iPhone 4 Winners and Losers

This article had me grinning – the last line is sooo full of irony:

iPhone 4 launched by Maxis, DiGi; but which has better plans for subscribers?

PETALING JAYA: Hundreds of buyers queued for hours to get their hands on the newly launched iPhone 4 when it was up for grabs last week. Both Maxis Bhd and DiGi.Com Bhd launched Apple’s latest iPhone 4 last week…

…Teo, a first-time iPhone user, said she had been waiting for the phone ever since it was launched in the United States in the middle of the year.

Teo said she was attracted more by the “cool” aura that iPhones conveyed than the technology itself.

Hidden Monopolies

I wrote a post last year about Maxis offering the iPhone on an exclusive basis, tied to long term contracts. I haven’t changed my mind about the potential problems this brings to consumer choice and what it means long term for competition in the telecommunications industry in Malaysia, even as the local asking price of the iPhone has dropped and with DiGi coming in as a second provider.

My thoughts on the matter bear repeating:

The Mysterious Affair Of MGS Yields And The Maxis IPO

There was some weird happenings in November, which I'll get to in a bit. It'd makes for an interesting whodunit, if I could just get a good idea as to who the culprits are. Unfortunately I can't, so I have to settle for presenting the evidence and see if anyone has any better ideas.

First up, money supply growth shot up in November, even on a seasonally adjusted basis (log monthly changes, seasonally adjusted):



Half of the growth was driven by a jump in demand deposits, which forms roughly 4/5ths of M1 (RM millions):



Average lending rates fell 6bp (no big deal), while loan growth fell to a seasonally adjusted 0.5% m-o-m. Here's where the story gets interesting. There was a net increase in public borrowing to the tune of RM6.5 billion (i.e. an increase in supply of government bonds outstanding) specifically for 3 year and 5 year maturities, but while 3 year MGS indicative yields did indeed go up (i.e. the price fell), yields fell at every other maturity:



As there were hardly any redemptions, that ought to indicate an increase in MGS demand sufficient to not only swallow the extra RM6.5 billion but also move prices up. On top of that, you have the competition from the massive Maxis IPO which set a record for equity fund raising in Malaysia (and incidentally, explains the surge in demand deposits)(RM millions):



To make things clear, we have a downward movement in MGS yields despite an increase in MGS supply, as well as a record IPO that mopped up tons of cash. Which means that there is an awful lot of investor demand for both, to the point where nearly RM18 billion in new securities were snapped up.

The question is: where did this demand come from?

It doesn't appear to be from foreign investors, unless they did a hit and run job - while the Ringgit had a wild month (by Ringgit standards), little of the funds appear to have stuck locally. Forex volumes, bank forex deposits and BNM's international reserves didn't change much for the month.

If it's local (or locally held foreign funds), then there ought to have been some kind of shift out of other assets into MGS and Maxis. That's harder to track, though by rights there ought to have been a drop in the KLCI pre-Maxis - there wasn't. There also ought to have been a shift from other deposit types (including interbank) into demand deposits - that didn't happen either, or at least not to the point where other deposits shrank.

I'm stuck with the rather unsatisfactory speculation that there's money from Singapore accounts coming back to Malaysia - but there's no way to "officially" substantiate this.

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.

Update:

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."

and:

" 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.