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Prepaid Phones and Walled Gardens August 16, 2006

Posted by NoWires in China, Wireless.
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The Wall Street Journal reported a story (subscription needed) about people buying up cheap prepaid cell phones and resale them for quick profit. After years of pushing for annual contracts, US mobile carriers suddenly discovered the benefits of pay-as-you-go services and started pushing it by handing out heavily subsidized cell phones. It is rather odd that marketers at these carriers were caught by surprise since the arbitrage opportunity is quite obvious.

Pay-as-you-go services have been popular in Asia for years. In my previous life I needed to travel to China and HKryt08010091.jpg frequently. The choices for were either to pay the $2.5/minute Cingular slapping on me for international roaming, or to give up on the idea of using cell phone all together. Luckily, the local carriers in those places offered me an alternative: I would buy a SIM card at the airport with a local phone number, pop it into my GSM phone and ready to go. I buy minutes in chunks which costs me about $0.2/minute depending on which country I am in. Considering my local friends and colleagues can reach me on a local instead of an international number, it is a bargain all around.

What’s interesting about the WSJ article is the carriers are selling a handset for this service. So I would have to buy a phone if I wanted this service here. This is a direct result of the “walled garden” approach these carrier practiced for years. In the US market, carriers wield enormous power over phone manufacturers. Carriers decide which models can be used, and in many cases which features can be turned on. Most of the handsets are locked – it works only on one carrier’s network.

This walled garden approach will hurt the carriers, as the article illustrates. Ultimately, man-made barriers make developing applications for cell phones a mini water torture. (I know because I am in the thick of it.) You are forced to deal with one carrier, one platform, one manufacturer, even one model at a time. Speaking of choking off the innovation.

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