Analysis: Legalizing iPhone Unlocking May Harm Consumers?

Tony Blinard
Analysis: Legalizing iPhone Unlocking May Harm Consumers? image wireless competition
Analysis: Legalizing iPhone Unlocking May Harm Consumers? image wireless competition

The public petition to the White House to reinstate the DMCA exemption that permits smartphone owners to unlock their devices received over 114,000 signatures. President Obama’s administration approved the petition saying that consumers should have a legal venue to unlock their cell phones provided the phone is not under contract. CTIA (The Wireless Association), with members including Verizon, AT&T and other major carriers responded that locking in smartphones is an essential part of the wireless industry’s business model which allows consumers to purchase cell phones at significantly lower prices in exchange for signing a two year contract with the carrier. FCC and other government agencies are about to look into the issue and similar legislation has already been introduced in the Senate. The economics question is, of course, whether legalizing unlocking can harm consumers in the long run – in terms of higher prices and lower service quality.

When analyzing any economic policy that involves several stakeholders, it is always beneficial to clearly identify each stakeholder and their interests. Then, any conflicts of interest must be determined as well as winners and losers of a proposed policy. Ensuring healthy competition in the sector is the best guiding benchmark throughout the analysis.

Industry Stakeholders

Obviously, mobile carriers are one such major group of stakeholders in this case. While top four carriers, including AT&T, Verizon, Sprint and T-Mobile quickly come to mind, there are smaller local wireless providers that have been excluded by Apple from its distribution network. According to the recent publication by Bloomberg, the Competitive Carriers Association members strongly support the idea of letting consumers unlock their smartphones and tablets without carrier’s permission. At this time, consumers who would like to use their localized wireless services won’t be able to do so on their locked iPhones. Clearly, legalizing iPhone unlocking would bring more business to these local carriers and provide more flexibility to consumers which is a positive thing.

The large carriers, however, may lose their customers before being able to recover the costs of subsidized phones. This would be possible if the proposed policy required carriers to unlock subsidized iPhones which is not the case. The proposed legislation only applies to out-o-contract devices. According to this Mashable.com study, a subsidized AT&T iPhone 5, currently sold at $199, ends up with a hefty price tag of over $1,400 after all the “recovery costs” are factored in. In other words, carriers actually make enough money and then some to recover the full cost of subsidizing iPhones. In addition, unlike in the past, consumers now have an option to buy an unlocked iPhone at full price and use it on any network within the U.S. It seems nobody loses – everybody wins.

But what happens when the contract is over and one is ready to move on with a different carrier or a new iPhone? And what are the options for someone who would like to use their locked-in iPhone on a different network?

The problem is that one’s device is not unlocked automatically after contract expires. It is still up to the carrier whether to provide an unlock. Without unlocking the iPhone, it will still be impossible to use it on a different network. And if you want to sell it on a second market, what are the chances that the person, who buys it, is going to use it on the same network. Another common situation in which consumers may need an unlock is when they travel to a different country and would like to save on roaming charges by using a local carrier.

Quick Poll: Why do you need an iPhone unlock?

Vice-president for AT&T issued a statement that the company makes it “as easy as possible” to unlock iPhones. But unlocks are not unconditional. The conditions are roughly the same across major carriers: 1) the person who requests the unlock must be a current or former AT&T customer; 2) all contractual obligations have been fulfilled; 3) the iPhone was not reported stolen. Carriers also promise to provide unlocks to current customers when they travel abroad and who meet certain “good standing” conditions. These conditions are the so-called fine print and might actually result in more harm than good for consumers.

According to consumer watchdogs, wireless companies play all sorts of games to make the unlocking process quite a hassle. The customers are often required to fax proof of purchase for their out-of-contract iPhones. Who would keep the receipt after two years? You may be out of luck if you wish to unlock a second hand device or if you received one as a gift, as only the legal owner can file an unlocking request. And there is a myriad other nuances that may result in consumers unlocking requests rejected. This, unfortunately, does not constitute a winning situation for consumers. It may result in waste for both parties as some iPhone owners could otherwise switch to a new model but instead are stuck with their older phones. There is a huge secondary market for used iPhones which suggests a trend in reselling older handsets.

For in-contract iPhones the situation is even murkier. While carriers keep repeating that they readily unlock devices for their customers who often travel abroad and in other similar circumstances, visiting the carrier support forums is all it takes to see numerous complaints from customers about how cumbersome the unlocking process may be. The situation is not much different in other countries where carriers apply conservative standards to unlock request from their in-contract customers.

A Note on Competition

From the beginning an exclusive business relationship between Apple and big cell phone providers has created a competitive advantage for those carriers included in the Apple’s distribution list. Older iPhone models were even tailored to a particular carrier’s network specifications. While this could be justified by differences in wireless technology, the latest versions of iPhone are more accommodating of different specifications allowing users to easily switch between networks – at least, in principle. In order to be able to do so, consumers often need to get their devices unlocked by the carrier. The lock-in arrangement can potentially harm competition. For example, carriers may be reluctant to upgrade their networks or invest in better customer service if they know that their customers cannot easily switch to a different provider. The latest developments, however, have created conditions that can actually help minimize such competitive distortions.

Verizon was required by FCC to leave their iPhone 5 devices unlocked which means that Verizon subscribers can use their iPhone 5′s on GSM networks like AT&T and T-Mobile. While this only applies to iPhone 5 models, it certainly contributes to higher flexibility for consumers, and thus, healthier competition among wireless providers.

Conclusions

It follows that any legislation that would make it easy for consumers to get their out-of-contract iPhones unlocked would certainly benefit consumers. It would also strengthen competition in the wireless sector as smaller local providers would be able to attract customers with unlocked cell phones. The top three mobile carriers may also benefit from this policy in the long run as easy unlocks will facilitate the process of recycling older models and switching to newer versions. As a positive side effect, this change would also create a happier customer and a favorable word of mouth among consumers.

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