T-Mobile, jailbreaking devices and security updates: economics of mobile (part I)

An economic subtext connects these three seemingly unrelated events:

  1. T-Mobile announcing a new approach to pricing wireless plans, with emphasis on surfacing the full price of phones instead of subsidizing hardware with inflated charges on voice/data service.
  2. ACLU petition to FTC on Android security, urging action against wireless carriers for not delivering security updates to mobile devices
  3. Ongoing argument about user freedom to jailbreak devices and load alternative software– including replacing the entire operating system– than what the device originally shipped with

All of them are facets of the same clash of incentives surrounding mobile devices. The cast of characters in this conflict is numerous, some looming large others largely consigned to invisible roles. First is the hardware manufacturer who assembled the hardware (“assembled” because often times it amounts to no more than sourcing components from dozens of suppliers and soldering/gluing them together) Then there is the operating system vendor who wrote the platform running on that device. There are application developers competing to develop applications running on that platform, trying to reach maximum audience. Fourth is the wireless carrier, who often acts as the distribution channel in the US. While it possible to purchases phones  à la carte without bundled service plans– Google has been on the frontlines of trying to popularize that model with Nexus series of flagship Android devices– most devices are purchased as part of bundle that includes wireless service. In fact as the original exclusivity of iPhone to AT&T demonstrates, a highly desirable device may be available only from one particular carrier.  Finally, there is the hapless consumer at the end of that chain, the one using that phone every day for making calls  and accessing the internet. Sometimes one or more of these roles is played by the same entity. For example Apple both produces  the iPhone, furnishes the operating system and provides some of the key applications. Google did not have the same extent of vertical integration until the 2012 acquisition of Motorola mobility, which builds devices. All of these players are battling over a fundamental question: Who controls the phone? Whose device is it? Who gets to decide what can be done using the capabilities of that hardware? That question has been answered in different ways depending on circumstances. The carrier wins in the majority of cases with a simple argument: the user never really paid for the device. Phones are sold at substantial discount relative to the cost of the hardware, with the expectation that wireless service revenue over the lifetime of the contract will make up for that loss. It is better to view the phone as “leased” to the consumer instead of outright sold, according to this argument. In the same way that lessee can not make extensive modifications to leased cars such as swapping the engine, subscribers are expected to follow the requirements from the carrier. Logical conclusion, if one accepts this premise, is carriers call the shots and impose restrictions according to their own interests.

Most obvious example is that devices are locked to a specific carrier, artificially creating interoperability and restricting full use of hardware capabilities. Not all GSM networks use the same frequency bands, but OEMs intentionally build phones to operate on multiple frequencies. This allows the device to operate with any carrier, by popping in the appropriate SIM card. This helps not only for permanently switching  carries but also when travelling overseas, with a temporary prepaid SIM from the destination country.) But if AT&T has subsidized the cost of the device, then a user who goes over to T-Mobile shortly after purchasing one is a net loss. Naturally the contract imposes 12 or 24 month terms, guaranteed to recoup the hardware subsidy with a healthy profit margin. Not trusting consumers to honor that– it would be messy sending a collections agency after everyone to recoup the amount owed if they defect early– the carrier also raises switching costs at the hardware level. The phone is restricted from operating on other networks, by locking the baseband to one carrier, effectively undoing the flexibility OEMs built-in at manufacture time.



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