Slow but steady: How the iPhone is changing the phone industry

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Micro message machine

Solutions like iMessage and Google Voice let users have the same text messaging experience, but without any extra cost.

For those who argue that the carriers are too deeply rooted for real change to ever happen, the microcosm of text messaging provides a useful object lesson.

Text messaging has long been a staple service of carriers, because they can charge through the nose for it despite the fact that it costs them next to nothing for you to send a single text message, or even a thousand text messages. Regardless of whether you pay per-message or for a monthly allowance of messages, you can rest assured that the carriers are raking in a healthy profit.

But with the advent of smartphones, there are suddenly a number of other options. You can send an email. Or download an instant messaging app. Or, perhaps most damningly, use the built-in private messaging features of social networking services like Twitter and Facebook.

Suddenly, there are dozens of popular messaging apps looking to supplant the text message. Even the platform makers themselves have waded in, with the likes of iMessage and Google Voice, which provide traditional text messaging features but use the pipes of the phone’s data network instead of the voice network.

And as entrenched as text messages might be, there’s already been a dent: At the beginning of 2012, text messaging was down globally, but still growing—albeit at a slower rate—in the U.S. Before the end of the same year, text messaging had started to decline in the U.S..

It’s no wonder that the carriers moved to preempt this by “streamlining” the text messaging packages they offered, as AT&T did in 2011—it’s about bringing in as much money as possible before that revenue stream dries up completely (or, as they say in business lingo, “managing for profit”). And while the text message remains the lowest common denominator of phone-to-phone communication, its long-term prospects position it somewhere north of the fax machine.

Switcheroo

Historically, the power has been firmly in the hands of the carriers: They dictated which phones a customer could buy, which ones would work on their network. As a result, the phones themselves had become largely commoditized, and with a captive customer-base the cell phone networks themselves had very little reason to improve what they were doing.

There was a decided lack of counterweight to the carriers’ influence—phone manufacturers had a limited number of venues for their product, and, due to contracts and locked phones, it was an uphill slog for consumers to put one’s money where one’s mouth was by switching carriers.

So what happened?

Despite former Palm CEO Ed Colligan’s infamous insistence that the “PC guys are not going to just figure this out,” that’s exactly what ended up happening. The smartphone revolution didn’t come from Motorola, or Sony Ericsson, or Nokia, or even Palm itself—it came from Apple and Google. They made devices that attracted the consumer, and which weren’t simply interchangeable with the millions of other phones already out there.

Pre-iPhone, smartphones looked a lot different from today.

And so the balance of power has begun to shift in favor of the companies making the actual phones. While some customers will undoubtedly continue to make their purchasing decisions based on the service available in their area and the quality thereof, many parts of the country are saturated in wireless offerings; in those places, which include many of the most profitable, concentrated markets, the game is now about which device the consumer wants.

It’s possible that the carriers may try to curb the influence of the manufacturers—that’s ever the case with middlemen who have grown used to their comfortable position. But in doing so, the wireless providers now actually run signficant risks.

AT&T

Smartphones aren’t just a niche product anymore; they now make up an overwhelming percentage of the handsets that the carriers sell. According to Verizon, 87 percent of postpaid devices sold by the carrier in its most recent quarter were smartphones; both Sprint and AT&T reported the same statistic at 89 percent. And the iPhone’s a big part of that—according to Verizon, 53 percent of its smartphone activations in 2012 were some model of Apple’s handset, and Verizon’s iPhone sales are lower than AT&T’s.

Customers clearly want smartphones, and taking measures like throttling their data usage or breaking out features like tethering and messaging into additional costs is tantamount to the carriers cutting off their nose to spite their face. Or, to paraphrase an old favorite: The more they tighten their grip, the more customers will slip through their fingers.

In truth, the carriers have run up against the fundamental problem of their business model: They own the streets, but they don’t make the cars. And other than paying their taxes to make sure they stay open and pothole free, people don’t really care much about their streets.

Think about it. Few, if any of us, really love our wireless carriers, any more than we love the roads we drive on. When carriers and streets work, we don’t think about them; when they don’t, we start concocting ways to switch to other, better maintained avenues.

Freedom, that’s what I need now

Imagine that you didn’t have to deal with the illegalities and technical finagling of unlocking your phone and taking it to another carrier. The competitive landscape sure starts to look a lot different in this not-unreasonable fantasy world: Carriers will have to work harder to differentiate themselves, and that means offering more to customers, whether it be options like unlimited data, cheaper costs for adding on features like tethering, more cost-efficient family plans, or other incentives.

This seems to be what T-Mobile has up its sleeve, though the company hasn’t yet disclosed all the details of what its contract- and subsidy-free future looks like. But I imagine that both its rivals and consumers will be watching the experiment with interest.

Right now, the state of the industry reminds me a bit of the slide we saw with Digital Rights Management in the music business just a few years ago. The snowball’s rolling downhill, momentum is growing, and it seems only a matter of time before it achieves critical mass and bowls over the established players.

And just as Apple started that ball rolling with the abolition of DRM (on music, anyway), the company’s done the same here, if more subtly. Steve Jobs’s proclamation that Apple was going to reinvent the phone may have been overtly aimed at consumers tethered to their BlackBerries and dumbphones, but it was also a message to the carriers that their days of influence were numbered.

So, alongside the notches in its belt for its revolutions in computing and music, Apple can now add one more. Or, to put in a more Jobsian fashion: In 2007, Apple introduced the iPhone. And it didn’t just change the phone—it changed the entire telecommunications industry.

Updated at 6:28 a.m. PT to clarify status of Verizon iPhone 5 SIM slot.

Updated at 6:39 a.m. PT to clarify current laws about unlocking.

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