The EETimes has an interesting article on how U.S. cellular providers are choking off innovation and profits in the electronics industry. As I have long predicted, cellphones are absorbing the features of standalone gadgets like PDAs; PDA sales have been flat for some time. One of the hottest "gotta have" gadgets is the Palm Treo 600, which is a cellphone with the Palm PDA built in.
So what's the problem? Fewer things (and fewer chargers) to lug around sounds good, right? Not when you can't buy any of the new gadgets on the open market. Try buying JUST a Treo 600. You can't do it. You have to buy a cellphone plan with it; when you do so, you get a discount off the "Manufacturers Suggested Retail Price" (MSRP), which we all know means nothing in an open market.
By tying cellphones to service plans, the cellular companies have created an odd kind of monopoly, in which they have captured and now control the marketplace for handheld consumer devices. The EETimes article discusses the potential impact on the digital camera market--as cellphones get megapixel cameras built in, the digital camera marketplace will disappear. Not only that, consumers lose choice and competition, which keeps prices low. MP3 players are another threatened market; by adding extra memory, cellphones become music players, and the MP3 marketplace disappears.
Consumers are already losing in this situation, and it will only get much, much worse. Bundling, which is what the cellular providers have been doing, is a classic strategy for locking a marketplace up and creating a monopoly. In effect, gadgets like the MP3 player and the digital camera become free, in the sense that the real cost is hidden in the cellphone service contract. And the cellphone companies are now demanding two year renewals on service contract, making it harder and harder to switch.
Microsoft destroyed the market for Web browsers in exactly the same way. Internet Explorer, by giving it away, wrecked the market for every other company. But Internet Explorer is not really free; Microsoft bundles the cost of IE into the cost of Windows--you pay for IE whether you use it or not.
Ironically, just as cellphone number portability is available, it is becoming harder and harder to make use of it. I'd love to have a Treo 600, but my cellphone provider does not offer it, making the feeble and pathetic excuse that "no one wants it." Uh huh. That's why Palm is making them as fast as they can. But the electronics industry is groaning as well. All these cellphones are being marketed at low margin OEM prices directly to cellphone service providers. Profits are nonexistent when you can't move any product at all at dealer or retail prices. It's the same squeeze that Walmart uses on its vendors--sell to us at your lowest possible price or we'll buy from someone else.
In the short term, consumers get lower prices (Walmart) or more features (cellphones). In the long term, when choice is driven out of the marketplace, we all lose bigtime.