Newsflash to FCC: The iPhone is a Closed Platform, and Consumers Love It

by on August 2, 2009 · 30 comments

Just when you thought the FCC’s investigation of the wireless industry couldn’t get any stranger, TechCrunch reports that the Commission has sent letters to AT&T, Apple, and Google inquiring about Apple’s recent decision to reject the Google Voice app from the iPhone App Store (as Berin discussed yesterday).google-voice-iphone-app-rejected-by-apple

It’s been over two years since the original iPhone was launched, but it seems the FCC still doesn’t get it: the iPhone is very clearly a closed platform — a prototypical walled garden — and Apple has the final say on what applications users can install. When you buy an iPhone, you’re not simply buying a piece of hardware, but actually a package deal that includes software, hardware, and a wireless contract. Is this anti-consumer? 26 million consumers don’t think so. The iPhone 3GS, the latest version of the phone, is selling so fast that Apple’s CFO says they can’t make enough to meet demand!

Of course, the iPhone model isn’t for everyone. I, for one, don’t own one because I’m an obsessive tinkerer and prefer a phone that’s as open as possible. But not everyone shares my preferences. As mentioned above, over 26 million iPhones have been sold since June 2007, so openness clearly isn’t make-or-break for a lot of consumers. Who knows, maybe some people actually trust Apple and like the comfort of knowing that every app they can get comes with a seal of approval from Cupertino.

The FCC’s letter to Apple demands an explanation for why Google Voice was rejected. If Apple’s explanation doesn’t satisfy the FCC’s criteria — which, by the way, are entirely unclear — then what? Will the FCC force Apple to accept Google Voice? Say what you will about Apple’s app store track record, but the prospect of federal regulators having the final word on which applications smartphone owners can install hardly seems pro-consumer. The FCC can’t even figure out how to run its own website!

In some ways, the iPhone has perhaps been too successful for its own good. It’s so popular that many consumers seem to no longer view it as just another product but instead as an item to which they are entitled. Thus, bureaucrats and Congresscritters in search of political points are making a big fuss over the fact that the iPhone isn’t everything to everyone. Why can’t it be wide open? Why isn’t in available on every carrier nationwide? Why is it so expensive to purchase without a service contract?

The answers to these questions lie in the rational self-interested decisions made by Apple and AT&T. The iPhone exists not just to make consumers happy (which it’s been exceedingly successful at doing), but also to make money for Apple and AT&T. And what’s wrong with that? Both firms arguably took a big risk on the iPhone, with Apple putting big bucks on the line to develop it and AT&T accepting an unprecedented arrangement with Apple to hand over a sizable chunk of wireless revenues.

Rewarding penalizing Apple and AT&T’s iPhone gamble with stricter regulations may make some iPhone owners happy in the short run, but it will also make phone developers wary about taking iPhone-esque gambles in the future. Why invest hundreds of millions to hopefully concoct the next big device if the price of success is political predation? (See Barbara Esbin and Berin Szoka’s paper, Should the FCC Kill The Goose That Laid The Golden iPhone, for more on this).

As we often say on TLF, if you don’t care for the iPhone’s App Store, get another phone! There are dozens of smartphones out there that compete with the iPhone. The Palm Pre, LG Versa, Samsung Omnia, and HTC G1 are just a few notable examples.

Want a phone that’s wide-open? Try the G1 — its Android OS is open source and even comes in an unlocked flavor that’s designed for developers. If you love Google Voice, then try a Blackberry — unlike the iPhone, Google Voice works great on Blackberries.

The FCC should stop wasting its time on futile attempts to make already-competitive markets even more so.  Instead, the Commission should be focusing on how to free up the airwaves, most of which remain out of reach of innovators because of outdated rules.

  • DioGratia

    Shouldn't this be an Federal Trade Commission matter and not one for the Federal Communications Commission?

  • nicholasdimitri

    No. The FCC's concern is with telecom competition and the relationship between cellular providers and handset manufacturers; they aren't concerned with the closed platform model in general.

  • http://www.technologyslice.com.au/using-bmi-to-measure-obesity Obesity

    Sounds like some under the table deals are going on there. Definitely not above board.

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  • http://www.unfocus.com/ Kevin Newman

    Being so successful, that your problem becomes getting regulated by the FCC is any innovators dream. I really can't see why some form of regulation would discourage anyone from taking a risk that might pay off with the same kind of success – just the opposite I'd say. Maybe the exceptionally timid would be scared off? ROFL

    BTW, the mentioned parties, Apple and AT&T, are probably acting rationally, and are most certainly testing the edges of what they know they can get away with, but there's something of an odd rational market tinge to your entire article. Hasn't that been debunked by now? Markets are emotional, not rational.

    Still I agree in principle, it's not time to regulate Apple and AT&T – the iPhone as big a success as it is, has not cornered a horizontal slice of any market. When they do that, they are a problem worth addressing, but not until then (and I doubt they'll ever get there – it's Apple after all).

  • Anonymous

    It’s not ridiculous. Nowhere in the developer contract does it say that Apple will cover the entire cost of a refund for apps that have been rejected from the App Store. It seems ridiculous to me that any developer would expect that from Apple or any publisher.
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  • http://enigmafoundry.wordpress.com eee_eff

    hmmm… yes they like it as long as it doesn't EXPLODE…..

    http://news.cnet.com/8301-13579_3-10302038-37.html

  • dm

    “Hundreds of millions” developing a new phone? Hardly. $20 million at the most.

