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Full Transcript

Don Kellogg 0m10s

Hello, and welcome to the two hundred and first episode of the week with Roger, a conversation between analysts about all things telecom, media, and technology from Recon Analytics. I'm Don Kellogg, and with me as always is Roger Entner. How are doing, Roger?

Roger Entner 0m22s

I'm good. How are you?

Don Kellogg 0m24s

I'm good. So, Roger, we just heard news from, uh, the FCC about phone unlocking. Do you wanna tell us a

Roger Entner 0m30s

little bit about it? Well, the FCC wants to require operators or carriers, service providers, basically everybody, to unlock their devices after sixty days, regardless if the phone is paid off or not, and regardless if there is a subsidy on it or not. This would mirror the policy that Verizon and its subsidiaries and its brands have to follow since they bought the 700 megahertz spectrum, the d block, what is that, twenty years ago? Like 700 d block, 20 megahertz, came with net neutrality and handset unlocking. The FCC put that in because Google told them that if they would put net neutrality in, that they would bid on it.

Roger Entner 1m28s

The FCC heard them Google will win the license. To their great chagrin, the auction started, there was one bid from Google, then a second bid from Verizon, and then there was crickets. Nothing. Nobody else bid on that spectrum. And I doubt that Verizon would have bid on the spectrum again, because the conditions, net neutrality, which goes through the courts right now again, were attached to that.

Roger Entner 1m58s

And so Verizon had to take the spectrum, and has been hampered by it since then, that the handset unlocking for Verizon was sometimes ninety days, because they saw a lot of fraud, and now it's sixty days. So now the FCC wants to roll this out to everybody, because it wants to spread the love. If it goes through, and with Chevron deference gone, who knows how the courts will decide on this, even if they win it, I don't think they will get the outcomes that they want. But they will probably get the opposite of it.

Don Kellogg 2m41s

It's definitely been a bugbear for the FCC recently. Right? Yeah. T Mobile had unlocked obligation as part of the Sprint merger up to a year on the prepaid handsets. The Mint Mobile acquisition also had a sixty day unlock for Mint Mobile and Ultramobile handsets.

Don Kellogg 3m0s

So it's something that is being kind of unevenly applied across the industry

Roger Entner 3m4s

yet. Selectively applied.

Don Kellogg 3m6s

Yeah. Selectively applied unevenly however you want within the context of mergers. Right? Yeah. It's interesting within the context of whether or not consumers really understand what locking is and how it works.

Don Kellogg 3m18s

We've done some research on this. You know, T Mobile famously came out with an Un carrier event last year where they were talking about specifically going after AT&T locked devices. We did some research on this. What we found is that most folks actually don't understand whether or not their devices are locked or not. A lot of people at Verizon that were subject to that sixty day unlock thought their devices were locked.

Don Kellogg 3m40s

It's not well understood by consumers, right, is the key point.

Roger Entner 3m44s

Yeah. And it is important to understand why are devices locked. Right? Because there's an easy knee jerk reaction that, you know, all devices should be free and, you know, let them go wherever. But it's not that easy.

Roger Entner 3m59s

Devices are typically locked because devices are expensive. There is either a financial obligation to pay the device off, or it is often subsidized. While the top devices, traditionally they were not subsidized, but now, you know, if you stay with your carrier, they're paying off your device subsidy. And if you want to break that device agreement, then you have to pay it off, and when you pay it off, they will unlock it and you can go on your merry way. But that's a $1,000 $1,500 device.

Roger Entner 4m35s

Even with a sixty day unlock, I don't think much will change because if an operator trusts you to put a $1,000 device in your hands, they have done credit check on you. And if you pass the credit check, nothing will change. If you can't pass the credit check, you will have to pay for the device. Also, the prepaid side, most of these prepaid phones that are $50, $30, $80, $100, are actually subsidized by $20 $30 $40 And there are criminal gangs in this country that have bought these devices when they were not locked by the shopping cart full. They bought $100 devices.

Roger Entner 5m24s

I've seen pictures and I've seen the lawsuits. Like TracPhones sued these folks, like left and right, prior to merger, right? Because they were gangs, they bought these devices, they were subsidized by TracPhone with $50 or whatever. They stripped the software off, and then resold it to Latin America and South America. They were typically transnational gangs.

