Mr Jobs, unlock your iPhone

Apple's newly announced $499 iPod cell phone, iPhone, could be a disruptive force in cellular service. It could be the first widely successful "unlocked" cell phone, capable of working with different carriers' service offerings (see the news story). It could be the world's first wildly popular dual-mode phone, allowing calls via WiFi or cellular. It could be a contender.

But it's not.

Mr. Jobs took a pass, instead locking Apple's new iPhone - and its fortunes - to a single cellular carrier. If users want the iPhone they will have to buy it through one exclusive carrier: Cingular. The first iPhone will also be tied to the GSM technology used by Cingular - a less ubiquitous technology that doesn't offer nearly the coverage or Web surfing speed of the more dominant CDMA-2000-based services from service providers such as Verizon Wireless. That means a whole lot of people who would be quite happy to pony up for an iPhone won't be too excited if it comes with the baggage of a two-year Cingular service contract.

I'm betting that will change.

The iTunes Walled Garden

Many people (including me) expected Apple to unveil an unlocked phone. In hindsight, Apple's move isn't all that surprising. Like the cellular carriers, Apple has its own walled garden in iTunes, which is in many ways a closed, proprietary architecture. While the iPod can play MP3s, iTunes will only play on iPods and no other music players can play songs in iTunes format.

From the consumer's standpoint the weakness of this model is obvious: it limits choice. There's another issue too. If you buy the iTunes song you get only the iTunes file format, which is of lower quality than a music CD, plus you have to put up with the awkward digital rights management restrictions associated with that file. On the other hand, you can buy a music CD for the same price (or less), rip the songs and load them onto the iPod in MP3 format, a portable, industry standard format. If you buy your music that way you preserve your options. And in the event that, someday, someone actually makes a music player that's as cool and easy to use as the iPod, you're good to go - and you still have the high fidelity version for the CD player.

So why buy iTunes, which delivers a lower quality, proprietary and less portable file format with DRM strings attached? iTunes has gained ground by riding the coattails of the iPod. That honeymoon may be coming to an end. The speculation about a gradual decline in iTunes sales over the last two quarters might indicate that some consumers are doing the math. (The assertion of a sales decline has been made by some market analysts and was vigorously denied by Apple's Jobs at MacWorld this week. But Jobs wouldn't back that up by revealing actual sales numbers, which Apple continues to keep secret).

There could be another reason for the alleged decline in iTunes sales: Perhaps users are pirating more and buying less.

But music publishers may be more worried about Apple's inflexibility than they are about piracy these days. Apple's rigid music pricing (.99 per song) and unwillingness to open up its music format - combined with supposedly flattening iTunes downloads - may have emboldened EMI's Blue Note Records to pre-release the latest Norah Jones recording, Thinking About You, later this month in unprotected MP3 format through Yahoo Music.

For now, iTunes still controls 90% of the legitimate download market, which by some estimates is itself just 10% of the total music downloads on the Internet. Ultimately, however, I suspect that the current iTunes model will fall by the wayside for much the same reason that music downloads on cellular carrier services haven't caught on.

iPhone: Locked down, locked out

iTunes notwithstanding, the iPhone hardware represents a potentially disruptive force. If Apple released an unlocked iPhone, that could start to break the stranglehold that cellular carriers have on the cell phone hardware business by offering a phone that's not rigged to work only with a specific carrier's service. In other word, vendor lock-in.

As happened with Western Electric and AT&T with home telephones before the Consent Decree that broke up the monopoly, cellular carriers may no longer be the gatekeeper for which phones you can choose, what software comes loaded on them and how much you pay.  A recent Copyright Office decision prevents carriers from prosecuting consumers under copyright law if they unlock a phone that they own and use it with another carrier's service. Now what keeps users from buying elsewhere is not legal considerations, but an economic one - the carriers' clever business model that defers the cost of buying a phone by bundling most of the price into a service contract. You pay the full price, just not up front. Instead, you might pay nothing, or $50 instead of the $300 full retail. But if users get all of the features of a multifunction iPod phone, they may be more willing to pay up front.

Apple doesn't appear to have enough confidence in the iPhone to give this business model a try. But by apparently linking its fortunes exclusively with Cingular it is greatly restricting potential sales. It's a great deal for Cingular and a poor one for Apple.

If Apple does offer an unlocked phone, iPhone just might introduce a new openness in service mobility. Other phone manufacturers that offer unlocked phones could also see their sales increase. And If users get used to the idea of buying their own phone, there will be no need to get locked into the unpopular two-year contracts required today.

A dual-mode iPhone would also give users more choice by allowing them to bypass the cellular carrier when roaming through WiFi hot spots. That's unlikely to happen for two reasons: Apple has tied is fortunes to Cingular, which wants to protect its business, and doing so will create further legal headaches with Cisco, which is already suing Apple for trademark infringement for its appropriation of Cisco's iPhone trade name. Apple's defense, according to this Computerworld story: "Apple executive told PC World that because the Cisco iPhone is a voice over IP (VoIP) phone and the Apple iPhone is a cell phone, Apple is not violating Cisco's trademark."

The mobility that comes from an unlocked phone costs more up front if users could forgo phone payment embedded in the montly service contract. And most users realize that the full cost of that "free" or "discounted" phone is actually built into the service contract in higher monthly charges. Today, however, if you buy your own phone the carriers won't give you a lower rate. But if enough consumers begin buying their own telephones, they may begin demanding a la carte pricing - and it could spark increased price competition for cellular services. That's a good thing, since plan prices have been steadily increasing as carriers continue to raise the minimum number of "free" minutes per month one must pre-purchase in a service plan.

More choice can only benefit the user. So reconsider, Mr. Jobs.  If you really want the iPhone to be a revolutionary product, make it dual mode. And unlock that phone.

Copyright © 2007 IDG Communications, Inc.

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