    Apple didn't “put big bucks on the line” to develop it — read the article you linked to. Apple put big bucks on the line to market it.

    Customers would like the iPhone even better if it were open. Not being open is why I got another phone. But as soon as the iPhone is open, I'll be replacing my other phone.

  • Ryan Radia

    I'm not saying innovation will come to a complete standstill because of the FCC's crackdown on the wireless industry. Rather, the threat of regulatory intervention against successful firms like Apple and AT&T will distort investment in wireless innovation, causing firms to allocate scarce dollars toward more lightly regulated pursuits. Innovation happens when firms take risks in search of profit; thus, industries with artificially diminished profit potential will be industries that see less innovation.

  • Ryan Radia

    We'll likely never know for sure how much Apple spent on iPhone R&D — but estimates I've seen range from $100 to $150 million (see below). Also, Apple's entire R&D budget has been climbing steadily for the past few years and recently topped $1 billion. One can reasonably assume that at least some non-trivial portion of that was related to the iPhone.

    http://www.applematters.com/article/apple-to-sp
    http://www.technewsworld.com/story/development/
    http://www.tgdaily.com/content/view/42986/97/
    http://www.businessinsider.com/2008/6/with-a-19

    I won't disagree with you that some people would like their iPhone more if it were more open. But if so many customers are dying for more openness, then how do you explain the fact that the iPhone — very much a closed device — has been so darn successful at besting competing devices that are far more open? Windows Mobile phones are arguably more open, and they are widely available on every major carrier, yet they are vastly underperforming the iPhone in sales growth. And while Android is still nascent, when it begins to be widespread later this year, I suspect it won't make a big dent in Apple's sales.

    Of course, I may well be wrong to assume that open phones won't take off any time soon. In fact, as a lover of open devices, I certainly hope I am. But I cannot deny that closed devices seem to be perfectly capable of pushing innovation forward. The natural evolution of the market isn't always easy to understand, but it just works — after all, it is merely the aggregation of the rational self-interested voluntary choices made by millions of consumers and firms.

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  • dm

    Okay, I concede your point about “hundreds of millions in development” — your first citation makes that pretty clear. It's hard to say how much of the over $3 billion Apple has spent on research in the last few years was for iPhone development, but even a tiny percentage of $3 billion will get you to hundreds of millions.

    On the other hand, read those articles before you cite them! Only your first citation is relevant to Apple's development costs. The other three either talk about Apple's marketing moves, or how much it costs Apple to build an iPhone (no mention of the non-recoverable-engineering that would reflect the development costs).

    As to customers dying for more openness: http://apple.slashdot.org/story/09/08/07/133320

    Four million iPhone owners have both violated their warranty and found their way to the Cydia app store. That's maybe 25% of all the iPhones sold (17 million: http://www.networkworld.com/news/2009/032409-ap…), though I'm sure there are a few jailbroken iPod touches among that four million, so the percentage is actually smaller.

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  • Ryan Radia

    Second article from above, TechNewsWorld: “Reports indicate that Apple spent $100 million on the development of the original iPhone.”

    Third article is useless. I have no idea why I put it in there.

    The fourth article isn't specifically addressing R&D expenditures but rather the financial risk that Apple has taken with the iPhone and its aggressive pricing strategy (which has worked out quite nicely for Apple).

    There's no denying that lots of people want an open iPhone. Ten percent of iPhone/iPod touch users have installed Cydia according to its developer (via your slashdot article). Frankly, if I were an Apple exec, I'd probably try to cater to the openness-loving audience. But it seems that Apple just doesn't care about appealing to those folks, which is fine — that's what all those other open phones are for. The idea that unless every product manages to be everything to everyone, then markets must be failing doesn't seem very convincing to me.

  • Ryan Radia

    Second article from above, TechNewsWorld: “Reports indicate that Apple spent $100 million on the development of the original iPhone.”

    Third article is useless. I have no idea why I put it in there.

    The fourth article isn't specifically addressing R&D expenditures but rather the financial risk that Apple has taken with the iPhone and its aggressive pricing strategy (which has worked out quite nicely for Apple).

    There's no denying that lots of people want an open iPhone. Ten percent of iPhone/iPod touch users have installed Cydia according to its developer (via your slashdot article). Frankly, if I were an Apple exec, I'd probably try to cater to the openness-loving audience. But it seems that Apple just doesn't care about appealing to those folks, which is fine — that's what all those other open phones are for. The idea that unless every product manages to be everything to everyone, then markets must be failing doesn't seem very convincing to me.

  • Ryan Radia

    Second article from above, TechNewsWorld: “Reports indicate that Apple spent $100 million on the development of the original iPhone.”

    Third article is useless. I have no idea why I put it in there.

    The fourth article isn't specifically addressing R&D expenditures but rather the financial risk that Apple has taken with the iPhone and its aggressive pricing strategy (which has worked out quite nicely for Apple).

    There's no denying that lots of people want an open iPhone. Ten percent of iPhone/iPod touch users have installed Cydia according to its developer (via your slashdot article). Frankly, if I were an Apple exec, I'd probably try to cater to the openness-loving audience. But it seems that Apple just doesn't care about appealing to those folks, which is fine — that's what all those other open phones are for. The idea that unless every product manages to be everything to everyone, then markets must be failing doesn't seem very convincing to me.

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