to use those features without a plan anyway doesn't make sense.
T-Mobile USA has two prepaid plans. The Pay By The Day plan is $1 per day plus $0.10 per minute; that's the one you're thinking about.
With the Pay As You Go plan you pay for minutes at a variety of denominations, with no daily access charge. The per-minute charge is significantly higher at lower denominations (30 minutes for $10, equal to $0.33/minute) than at higher denominations (1000 minutes for $100, equal to $0.10/min).
Here's the kicker: once you've put $100 into your Pay-As-You-Go account, you've reached Gold Status and the minutes won't expire for a year. Even better, the minutes roll over for another year if you stick more money (any amount, even just ten bucks) before the expiration date. I looked at prepaid plans from other carriers and could not find a similarly generous plan.
I'm currently using the phone about 30 minutes per month, but it's probably something like ten calls averaging three minutes. Assuming I'm using the phone seven days a month, if I was using the Pay By The Day plan, I'd probably pay $10/month.
The phones that will do the best for the unlocked market are those that appeal to the frugal, yet have just enough bells and whistles to make them deisrable. Phones that are "smart-phonISH" aren't likely to appear to someone that sees the value in an unlocked phone.
As someone who owns an iPhone and habitually switches to prepaid cards when travelling abroad, I was pretty shocked by the lack of prepaid data plans in the US.
The prepaid data we have here is usually a pitiful amount, too. Especially for overseas data. On virgin mobile, the prominent prepaid company, you get up to about 100 MB of data (last time I checked a couple months ago). For me on Verizon, I can have about 50 MB of data when I travel overseas (but my phone only supports GPRS/EDGE overseas so I wouldn't websurf anyways).
People always complaining about this and that with there phones.
The Telcos are thiefs plain and simple.
I have to get one due to circumstance but i know what i'm buying into i feel sorry for the people than don't know.
"But regardless of whether a device is subsidized or not, users will have to purchase some kind of voice and/or data plan, depending on the type device they buy."
"Why pay $500 or more for a phone when you can get an iPhone for $100? Of course you have to agree to the two-year service plan, but I think that's a trade-off most consumers are OK with."
Even if you manage to skate by without a data plan, you'll save little (if anything) buying an unlocked device and avoiding a contract. Contract or not, you either have to have a service plan or a pre-paid account (and they are often more expensive).
Bottomline: The aversion to having a contract is purely psychological.
You are correct, because even with an unlocked phone you still pay the same price for service that a subsidized customer pays. And its not like you are losing that much choice... its pretty much AT&T or Y-Mobile for GSM and if ubiquitous data is essential then your choice is AT&T or nothing.
The choices will grow a bit as all the carriers transition to LTE of course. But given that the four dominant US carriers are conducting business via a public resource (the airwaves) I think its perfectly reasonable for the government to demand some ground rules about how they do business. The free market this is not. The practice of phone locking in the US will likely never end until the FTC steps in.
They have a great model that I hope the big carriers notice and follow. There is no reason to lock the phone. They are already getting their money to cover the phone subsidy by way of the contract.
For my carrier (AT&T) last time I bought a phone, the subsidy was $175 with a 24-month contract. That means I'm paying $7.30/month in "subsidy fees". I was not permitted to refuse the subsidy and take a $7/month discount.
The problem is most people are not even aware of how much carriers limit phone's capabilities or otherwise ruin the experience.
Another huge factor in why unlocked phones don't take off here is that in Europe the countries are all smaller, people travel between them easier and more often. Thus, to avoid huge charges, they can easily switch carriers/SIMs and work from there. However, since the USA is so large, we can stay on one network across the country without incurring large overages. If I live in California and move to Minnesota, I don't have to change networks.
That's not what TechnoMan wrote. The article is specifically about the sale of these phones in the U.S. market--not the international market. And I think it's valid to assume that, for most Americans, international use of their phone is not an important factor. --mark d.
I'm tempted to unlock my AT&T Iphone and use the pre-paid VodaFone when I travel. I know so many people whom have unlocked with ZERO hassles. People in the UK Carry 2 phones to get great rates.
I'm glad this is happening because it will drive prices down. Iphone 3G in UK on my AT&T network was $20 a Megabyte and is a total CON... I didn't use it, just VodaFone. AT&T are rip-offs and should realize this is what a lot of people do and they get nothing.
If we just disregard the theoretical calculation above, in reality, 99.99% of the time I don't need the data plan, because I have Wi-Fi access both in my office and at home, and all of my friends have Wi-Fi at home, too. So, paying $30 extra for that data plan is plain silly to me! $30 X 24 = $720.
I use most of my bandwidth while driving and listening to pandora, and surf the net waiting for food at the restaurants.
Another article on this site points to a iPhone, Palm Pre Review by Consumer Reports where Apple wins, however it did not even include a Nokia E71 (can be bought unlocked for abou$300 or subsidized by AT&T for about $99). While $300 is a bit more than the cost of some of the cheaper phones, for an unlocked phone it seems fairly reasonable for the feature set. I would love to see a review of these new phones compared with the E71 and or the E71x (also note the the Consumer Reports review gave less emphasis on Talk Time and Voice Quality than it has before which seems to be a pretty blatant case of "adjust the test to get the results you would like to me). I think American journalists overlook the Nokia phones far too much, because they may not have the glitz and glamour, but they typcially do have the features and functionality.
