Hazlett on the iPhone, walled gardens, and innovation

by on September 27, 2007 · 0 comments

In his latest FT.com article, Tom Hazlett, professor of law and economics at George Mason University, points out that despite all the talk about the need for mandatory “openness” or wireless Net neutrality, Apple’s “walled garden” i-Phone model has spawned some serious innovation. He argues:

“One million customers bought iPhones in the first 79 days; analysts project 4.5m units sold in the first year. Hosting this Apple party is a curious way for carriers to lock out innovation. It is even more remarkable that critics could configure Apple’s entrepreneurship as an attack on creativity. They claim that only a device that is optimised for any application and capable of accessing any network is efficient.

They are wrong. What works best for consumers is a competitive process in which independent developers, content owners, hardware vendors and networks vie to discover preferred packages and pricing. When decision-makers compete for customers and answer to shareholders, a sophisticated balance obtains. The alternative proposition, business models voted on by regulators, is a recipe for stasis.”

Hazlett goes on to show how it benefits consumers:

“Consumers evince strong preferences for network co-ordination. Perhaps the most impressive burst of wireless innovation was launched in 1999 by DoCoMo’s iMode in Japan, enabling easy handset access to e-commerce sites. Content providers pay a cut to DoCoMo, which bills users.

The platform has been called a “walled garden”, as applications must abide by strict rules. Economist Len Waverman, of the London Business School, writes that DoCoMo initiated three significant controls never before used in wireless: limiting prices charged by independent vendors; showing customers their charges for content in real time, as incurred; and restricting bandwidth-hogging applications.

Rejecting “neutrality”, iMode proved a rousing success, attracting over 35m subscribers by mid-2003. DoCoMo’s mobile rivals responded with managed web platforms of their own. Today, customers choose from bountiful, competing gardens.

Innovators such as DoCoMo and Apple bask in the opportunity to craft custom products and business models. Liberal spectrum policies that invigorate markets intensify that creative dynamic. Regulations that foist preordained structures on consumers and suppliers do not.”

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