Some iPhone owners crave freedom to unlock from AT&T

Who really controls your Apple iPhone? If you think you do, think again. AT&T, the U.S. distributor, requires iPhone owners to use its wireless networks exclusively. Those who "jailbreak" their devices and use another carrier void the warranty.

Even if you pay full retail ($500 to $700), you still have to agree to use AT&T's network, or it won't sell you the device. Subsidized iPhones start at $199 but require a two-year service agreement.

As for trying to use your state-of-the-art device to place calls over the Internet, good luck. The iPhone's Skype application works on Wi-Fi but not on AT&T's 3G network. Other iPhone apps work on both. AT&T says the block is justified, because Skype is a direct competitor.

Customers have two choices: They can suck it up and stay with AT&T, or storm the wall. So far, more than 300,000 iPhone owners are now using T-Mobile's network and data plans, according to two people with direct knowledge of the situation. Those scaling the wall include owners of the new iPhone 3G S, which hit retail shelves in mid-June. The sources declined to be named because they aren't authorized to talk publicly about iPhone customers.

The lesson?

"Consumers are craving greater control," says Joel Kelsey, a public policy analyst with Consumers Union. So much, he says, that "they're willing to risk turning their $300-plus investment into a brick."

The problem for consumers: Carrier obsession with customer control is growing. Profit is the driver. As the USA reaches wireless saturation — meaning everybody who wants a cellphone already has one — carriers have to hustle hard to add customers and grow revenue. The USA (population about 300 million) currently has around 270 million cellphone subscribers.

The real pot of gold is mobile data, widely regarded as the next frontier of wireless. That's why carriers are so hot to get their hands on the latest, coolest devices — so they can sell consumers pricey data plans.

To land exclusives, carriers typically pay handset makers a certain amount of money, or subsidy, per device. AT&T, for example, pays Apple more than $300. That's why AT&T's iPhone policies are so tough: It's trying to lock down customers long enough to earn back that money.

But the crush of iPhone jailbreaks is just the beginning of what could become a full-tilt consumer revolt, predicts Sameer Mithal, an independent wireless consultant.

"There's a consumer movement to controlling the service," as well as wireless devices, Mithal says. U.S. "carriers will be very reluctant to make this change," he adds. "But they're not going to have a choice."

Shifts in U.S. lifestyle are a big factor, he says. Currently, about 18% of U.S. households are wireless-only, and the trend is gaining, thanks to souped-up devices such as the iPhone.

Exclusive deals under scrutiny

The iPhone is available on a non-exclusive basis in many countries, including France, Belgium, Italy and Australia. In those markets, consumers can buy the device and use it on any network.

Outside the USA, wireless devices typically aren't subsidized — consumers pay full retail. While devices are more expensive, buyers don't have to lock into long-term contracts. Carrier-imposed bans on applications, such as AT&T's Skype block on the iPhone, are practically unheard of.

Once U.S. consumers get a taste of true wireless freedom, Mithal thinks they'll like it — a lot: "More choice is always better" than less.

The U.S. wireless industry is unregulated, so carriers can do as they wish in terms of prices, devices, service plans, customer policies and more. AT&T, for one, believes an unregulated wireless industry is good for consumers.

The U.S. wireless industry "is a highly competitive market," says Jim Cicconi, head of public policy for AT&T. In most markets, he notes, consumers have their pick of three carriers, at least.

Consumer gripes about AT&T's tough iPhone policies are unfair, he says. The fact that so many people — 2 million in the fourth quarter alone — flocked to AT&T for the iPhone "is ratifying the (exclusive) arrangement" with Apple, he says.

"Consumers have the ultimate option of buying or not buying" an iPhone, he adds. "And the fact is, they're choosing to buy in overwhelming numbers."

Without AT&T's discounts, he says, "The device would be a lot more expensive."

AT&T's position assumes that rivals, given the opportunity, wouldn't charge less for the iPhone, Kelsey notes. Likewise, he says prices on mobile voice and data plans, which start at $70 for iPhone users, might also improve if others were competing.

The Senate Commerce Committee recently held a hearing to explore the impact of exclusive handset deals on consumers. The Federal Communications Commission— whose new chairman, Julius Genachowski, is a confidant of President Obama— is examining the same issue.

