Thursday, March 12, 2009

Maxis, iPhone and competitive markets

I'm going slightly off topic with this post, but since it's something I feel strongly about, I think it's justified.

The Star reports that the Apple iPhone will be launched on March 17, and only available with 6 month/24 month contracts through Maxis. I have nothing against the iPhone per se - it's a nice piece of hardware and engineering - but I truly deplore the idea of lock-in contracts, subsidised hardware, and exclusivity. The cheapest plan requires a monthly commitment of RM100 for 24 months, on top of the phone price of RM1900/RM2290 (8GB and 16GB models), and this comes with 333 minutes talk time and 500MB of data (full details of rate plans here). If you are already a Value Plan subscriber the phone costs RM2,540 for the 8GB model and RM2,960 for the 16GB model.

My opposition to this is that the way this is structured constitutes monopoly behaviour and restricts consumer choice. All the telcos have shifted to this model for wireless broadband modems, so the business model itself is nothing new. But putting it into practice with handphones is in my view a dangerous precedent, because that takes the business model mass-market. Here's my take:

1. Lock-in contracts means customers can't leave a telco without paying a hefty penalty.
2. Subsidised hardware distorts the price signals for handsets. Check out the difference between the new customer prices and old customer prices.
3. Exclusivity is market distortionary as well - want the iPhone? You have to be a Maxis customer, and never mind their service level. I can't confirm the exclusivity aspect, but I suspect it's there as that has been Apple's standard practice in every market they've tried to enter.
4. As a result of all the above, both Maxis and Apple will gain monopoly profits.
5. The incentive for maintaining after-sales customer service is substantially reduced.
6. The pressure to compete on price and service as far as voice and data are concerned, is also substantially reduced.

My biggest fear is that the iPhone deal will force other handset makers to follow suit - want a Samsung Omnia? Go to this telco. Want a HTC Touch Pro 2? Go to this telco. Want the latest, greatest Nokia? Go to this telco. The market becomes defined not by who has the best or cheapest service, but rather who has the best subsidy and hardware. If consumers were fully rational in the economic sense and take into account the total cost of a contract, this business model would never get off the ground. But the lower upfront costs relative to unsubsidised hardware seriously colours consumer perceptions, and we contribute to reducing competitive pressures in the market.

This business practice is one American import I truly wish we didn't get. Look at the structure of the US telco market - choice of handsets are far more restricted; services and features are defined by what telcos want to offer, not what the hardware can handle; and the pace of innovation is slow. France did the right thing in forcing Orange to supply iPhones unlocked and unsubsidised - I wish we had done the same.


Hah! Someone agrees with me:

"I think American cellular customers, businesses especially but also individuals, are not well served by linking handsets and carriers so tightly. Is it going to change? Not likely. Unless consumers speak up, Americans will probably continue to get second-rate cellular forever."


" I do not know how we end these subsidies. I do not expect the government to intervene, though I do wish the FCC would take a deep breath and show some gumption for a change...Hardware subsidies by wireless carriers are anti-customer and need to stop. Wireless hardware and services should be purchased separately, which will lead to enhanced competition in both areas and wider choice/lower prices for customers."

And this link goes to a study of the American cellular industry that supports the contentions in this post.

1 comment:

  1. Bro, I fully agree with your analysis. I really can't stand the way these artificial barriers to entry are created. In the case of iPhone, the silly business structure is created by Apple. But, let us not forget that Maxis was also involved in the initial Blackberry arrangement that was also exclusive. I recall that it quietly died. Now Blackberry is smartly selling their phones to all and sundry.