Roger Entner 5m52s

You know, we talk about human trafficking. There's also phone trafficking going on, and it's going from North America to South America. And so that is the backdrop. So one of the things that will happen if the FCC comes through there is the carriers who are not affected by these locks will subsidize the devices less, and the people that the FCC would like to help are going to pay more. They're going to have their devices longer.

Roger Entner 6m23s

They will hold them longer. They will more likely run out of the protection of the software updates with security updates, and the whole thing will be an even more aging handset base with less security. Thank you, FCC.

Don Kellogg 6m41s

The counterpoint here, right, and I agree, you know, with all of those things you said, but what I would say is that not every carrier was unlocking devices on the day that they paid off. Those devices were paid off. Right? So Yes. To the extent that locking devices prevents churn and to the extent that as a consumer, once you have paid off that device, I think it's all fine and good for devices to be locked until you pay them off or until you settle up with the carrier.

Don Kellogg 7m7s

But I do think that there should be more strict rules around unlocking devices and allowing healthy movement within the industry that's legal and, you know, doesn't involve cross border device trafficking. Right? That should be more allowed. It's not all roses and puppies

Roger Entner 7m22s

Oh, yeah. No. No. No.

Don Kellogg 7m23s

It on the locking front today. Right?

Roger Entner 7m25s

So Verizon unlocks it after sixty days. T Mobile, when you pay your device, automatically unlocks it. AT&T, after you paid it off, you have to request the unlock and then they unlock it. And with the smaller prepaid guys, it's a hodgepodge of how they handle it. You know, friend of the show, Peter Arden with MobileX, just filed with the FCC that he is in favor of the handset unlocking after sixty days, which is fully understandable from his perspective.

Don Kellogg 8m1s

He wants to be a share taker. Right? He wants to take share. Right? So that helps.

Roger Entner 8m5s

He wants to take share. And from his perspective, it's perfectly rational that he wants that policy, because he sees a lot of people coming with devices, wanna sign up, and they're locked. You know, they came excited and left disappointed. And at the same time, the way it builds is, I think right now he has one handset. It's a low cost handset, I think around $100 and it doesn't make a big difference.

Roger Entner 8m31s

He's counting on people to bring their own device. And with that perspective, he's perfectly right from his perspective. And on the other hand, the operators are all right, too. I think if the device is paid off, it should be unlocked, people should go with that device wherever they want to. But a lot of the prepaid devices are subsidized.

Roger Entner 8m53s

And I think when this comes through, they will be less subsidized, or not at all.

Don Kellogg 8m58s

Well, there's a difference between a $40 subsidy and a $400 subsidy too. Right?

Roger Entner 9m4s

So Yeah. Or $1,500.

Don Kellogg 9m6s

Yeah. To the extent that, you know, if you're on a postpaid carrier and you have a relatively new device, it's been partially subsidized, your early termination fees could easily be well into the hundreds. Right? Whereas on the prepaid side, you know, yes, these are often people with less means, but it's not as onerous of a charge.

Roger Entner 9m23s

Yeah. But they make it up in volume. TracPhone, prior to Verizon acquiring them, They lost tens of millions of dollars on this fraud. The pre Verizon track phone ran on like 7% profit margin. That fraud made a meaningful impact on their profit.

Roger Entner 9m45s

And so small MVNOs that have to really sharpen the pen and be very conscious might not be able to subsidize devices anymore. We're not talking about the iPhones that can be done through credit checks. It's the little people that this is supposed to protect that might get shafted.

Don Kellogg 10m4s

Yeah. Perhaps. I mean, it also increases the utility of advice that you have in your drawer. I still think with handset replacement cycles getting longer, folks being happier to have, you know, older devices and move them around on the network, that it's not necessarily a bad thing overall, particularly if devices are paid off for folks to be able to move around.

Roger Entner 10m22s

We'll see who will pay the bill in the end. My suspicion, it's a well meaning policy, and in the end, the little man will foot the bill.

Don Kellogg 10m30s

Well, we'll see if it even gets through the courts.

Roger Entner 10m33s

If it even gets that far. Right?

Don Kellogg 10m34s

Yeah. Yeah.

Roger Entner 10m35s

Yeah. There might be an election in the works, and

Don Kellogg 10m39s

Well, that's that's up for grabs too. We'll see. Exactly. All right. We'll talk to you next week.

Don Kellogg 10m44s

Thanks, Roger.

Roger Entner 10m44s

Thank you. Bye bye.