The telecom enforcement section at the Justice Department regularly reviews wireless industry practices. But Justice Department spokeswoman Gina Talamona declined to comment on whether a specific investigation is underway.

The Senate Judiciary Committee, in a letter on Monday, asked the Justice Department to examine handset exclusivity agreements, among other issues.

Rural phone companies, meantime, have asked the FCC to ban, or at least limit, handset exclusives. Historically, exclusives lasted no more than a few months. AT&T has had its exclusive deal with iPhone since it was launched in 2007. Verizon's exclusive on LG's "Chocolate" cellphone runs for the lifetime of the device.

Small carriers don't have enough subscribers or financial clout to land exclusives on the latest devices, says John Rooney, CEO of U.S. Cellular, which has 6.2 million customers. As a result, he says, many are losing customers.

Consumers Union, Free Press and other consumer groups are calling on Congress to step in. Their goal: to end practices such as application blocking and long-term device exclusives that they say limit choice and tamp down competition.

"The time has come for regulation," says Ben Scott, public policy director of Free Press.

The Big Four

Size is part of the problem, Scott says. Thanks to years of megamergers, the U.S. wireless industry is dominated by four giants — AT&T, Verizon, Sprint and T-Mobile. They control 85% of the market. The bulk — 65% — is controlled by two: AT&T and Verizon.

AT&T is an amalgamation of four Bells — SBC, Ameritech, Pacific Telesis and BellSouth— plus former wireless giant Cingular and long-distance icon AT&T.

Verizon is a patchwork of two Bells —Bell Atlantic and Nynex— plus GTE and long-distance icon MCI (formerly, WorldCom). It recently acquired Alltel, the No. 5 wireless player.

Their Bell-centric makeup means AT&T and Verizon are potent competitors, Kelsey says. Each controls miles of local phone networks that connect to buildings and cell towers. Known as "special-access" lines, they haul mobile data traffic from cell towers to local phone networks.

Without access to those lines, called the "middle mile," Sprint and other rivals couldn't exist.

Special-access lines are unregulated, so AT&T and Verizon can "bleed their competitors for access to them," Kelsey says. Those costs ultimately get passed along to consumers.

Tom Sugrue, vice president of government affairs for T-Mobile, says the issue is manageable in big cities, where alternative providers such as Level 3 help keep prices in check. But in suburbs and smaller markets, where AT&T and Verizon are often the only providers, T-Mobile and other carriers are basically stuck.

"When the supplier is also your major competitor, the problem (of special access) can be acute," he says.

AT&T's Cicconi says rivals can build their own facilities if they don't want to pay AT&T and other carriers. He also says it's unfair to accuse big carriers of price gouging.

Scott and Kelsey say the real problem isn't special access, or even consolidation. It's the lack of regulatory oversight in wireless, which is quickly becoming a fixture in American life.

"Big isn't necessarily bad," Scott says. "But big and completely unregulated is bad."

Locked down and waiting

For locked-down iPhone users, the wait continues.

Peter Tögel, a Web development manager for Clemson University, says he recently asked AT&T to unlock his 2-year-old iPhone. Tögel says he and his wife were going to Australia, and he hoped to use a "SIM" card there so he could get a better rate on data roaming. SIM cards are removable data cards containing subscriber information. They can be swapped out so you can use your phone on any compatible network. AT&T and T-Mobile, for instance, use similar technology standards for their networks.

Since he'd fulfilled his two-year contract obligation, Tögel says he didn't think his request would be a problem.

It was. AT&T said no. Apple, citing AT&T's exclusive arrangement, also said no, he says.

Tögel, a self-described geek, says he's considering jailbreaking his device, "but that's a last resort." He's also considering buying an iPhone in Australia, where it's sold on an unlocked basis.

Tögel says he's not mad at AT&T — he likes the carrier's service. He just wishes AT&T would show a little compassion, particularly when it comes to iPhone customers who have fulfilled their contract obligations.

"I was bound for two years, but after that, please unlock it," he says, offering some advice to AT&T. "I paid my dues. That's all I'm asking."

Contributing: Donna Leinwand