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As handsets have become smarter and morph into pocket computers, they have gained an OS (Symbian, Microsoft CME, Palm etc). That OS has to communicate with all the hardware and with the phone’s user interface. It also has to communicate with the carrier’s billing systems and a carefully selected subset of the world wide web.

While hardware may be specified by the carrier in its contracts with the handset maker, from the point of view of needing to keep its customers locked in, it is the software that holds the keys that determine how tightly the silo door is locked.

What’s Negotiable

The handset maker wishes to sell as many handsets as humanly possible. Since the basic voice communications capability of handsets are fairly well commoditized, there are three places left for the handset maker to make its product desirable. Fashion. Sleek good looks as we know from Apple. Functionality (add camera, add music player) which is also quickly commoditized. Software: have a software interface designed to show the customer who uses the handset that you care about helping to get that customer the best deal. Here the opportunities for the handset maker are bountiful.

Provide the user with an interface that will allow him to select the most cost effective method of placing the next call. Provide a meter that will show him how close he is to exceeding the number of allotted minutes in his monthly plan. Provide pointers to where the user can find 3rd party presence, trust, or other communications services. Leave hooks in the system that would make it easy for new services that may be outside the domain of the carrier or the handset maker to be added. Point to a website were code to un lock a SIM card may be purchased [gasp!]. Or make it easier to find wi-fi to GSM gateways. Help the ultimate customer save money. Make him want your phones. Show the customer all about Skype. Legitimate opportunities are huge. Also there are likely other less legitimate things that the handset maker could do with the software and firmware to give the handset users an advantage in dealing with the carrier.

Is it any wonder then, since the handsets are revenue producing interfaces to the carriers networks, that the carrier is “tempted” to use its buying power to ensuring that the handset has firmware and software that keeps its individual customer locked up? How to do this? Sets of specifications that the handset must meet before the carrier with buy ten million become part of the deal. Think of the torment of telco systems standards times ten. Etsi, Tiphon and ITU all bundled into one great choking pill.

More Than Five Thousand Specifications Lock You, the Customer, into the Vendor’s World

But five thousand specifications per handset? At a minimum. The size of the Manhattan phone book? Several times that. And how could there be that many if every line of code that did the all above were not specified in detail? To get the sale the handset maker has to cripple all the ways that it could act to become customer friendly. Including through the restraints of the “branded” user experience making some web sites hard to find and access if not impossible. Never let the user find the keys to the silo padlock. Allow encryption, VPNs, P2P?? Not if the carrier can help it.

Before you would lock the radio to a given protocol. Now you sit down negotiate every aspect of its performance with the carrier purchasing legal team. If you control 30 to 40 percent of the market for handsets as does Motorola, AND can produce a sleek beautiful and sexy product as the RAZR, one that becomes a customer fashion statement, then even with ATT you have leverage. It would look strange not to be able to sell the RAZR. So you would have some give and take. But you would likely not talk much about your specks for the same reasons that most purchases of fiber and wavelengths are shrouded in NDAs.

You the carrier talk a good free market line to Congress. But your market isn’t free. You’ve seen to that at the FCC as you have turned your silo into an unregulated information service on behalf of the alleged need to have the freedom to deliver benefits to the customer which regulation would otherwise snuff out.

Hey – who snickered in the back row there? I am SERIOUS. You LOVE your customer and just want to deliver all the billable minutes you can so you NEED your FREEDOM to innovate! (Your brain interrupts: Where’s IMS when we NEED you!)

Someone asked: Why does the Carterfone principle NOT apply to cellphones, smart phones and PDAs? To STBs? From Wikipedia: “The 1968 Federal Communications Commission allowed the Carterfone and other devices to be connected directly to the AT&T network, as long as they did not cause damage to the system. This ruling created the possibility of selling devices that could connect to the phone system and opened up the market to numerous products, including answering machines, fax machines, cordless phones, computer modems and the early, dialup.”

I replied that Carterphone does not apply because access to the internet has been redefined as access to a non regulated information service which frees the carriers to install their garden walls and abuse everything. Common carrier in as regards the internet is dead. “Not so fast” said a trustworthy Texas attorney pulling out his legal Smith and Wesson. “Carterphone is not dead when it comes to a telecom service. CMRS (cell/PCS/SMR) is a telecom service, even if one can also use it for information services. The question is whether the edge device someone wants to use has been approved as terminal equipment. If it has, they can’t stop use, although it is an interesting question whether they can inhibit full functionality. Note that the definition of “terminal equipment” recognizes it can be used for both telecom and information service.”

But let’s get back to the main story line. A further complicating factor is the existence of the subsidy where the carrier pays the handset maker a unit price or subsidy designed to enable the final customer to effectively lease the phone with a contract that may lock him into that carrier for a year or even two year’s service. When Korea banned subsidies in 2000, the world did not end. Although by 2006 they were coming back again. Still, the newly unregulated freedom that the carrier finds itself with has the handset maker locked in an impenetrable embrace of conflicting interests.

The results of the embrace were shown in the Washington Post article I cited from last week. Motorola’s bargaining power appears to be very very weak. It makes a product that is very very good but locked in its conflicted embrace where to sell to its handful of carrier customers it must go against the ultimate interests of the its final customers, the people who buy and use its products. What leverage does Motorola or Nokia or Samsung have with its carriers? Impossible to know with precision, but one can infer a LOT from the Post article. The answer looks like very little. Motorola comes out with the RAZR as a beautiful and much wanted fashion statement. They sell like hotcakes, but after two years Motorola gets less and less. They have been commoditized and perhaps Cingular says sorry I will pay you only $90 a phone instead of $140. Motorola has little choice to agree without something equally compelling. One must ask as well where the new compulsion comes from? Steve Jobs gave a hint with the I-phone but for a company with Motorola’s market position, the compulsion for future sales will likely only come from more features – features that will be blocked by Motorola’s customers because they will harm their silos. The result is that, while sales arte up, profits are down and 3,5000 Motorola employees will loose their jobs.

No wonder John Waclawsky in his recent interview with the Cook Report was talking about the future for Motorola as being one with making devices that would use peer to peer to deliver value to the human beings who used the handset – not used to nail that man or woman to the wall as a stuffed and trophied revenue producing unit for the carrier.

Aside from peer to peer there surely is a business opportunity for open phones. FIC with its OpenMOKO handset should begin to get the word out that there is no ambiguity between its interests and those of its ultimate users. On wonders how much actual hardware costs go into hardware necessary to keep the sets closed. Just think what it might mean to a handset maker if it didn’t have to spend vast amounts on overhead for the staff necessary to keep the specifications compliance procedure running. Why not give your customers more application capability in place of cramming a bigger camera and music player into their phone. A la Patricia Seybold do something that the carriers actually can’t go out and listen to your customer. Build something that solves a customer problem rather than crams more unused features down his throat. And besides those 8 or 9 radios per phone that both Motorola and Nokia engineer have mention are going to do no one any good if the phones carrier imprisoned software is blocked from allowing them to transmit.

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