Would mandatory rules on sale of “unlocked” phones enhance consumer welfare and competition in the U.S. mobile communications business? Some argue that the benefits to consumers would be significant, as “phone unlocking” would create a competitive situation more analogous to Europe, where any unlocked device can be used on any network.

And the question is being asked now because of recent speculation by Federal Communications Commission officials about mobile phone unlocking in the U.S. market.

Taken in isolation, one might be  tempted to say “yes.” If consumers could buy a device and use it on any mobile network, end users theoretically would have more freedom to choose between carriers, who would, in principle, lose bargaining power.

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As a practical matter, benefits for consumers and creation of more competition might be more complicated, and less extensive, than theory would suggest. Consumer device behavior, air interface standards and carrier responses to such a regime are key reasons why the outcome is less than perfectly clear.

Whatever might be the case after Long Term Evolution becomes the air interface for all service providers, the U.S. market still remains sharply divided into CDMA and GSM air interface segments.

So even if all devices were sold “unlocked,” users would have less choice than in Europe, where all carriers use the GSM air interface.

The immediate benefits in the U.S. would be more limited, by roughly half. At the moment, users of specific CDMA devices can move between Verizon Wireless and Sprint (or any regional provider or MVNO using CDMA).

Likewise, users of GSM devices can  move between AT&T and T-Mobile USA (or any MVNO or regional provider using GSM). That might be helpful, but less helpful than would be the case when any device could be used on any network.

Then there is the matter of consumer behavior. By many estimates, U.S. users tend to replace their phones every 18 months or so. All other things being equal, that suggests users already have a chance to change carriers every 18 months, if they want to.

Some will say that all bets would be off in  an “unlocked device” regime. When people are paying the full retail cost of a device ($400 to $600), one might argue they would keep their devices longer, and change carriers more often.

But carrier policies would have a powerful impact. If carriers abandoned device subsidies, but allowed people to buy on installment plans, there might actually be very little change in monthly recurring cost, or willingness to buy contract service, compared to the current situation.

An installment plan, with or without a service contract, might actually mean that behavior does not really change much, where it comes to the length of a relationship with a carrier.

Also, carriers would change their tariffs, encouraging people to sign contracts by offering non-contract service prices that do not compare so favorably to contract prices. You might assume that a “subsidized device with contract” plan includes the cost of the subsidy.

So an unlocked device plan would feature lower recurring charges, in principle. But an installment plan would mean the user’s out of pocket costs wouldn’t change much, if at all.

Users who just buy their devices outright might see lower cost service plans. But that is a matter of provider retail packaging. Mobile service providers could offer non-contract service prices that are higher than equivalent contract service prices, using the common notion that buyers who have more volume get better prices.

So sale of unlocked devices might, or might not, affect end-user behavior all that much. It depends on how tariffs change.

The other unknown is how many users might switch to unlocked, full price phones, when subsidized devices and plans are available.

Not many consumers will prefer shelling out the full retail price for the latest Apple iPhone, even if they can, when the alternative is a lower device acquisition price, even at the cost of higher monthly recurring costs than might be possible if subsidies were not offered and available.

The point is that the assumption that mandatory unlocking inevitably would lead to “more choice and lower prices” is not as clear cut as might seem to be the case.

Mandatory unlocking might have relatively slight impact, in fact, depending on how service providers chose to change retail packaging, and on whether users were willing to update their devices less often.

 

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