[continued from part I]
Market inefficiencies result when devices are “subsidized” by the carrier, starting with the fact that it is not even a proper subsidy. The analogy with leasing a car breaks down for two reasons:
- At some point over the lifetime of the service plan, the phone is paid for and subscriber is released from the contract Yet the technical limitations on the device are not lifted. (In fairness, there has been some progress over time, including carriers providing limited unlocking capabilities to customer that ask, reinforced by regulations guaranteeing that freedom.)
- More fundamentally, consumers are rarely given a meaningful choice of paying outright for their phone from the beginning in exchange for not having any carrier-imposed restrictions imposed in the first place. There is a small market for unlocked devices that can be used in conjunction with any GSM carrier. There is also a healthy grassroots movement for jail-breaking and unlocking devices, but this is hardly sanctioned by carriers or OEMs. Nor is relying on the existence of security vulnerabilities in mobile software a sound basis for improving competition in the market.
Distorted incentives caused by such bundling also explains why the recent ACLU petition to FTC is tilting at windmills. ACLU charges that wireless carriers are short-changing subscribers by abandoned devices with known, exploitable security vulnerabilities. Looking at the economics makes it clear why that happens:
- Each time a device is sold directly through the carrier channel, the carrier earns a net profit and extends the “lock-in” period for subscriptions. Shipping updates to existing devices is a cost with intangible benefits. Those costs are increased owing to carriers’ enthusiasm for customizing the core Android OS with their “value add” software. Since they are no longer shipping an off-the-shelf version, security updates coming out of Google must be carefully reviewed and integrated into their own private fork.
Compared to the more familiar PC market, this is a fundamentally a different model for software distribution: Dell may sell machines loaded with Windows, but has little say in scheduling security updates to the operating system. Consumers are free to download them directly from Microsoft Update.
- Further upstream, similar set of incentives apply to the OEM. Selling one more device generates new revenue, servicing existing ones is pure overhead. Of course there are indirect pressures to continue support: abandoning the device after initial sale would lead to a reputation akin to that of an automobile manufacturer who refuses to service vehicles sold or produce spare parts. (Tampered by the reality that mobile devices last ~18 months on average and are much cheaper to upgrade compared to cars.)
OEM options are also limited by what the carrier will permit. Since OEMs do not typically sell direct to consumers– with notable exceptions for Apple and that negligible fraction of “pure” Nexus devices— any demand to continue support must originate with the carrier. But the carrier has the exact opposite incentives: the conscientious OEM who eagerly ships Android upgrades and security patches to existing device is undesirable. It eats into the carriers ability to book additional revenue from hardware sales.
There is an argument for vertical integration here. Devices getting upgraded is a net positive for the ecosystem, and it may even allow charging more for hardware by increasing consumer confidence that their large investment will not become obsolete anytime soon. But in a fragmented ecosystem, none of the individual actors in isolation has the right incentives. In the case of the iPhone by contrast, Apple acts as hardware OEM, operating system provider and often the distribution channel via retail stores. Coupled with the precedent set by AT&T exclusivity (something AT&T had to compete with other carriers for) Apple has been able to maintain an iron grip on the core operating system and deliver upgrades independently of carrier incentives, optimizing for the brand and ecosystem overall.