January 24, 2007 4:00 AM PST
Will unlocked cell phones free consumers?
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Indeed, price is the major barrier for cell phone makers looking to sell directly to consumers. It makes little sense for someone to buy an unlocked Motorola Krzr, which costs $330 from Motorola's Web site, when Cingular offers it for $200 with a two-year contract and a $50 mail-in rebate.
What's more, unlocked phones require much more programming and manual updating by users than phones purchased through a carrier. For example, an unlocked Krzr that is used on Cingular's network won't get the automatic over-the-air updates that the same device would get if it was purchased through Cingular. This means features like voice mail or the mobile Internet might work one day on an unlocked phone, but not the next.
Unlocked phones are also available only for GSM networks. In the U.S. market, that means they can be used on two of the four large nationwide carriers, Cingular and T-Mobile. Major phone makers today do not offer unlocked versions of their phones for networks based on CDMA, which include national carriers Verizon Wireless and Sprint Nextel.
In Asia and Europe, all the operators use GSM technology. They have built their networks using standardized equipment and software, making it very easy for cell phone manufacturers to sell devices that can be used on all networks.
Because of network differences, operators in the U.S. claim it is important for them to certify phones used on their networks to ensure quality.
"We only allow devices on our network that have been approved," said Jeffrey Nelson, a spokesman for Verizon Wireless. "People come to Verizon Wireless and stay with our service because of the quality of the experience. And that includes the network and the quality of devices used on the network."
The current business model in the U.S. also gives mobile operators tremendous control over which features and services can be accessed from the handsets. The phones and new multimedia services that consumers most often see are branded by the carrier. In this way, Verizon is able to offer its V Cast video and music service and Sprint can offer its PowerVision service.
"If I were a carrier, I would drag my heels too," said Andrei Jezierski, a partner at the consultancy i2 Partners. "It's not clear if the carriers will make money from these value-added services. So if the economic model is still unclear, why give away more control earlier than you have to?"
But experts say tiny cracks are forming in the current model that could challenge mobile operators' dominance whether they like it or not. Apple, with its iPhone, has the brand recognition and established retail channel to easily sell millions of devices on its own. Initially, that device, whose price starts at $499, will be sold exclusively through Cingular. But experts say it's possible that Apple may eventually sell it directly to consumers.
"I think the first time there will be a threat will be if Apple unlocks the iPhone and sells it in its stores," said Lin. "It's already priced near the high end, so subsidies won't make much difference, and Apple already has such good brand recognition."
Experts also see smaller carriers and handset manufacturers potentially upsetting the status quo. For example, regional carrier Metro PCS came out of the Federal Communications Commission spectrum auction last year with more licenses that could help the company build a nationwide network. Metro PCS has already been competing against the big four national carriers in some regions of the country with low-cost prepaid services. And in those markets, it's been able to garner 15 percent of the market in as little as 18 months, Jezierski said. It could compete with bigger carriers by allowing subscribers to bring their own devices and then offer them a lower cost pre- or post-paid service without a service contract.
New hybrid services that combine cellular, Wi-Fi and eventually WiMax services could also put pressure on mobile phone operators to change their business models. Consumers could download music or videos, use Google or Yahoo for messaging and search, or even use voice over IP applications such as Skype to talk over a Wi-Fi network and completely bypass the carrier's cellular network.
"Once one carrier breaks ranks or hybrid Wi-Fi services start skimming away customers who might use advanced services, then I think we could see the market becoming more open," Jezierski said.
He conceded that the path to a truly open market will be a slow and steady one with real change at least three to five years away.
"I don't see major changes anytime soon," he said. "The subsidy offered by the carriers will definitely have to go away for it to make economic sense to consumers."
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