iPhone or iCarrot?

By Stephen Bone

Since the early days of the cellular industry, the justification for multi-year contracts has been handset subsidies. Since the cellular carriers subsidize the cost of the handsets, the argument goes, they need lock-in contracts to guarantee sufficient time to recover the up-front equipment costs. Holes in that story now appear with the iPhone.

Apple and AT&T have both stated that the iPhone is not being subsidized. That is the reason that the device is so awfully expensive. So cell phone consumers need to be asking themselves, “Was the contract-for-handset-subsidy argument legitimate or was it just an excuse to allow the cell companies to avoid short-term competitive pressures and quality service obligations?”

Given AT&T’s announcement that their plans for the unsubsidized iPhone will require a two-year contract, it would appear that cell phone contract requirements have indeed been about avoiding competitive pressures and service commitments.

Some might suspect that AT&T is simply trying to earn a few extra dollars from the iPhone excitement. However, AT&T may be thinking much, much bigger then that. What AT&T may be trying to do is to redefine the business model for the entire American cellular industry. They may want to set a precedent for getting rid of handset subsidies altogether. And the reason for the two-year contract with the unsubsidized iPhone is to establish that lock-in contracts remain a part of the deal.

That doesn’t have to happen. If consumers say “no” to this Friday’s launch of the unsubsidized, two-year-contract-required iPhone, then AT&T will realize that its new business model will not succeed in the American marketplace. They will have to modify the terms of the iPhone plan. If consumers instead say “yes” and buy the iPhone with the two-year contract, then it will only be a matter of time before all handset subsidies disappear and all cell phone users have to pay both the full cost of their handsets and still be locked into multiple-year contacts. Those who purchase iPhones under the current arrangement may very well be sealing that fate for all cell phone users.

Consumers should remember that AT&T is the company that, with its AT&T Wireless service, had the worst service reputation in the cellular industry. AT&T Wireless lost millions of customers in 1994, within the first few months that cell phone numbers became portable. Consequently, AT&T knows how important it is to lock in their customers, because AT&T’s previous wireless customers left in droves the moment it became possible to do so. That is why the “new AT&T” is so obsessed with preserving “the contract.”

That history, by itself, didn’t bode well for iPhone buyers. Now it turns out that the “new AT&T” is just like the old AT&T: willing to cut corners on service in search of a quick buck. Why else would AT&T be so insistent on preserving their two-year lock? It knows that it still risks short-term competitive pressures based on its service quality.

Either way, before American consumers become iPhone users, they need to consider the implications of assisting AT&T in sneaking in this new cell-industry precedent. Yes, the iPhone is an amazing device, but consumers need to understand the very expensive long-term burden they are risking if they acquiesce to AT&T's terms for this tempting electronic carrot. The decision to buy this week doesn’t just affect just them: it potentially affects every cell phone user in America.

This commentary originally appeared on TechSwot (http://www.techswot.com). Stephen Bone is a retired maritime I.T. officer who occasionally writes on tech industry trends. He can be reached at StephenBone@TechSwot.com.

Corporate Blogs: The New Editorial Page?

Google's public policy shop today officially joined the blogosphere, joining Cisco (February 4, 2005), Global Crossing (November 7, 2005), and Verizon Communications (October 2, 2006), each of which already have corporate policy blogs. The maiden post, by Andrew McLaughlin, Google's director of public policy and government affairs, promises "public policy advocacy in a Googley way." It's one in which users will "be part of the effort" to help "refine and improve" the company's policy positions. The blog already has 12 posts, done during the company's internal test. The most recent – which I suspect provided the occasion to officially launch the blog – is a short summary of the official Google position on network neutrality.

McLaughlin stoked controversy among bloggers (including this one) when in February he publicly suggested that it would be OK for broadband providers to charge other companies for quality-of-service guarantees "as long as it is done in a non-discriminatory way." The Internet search company went all-out to put out that fire, insisting that it hadn't changing its position on the hot-button telecom subject.

For the record, the Google blog states that the company's official position is that prioritizing all applications of a certain type, like streaming video, is OK. By contrast, prioritization of packet delivery based on the ownership or affiliation of the content – and charging a third party – is not OK.

The Google Policy blog already has some criticism from its co-corporate policy bloggers, including Verizon and Cisco. Incidentally, the companies disagree with Google on Net neutrality. Verizon's John Czwartacki says:

So I opened Wikipedia and learned that in Cricket a "googly" is a trick pitch, essentially a spinning curve ball designed to fool the batter or wicket guy or whatever he's called in Cricket.

So to prevent the tragically creative from accusing your Googley blog of also being "googly," I'd parse out that term carefully.

Cisco's John Earnhardt urges tells McLaughlin to:

Aim low…. Your stated goals are very high, and that is to be commended, but it is an awful lot of pressure to put on a blog...and your team.

For me, the most noteworthy part of the Google policy blog so far is its collection of videos of visits by presidential candidates – Hillary Clinton, John Edwards, John McCain and Bill Richardson – that have traipsed out to the Googleplex in less than four months. Hmm… I wonder if The New York Times editorial page, or CBS, can boast that kind of traction?