Last month, I authored a blog discussing the Librarian of Congress’s recent decision not to exempt handset unlocking of new phones from the anti-circumvention petitions of the Digital Millennium Copyright Act (“DMCA”). Since that blog was posted, copyright-reform activists launched an on-line campaign to have the White House “ask the Librarian of Congress to rescind this decision, and failing that, champion a bill that makes unlocking permanently legal.” Last week, in a post by R. David Edelman, Senior Advisor for Internet, Innovation Policy, entitled It’s Time to Legalize Cell Phone Unlocking, the White House joined in the dispute stating:
The White House agrees … that consumers should be able to unlock their cell phones without risking criminal or other penalties. In fact, we believe the same principle should also apply to tablets, which are increasingly similar to smart phones. And if you have paid for your mobile device, and aren’t bound by a service agreement or other obligation, you should be able to use it on another network. It’s common sense, crucial for protecting consumer choice, and important for ensuring we continue to have the vibrant, competitive wireless market that delivers innovative products and solid service to meet consumers’ needs.
This is particularly important for secondhand or other mobile devices that you might buy or receive as a gift, and want to activate on the wireless network that meets your needs—even if it isn’t the one on which the device was first activated. All consumers deserve that flexibility.
From this statement, it appears that the White House staff doesn’t have a very good grasp of the issue. To begin, the White House has bought into the popular misconception that the only thing that keeps a mobile phone from working on a competitor’s network is the locking function. This assumption simply is not true. U.S. mobile providers use a variety of different technologies (e.g., CDMA, GSM, LTE, IDEN, etc.) and, as such, a handset must match the carrier’s network technology. Stated in practical terms, my AT&T GSM iPhone will not work on Verizon’s or Sprint’s CDMA networks (and visa versa). Equally as important, many carriers make network-specific enhancements to take advantage of certain device functionalities, so a consumer may not get the full benefits of an “unlocked” smartphone if they try to use it on a different network. Put simply, a world of unlocked phones is not the same as a world of interoperable phones.
Second, Mr. Edelman’s hypothetical where a person gets a “secondhand or other mobile device” and “want[s] to activate on the wireless network that meets [their] needs—even if it isn’t the one on which the device was first activated” suggests a lack of familiarity with the Librarian’s decision. The Librarian of Congress made it abundantly clear that consumers are legally free to unlock “legacy” phones.
Third, the Librarian further found that no one was holding a gun to consumers’ heads to buy a new locked subsidized phone. To the contrary, the Librarian found that:
with respect to new wireless handsets, there are ample alternatives to circumvention. That is, the marketplace has evolved such that there is now a wide array of unlocked phone options available to consumers. While it is true that not every wireless device is available unlocked, and wireless carriers’ unlocking polices are not free from all restrictions, the record clearly demonstrates that there is a wide range of alternatives from which consumers may choose in order to obtain an unlocked wireless phone. (77 Fed Reg. 65265) (Emphasis in original.)
So, just to restate the obvious, a state-of-the-art unlocked phone can be quite expensive—for example, a new entry-level unlocked iPhone 5 will run you about $649. By signing a two-year contract with AT&T, however, that same phone runs you only $199, a $450 discount off the retail price for an unlocked phone. Not a bad deal, even considering the early termination fee of $325, which declines by $10 per month of the contract and need not ever be paid by adhering to the term. Of course, the ability to offer consumers heavily-discounted equipment requires the customer to stick around long enough to make the arrangement sensible for the carrier. As an incentive to adhere to the agreement made between the carrier and the customer, wireless providers typically impose early termination fees and/or “lock” the device to their networks for the duration of the contract. So, when a consumer gets a $649 phone for $199, is it that unreasonable to expect a little commitment from the consumer in return? Most rational adults would think not, particularly when customers freely enter into that contractual arrangement. When the contract is up, the customer is free to unlock the phone. (Indeed, so long as the phone is out of contract, a simple web search reveals that the major U.S. carriers are more than willing to unlock phones upon reasonable request.) If a consumer doesn’t like the idea of a locked phone and being bound by the terms of a service contract, then that consumer can spend $649 up-front and get an unlocked phone. But, if the carrier hands you a $649 phone for $199, there’s obviously and reasonably a catch.
At bottom, the unlocking debate is little more than a tantrum thrown by people—hiding behind half-baked arguments about competition, innovation and copyright—that don’t want to pay full price for an unlocked phone. Let me lay it out simply for you: If you want an unlocked phone, then you can buy an unlocked phone. There is no law against it, and plenty of places to do it. Every mobile carrier will gladly sell you an unlocked phone, and you can get a used device on Craigslist or eBay. But if you want someone else (i.e., your mobile carrier) to pay for your spiffy new smartphone, then you’ve got accept whatever limits they put on your use of that device. That’s the deal. If you don’t like the deal, then buy an unlocked phone.
Like it or not, there are major consequences for consumers at stake here. Indeed, as both politicians and activists continue to throw around the requisite buzzwords like “competition” and “innovation” in the handset-locking debate, let’s remember that in the end this puerile behavior puts increasing pressure on the industry to kill the subsidized phone, an outcome that the formal economics show will slow the diffusion of new technology, diminish innovation in mobile handsets, and raise handset prices.
So, as the old saying goes, be careful what you wish for.