Bellerbys Economics - Mr Stephenson

Tuesday, August 28, 2007

iPhones - A suicide bid from Apple?

The decision by Apple to lock the iPhone into American company AT&T's carrier network is a good example of barriers to entry - in this case both technical and legal. If you can create a barrier to entry, you can of course increase your prices substantially creating abnormal profits. Apple are also hoping that their brand identity as a 'modern, progressive, people-based' company will enable them to bring their largely sympathetic customer base over to the AT&T network with them. What we also have here is an example of vertical bundling - a manufacturer (Apple) dictating which service provider you should use (AT&T). It's questionable whether this is even legal under EU Competition Policy where the emphasis is on creating competition in the different parts of interconnected markets - eg the rail network and railway journey providers; the gas pipeline infrastructure and the gas service provider - and so on.

But can Apple make it work? Pressure already seems to be mounting on them. On the technical side, it appears relatively simple to break the lock. Irish company Unique Phones claims to have already done it - as well as a 17-year old hacker, George Hotz, who clearly lives up to his name. In addition, website iPhonessimfree.com is already offering access to multi-network iPhones. In some areas, it seems that if you get your services from AT&T partner companies, you can also use your iPhone with the partner without paying AT&T a penny. Some US consumer organisations are also calling for an iPhone boycott by consumers.

So Apple and AT&T are having to resort to stronger and stronger legal threats to back up their plan - thus damaging Apple's brand as a people-friendly company. People had already questioned Apple's link with AT&T - a company with a somewhat mixed history.

But if it works, this could catapault Apple up the league table in the mobile phone industry. It will be interesting to see if Apple can reach their dream of penetrating 80% of the mobile phone market or whether it will be swept aside in a wave of discontent over high prices and lack of choice.

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