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The big deal isn’t the iPhone itself, which is what the mainstream investment, gadget and tech media is focusing on. It’s the way that it will fundamentally challenge how carriers have coupled services with connectivity with a hardware distribution monopoly.

There never has been ‘net neutrality’ when it comes to mobile phone hardware. The Apple iPhone would be the first big test.

The new (rumored) iPhone will be sold (rumored) directly from Apple and (rumored) require the user to pull the GSM SIM card from their device (only T-Mobile or Cingular use GSM domestically) and insert it into the iPhone. No hardware manufacturer has ever tried this, instead they bend to the wishes and requests of the carriers in order to gain acceptance and distribution of their hardware by the carrier.

Apple’s decision comes as no surprise (see iPod Competition - a Fighting Retreat). Jobs himself was quoted in May of 2005 referring to the four largest wireless carriers as the ‘four orifices’, a graphic reference to how they control the distribution and use of mobile hardware on their networks. Walt Mossberg summarizes the effect well:

Cellphone carriers say one reason they keep tight control over what phones run on their networks is to protect the networks from harm and assure service quality for their subscribers.

But we’ve heard that before, and it wasn’t true then. Until the 1970s, when the government forced open the market, the old AT&T phone monopoly refused to let consumers buy phones and plug them into their home phone lines. You could only rent phones, and they had to be models made by an AT&T subsidiary. AT&T said the restriction protected the quality of the wired phone network. But, lo and behold, when the ban was lifted the phone network was just fine, even though consumers were plugging in millions of less expensive, more innovative phones.

Much effort has been expended by carriers to enter the content space by selling ringtones, games, music, useless wallpaper rubbish, etc. They control the user experience and subsequently control the revenue generating services.

If Apple does indeed attempt to distribute around the carriers, and is successful, they will usurp this capability and turn the wireless carriers into ‘dumb pipe providers’. This is the carriers worst nightmare, and I would expect them to push the limits of anti-competitive behavior to stop Apple.

It will be very interesting to see how the carriers respond.

Source: Apple's iPhone Would Undermine Carriers' Handset Domination