Whose Phones Are They? Nokia's and Motorola's Features Challenge the Wireless Providers

Includes: ERIC, GOOG, NOK, S, VZ
by: Dean Bubley

Keith over at TeleBusillis has an interesting point about reclaiming analogue FM radio spectrum for digital uses. He also talks about whether operator-subsidised mobile handsets should include features like FM radio, which generate no additional revenue for the carrier.

He mentions Bluetooth in the same context, pointing out that it generates little extra revenue (some extra in-car calls, but I'd guess no more than 1% of total mobile minutes are on Bluetooth headsets), but enables easier sharing/piracy of ringtones or content. (It probably also generates expensive customer support calls).

This is a central issue in the handset business at the moment. In many (but not all) countries, mobile phones are heavily linked to the operators' business models. Often they will be subsidised, customised & distributed by the carriers, especially in markets like the US and Japan (China and much of the rest of Asia is the opposite, however). Some will even be designed by the operator from the ground up, and manufactured by the ODMs.

Keith concludes that handset manufacturers (he singles out Nokia as probably the earliest advocate of FM radio in mobiles) "cannot go winding up the operators and playing them for fools " .

I can sort-of see his point, but at the same time the operators also recognise that the phone has two "personalities" from the end-user viewpoint. Sure, it's a "service device" intended to be part of the mobile communications package you get from an operator, integrated with & optimised for billable services like phone calls, SMS, and possibly some of this other stuff that not many people can bothered with....

... but it's also a piece of consumer electronics / jewellery / computing hardware. Nokia (NYSE:NOK) refers to its N series (pictured) as "mobile computers". Others draw comparisons with fashion accessories, or imaging devices. This is what customers want - and, if necessary, this is what the operators will need to "bribe" them with in order to persuade them to use their services. It's not just FM radio and Bluetooth - it's titanium casings & laser-etched keys, 3 Megapixel cameras & memory cards. I mean, the calculator software or the clock doesn't generate revenue either, but it's expected in the phone. Going forward, WiFi may also be included in some devices for non-operator functions (and will have to work well for these purposes, as well), as well as SIP for applications outside the operator IMS as well as inside it.

To some extent, the advent of the RAZR killed the idea that operators had "won" over manufacturers. In one swoop, Motorola (MOT) proved that the "shiny thing" philosophy won over a large proportion of consumers. "Give me one of those.... or else I'll churn to an operator that will". Hardware is more valued than software, which in turn is more valued than services. Ouch.

The subsidy issue is a thorny one. Up to a point, I have some sympathy for the operators. Subsidising something like Bluetooth or WiFi that generates no revenue (or even helps cannibalise existing revenues) has got to hurt. Ditto subsidising something that generates costs like support calls, or higher returns (step forward smartphone OS's...). My view is that subsidising something gives the operator some moral authority to say how you use it. But not as much as some of the US operators, that cripple Bluetooth & otherwise act dictatorially over "their" phones.

The question is one of balance. How can an operator minimise subsidies, whilst not increasing churn (or, worse, persuading people to buy "vanilla" handsets not optimised/customised for any operator's value-add services). It's a problem that will only get worse, as Moore's Law & other technology scale economics mean that the average handset will bundle in more capabilities (memory, power, processor, display, software, connectivity....) faster than the operator can exploit.

Historically, subsidies were about either (a) acquiring new customers, or (b) keeping them. Now, you also have (c) persuading them to use more of your cool new services, by giving them customised applications and user interfaces. But customers don't naturally want phones with 9 icons, 8 of which are trying to sell them stuff - you have to give them a certain amount of other cool stuff "for free", or else they'll just exploit the scale economies & processor price/performance curve and buy one SIM-free.

I chose my last two devices based on capabilities I wanted - decent camera, memory slot, good browser, aesthetics etc - and then looked at which carrier subsidised it most, with the fewest restrictions on usage and the least onerous service charges. But then I live in the UK, which has 5 main mobile operators and numerous MVNOs, and so they compete aggressively for my custom. It's also helped by a strong non-operator retail presence (AKA Carphone Warehouse) and a decent channel for SIM-free phones via firms like Expansys. Other markets are less (or more) open.

Bottom line - operators may be handset vendors' main direct customers, but the end user often ain't stoopid. There's going to be an ever-greater bunch of stuff that phones can do, which doesn't generate revenue for the carriers. Sorry, but that's the real world. Black chrome on a razor's handle doesn't directly help Wilkinson Sword sell more blades, but it's still subsidised as part of the whole package, helping them compete against Gillette & minimise "churn" amongst the shaving population.