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Can The iPhone Break The Carriers' Death Grip?

At first glance the conclusion reached by IDC mobile and wireless analyst Shiv Bakhshi, in his report this week titled "Apple's iPhone Hits the Market, But Can It Change the Game?" is absurd: Bakhshi argues that the arrival of the iPhone -- which is tied exclusively to AT&T's Edge network and carries a hefty service premium, will help break the stranglehold the Big Four wireless carriers have on the mobile telecommunications market in this country.

The iPhone, Bakhshi asserts, "must give Nokia (which has struggled in the U.S.) heart that it, too, can someday overcome the operator bottleneck and go directly to consumers."

I think Bakhshi is a bit loopy on iPhone iPhoria (what else is it going to do? end global warming?), but on second glance his hopeful conclusion is worth considering. The lines outside Apple stores last weekend were much longer than those outside A&T outlets. Though his arm is still sore from all the twisting AT&T COO Randall Stephenson gave it, Steve Jobs has managed to do what many handset makers (see Nokia, above) have tried to do for years: make the carriers irrelevant. Many thousands of people have just switched their service to AT&T from Verizon Wireless and Sprint Nextel -– not because they preferred the revenant Ma Bell but just to get an iPhone.

Furthermore, as my colleague Elena Malykhina pointed out earlier this week, Apple "requires that activation of the phone [be] routed through iTunes. … Prior to the iPhone, the typical model for activating a cell phone involved the carrier, either in-store or over the phone."

At the same time the iPhone is sweeping across America, former FCC chairman Reed Hundt is using his position as co-founder and vice chairman of Frontline Wireless, a startup backed by Silicon Valley heavyweights to be a major player in the upcoming 700-MHz spectrum auction, to rail against the "spectrum oligopoly" (as Tim Wu, a professor at Columbia University School of Law, called it in an an influential report on wireless network neutrality and carrier control) of the Big Four.

"It's like you finally achieved that long-held dream, and you bought that red convertible, and somebody says, 'Good luck on the car, and by the way you've got to buy all your gas from Exxon, and it'll cost you in the first two years $120,000," Hundt analogizes. "There's no other consumer appliance in America that comes bundled with mandatory service, at a price three times that of the device."

The carriers, of course, have long followed the classic Gillette business model: give away the razor and make out like a bandit on the blades. Like a bladeless razor, cell phones are no use without the accompanying service -– as many frustrated iPhone purchasers found out in the first couple of days. So the carriers have given away or heavily subsidized the phones while charging unspeakable rates for airtime.

Like Bakhshi and Hundt, I believe that's a dying business model. I'm afraid the period of fatal illness will outlast iPhone mania, though.

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