Modular Confines of Mobile Networks: Are iPhones iPhony?

Networks, the Internet, and Cloud Computing, Networks and Infrastructure and Wireless

Article Snapshot

Author(s)

Thomas Hazlett

Source

GMU/Microsoft Conference on the Law & Economics of Innovation, May 8, 2009.

Summary

This paper assesses a regulatory proposal for wireless phones.

Policy Relevance

A proposal to make wireless phone services more “open” would harm consumers and reduce investment and growth of new technology.

Main Points

  • Some have proposed rules for wireless phones like the iPhone requiring the phones be made “open” to connect with products made by rivals, and that wireless phones be sold separately from wireless phone service.

  • Healthy competition drives wireless growth, benefitting consumers. Today’s networks are modular, with firms offering different packages of services and hardware in partly open “walled gardens.”
    • Breaking tasks into modules helps solves complex problems, so modular networks make sense for rollout of new technologies.
    • End-to-end open networks are technologically possible, but this does not make economic sense for investors, network operators, or consumers.

  • Investment in wireless networks and technologies is driven by a profit motive, and creates a platform for consumers and others to use.
    • Firms can benefit from opening platforms to rivals, but not always, and must balance the opportunities they offer rivals against their own profits.
    • There is no one “right way” to strike this balance. Firms need flexibility to open or close platforms according to their needs.

  • The “closed” iPhone accepts applications made by thousands of others. It is a huge hit with consumers. This shows consumers value the convenience of packages of service and hardware assembled by a coordinating firm.
    • Apple’s iPhone profits tempt rivals to enter the market, and Apple must continue to respond to consumer demand.

  • One early ruling, the “Carterphone” decision, forced Bell phone networks to accept rivals’ hardware. It worked because “opening” was cheap and required little coordination. Ever since, “open access” mandates have done more harm than good, reducing investment and competition.

  • Regulation of wireless phones to “open” them harms consumers abroad, in countries like Finland and Korea.
    • When handsets must be sold separately from service, handsets cost much more.
    • Regulation slows adoption of new technology and wireless growth.
    • In Japan, where packaging of wireless service is most controlled by the wireless phone companies, growth of service is very fast.

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