On the other hand, if I sold my mom an E71 she'd probably hate the thing and go back to her W580 and tell me that she wanted to cancel the data on her phone.
As for the guy who says he doesn't need data on his phone, great then you're not who the smart phone market is geared towards. Penny pinchers and people who are always thinking about how they can just get by, are not the market for premium services that allow you to always stay in touch regardless of the format. You could just as easily say that you don't need a phone since you have one at work and at home.
There are definitely some great points with the percentages of unlocked phones in Europe and Asia over-exceeding the phones in North America. I believe that the main reason for the lack of unlocked phones in the USA is due to lack of education.
Since unlocked phones have been bigger in Europe and Asia for so much longer, how can you not know what an unlocked phone does?
As a North American, why pay $600-$700 for an unlocked phone when you can pay a vendor to unlock your phone? The article says that it's because they will relock up after upgrading etc. This is true to a certain extent. With the iPhones, software unlocks will definitely brick your phone.
The unlock codes that most vendors like myself sell are factory codes. This means that the codes come straight from companies like Nokia, Sony Ericsson, Blackberry, Motorola etc. There is always a way to enter the 'subsidy unlock code'. Why would manufacturers build a way to enter a subsidy unlock code as simple as putting in a non-accepted SIM card and then the phone asking you to "enter the subsidy unlock code"?
I've had my Blackberry for over a year and have updated to the latest firmware without any problems.
Anyway, back to the point of the benefits. Most people in the US tend to unlock their phones to use their ex. AT&T phone on the T-mobile Network. The beauty of unlocking a phone is to eliminate roaming fees.
How do you do that? Easy! After unlocking your phone, when you travel outside of your country, walk into any GSM Network in your country of travel and tell them "I'd like to activate a prepaid SIM card". They'll give you a local # and you can load on however much you'd like. You're now a local with your phone.
One last comment: As for Verizon and Sprint (CDMA) networks, the Verizon Storm and 8830 can be unlocked. Myself and colleagues have probably unlocked over 5000 storms since it was first launched. The 8830 is a little more tricky. Also, since the 8830 is a dual band phone, you can only use the GSM portion in Europe.
Anyway, that's my 2 cents for those who are interested! If you have any other questions, feel free to e-mail me.
Sam
sam@cellfservices.com
I used to work for a GSM provider here in the US until 2007 but even before then about 2005 I was already interested in the phones that they sold out in Europe. Indeed, you must be a tech-savvy consumer to really know the differences in locked and unlocked phones. One of the biggest things I noticed is that I was able to freely use all the phone's functions, such as recording a video as long as the phone had memory space (unlike locked phones, which the service provider will many times limit the amount you can record up to 30 seconds or something ridiculous like that). My argument has always been: WHY DO THE PROVIDERS INSIST ON BLOCKING THEIR CUSTOMERS FROM USING THE PHONE TO IT'S FULLEST POTENTIAL!!!?! i MEAN... Ahem, excuse me.. I mean if it has a lens and video recording capabilities, why are you going to "neuter" the phone and only allow 15 seconds worth? What's that you say? You do that because the network will only allow to send a video message that's 15 seconds long? Well what if I'm not recording a video to send it over the network to someone! Maybe I'm just recording a special moment that I wouldn't otherwise be able to record because I don't have a camcorder on me! But nooooo, providers only think of themselves here. That's selfish thinking.. if you ask me.. they should be asking and looking to see what the consumer wants!
Another example is I've had some phones that don't even allow the transfer of files from one phone to another via bluetooth (for those non-tech-savvy customers, yes you can use bluetooth to transfer pictures, videos, sounds, and basically any type of file to another bluetooth device). The reason for that again is because the service providers want to neuter their phones so that you are FORCED to use the network to send a picture from one phone to the other (that way they charge you per picture message if you don't have a plan for it).
So there, you see, are just some examples of why I have been buying unlocked phones for years now, regardless of their price. Oh yeah, my provider also blocks access to the Youtube mobile site on their phones while me, I'm pulling up videos on my phone and showing them to my old tech buddies at the place I worked and watch them be perplexed as to how I'm doing that if their phones can't even do it.... and they work there! Ha!
- by jakeZ2 July 3, 2009 12:56 AM PDT
- Funny how American are always fine with financing purchases. Isn't that how we got where we are today? Personally I would rather, and do, purchase an unlocked phone and move to the carrier of my choice, without a contract. If need be I can change my plan. I'm not locked into 90-100 dollars a month.
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Showing 1 of 2 pages (38 Comments)The article states that you'll have to purchase a data plan. Not true. If you're cheap, you can work off wifi alone. Something that you can't do with "smartphones" purchased through carriers.
Using unlocked phones on at&t you can get on the family plan with unlimited data and texting for about 55 dollars a phone. That's a huge savings compared to what an iPhone or Pre contract will cost you and you have the freedom to cancel at any time.