Mad Dog 21/21: Slim’s Simmering SIMs
February 27, 2012 Hesh Wiener
Carlos Slim Helú worth about $75 billion, might be the richest person in the world. One of many companies Slim and his children control is Mexico-based América Móvil, which spans the Western Hemisphere, serving more than 200 million mobile telephony customers. On Groundhog Day, Straight Talk, one of AM’s brands, aided by a cadre of phone unlockers and iPhone jailbreakers launched its assault on the USA’s cell phone business. For openers, it halved the cost of operating an iPhone. What will follow might do more than change carriers’ market shares. It could reshape the entire mobile client ecosystem.
This wouldn’t be the first business revolution led by Carlos Slim, his family, and his empire–and it surely won’t be the last. Slim is the child of Maronite Lebanese immigrants to Mexico, part of an eparchy that brought their adopted country a notably productive influence. In Slim’s case, success was won early; by the time he reached his mid-twenties, he had become a multi-millionaire. Today, Carlos Slim, 72, is no longer very active in the day-to-day affairs of business but he does stay in touch with his financial interests and philanthropical pursuits. His children serve as top officers of the family’s operating companies, including AM, the parent of Straight Talk.
Straight Talk is selling SIM cards that define clients in the GSM telephony system along with web-based instructions for adjusting smartphones, whether iPhones or Androids, to work with its service offerings. The main competitive target of Straight Talk’s strategy is AT&T, from which, it turns out, Straight Talk, which is a value-added service and not a primary carrier, buys capacity. Straight Talk GSM phones can also work with T-Mobile, but T-Mobile’s data frequencies are not the same as those of AT&T. So, while an iPhone is fine for voice calls and low volume data such as common email while on the T-Mobile network, the high-speed data radios in GSM iPhones just don’t work. But this doesn’t mean Carlos Slim’s wireless empire can’t play T-Mobile against AT&T, not since AT&T’s botched attempt to take over T-Mobile fell apart.
As part of the settlement of its failed attempt at acquisition, AT&T gave T-Mobile data roaming rights for the next seven years. That means T-Mobile users’ phones, if they have the right kinds of radio technology, can use the more widely available AT&T data network. The roaming rights cover what is called 3G or 3G+ data (and is also called 4G data by T-Mobile’s sales folk), not the faster LTE technology that most carriers other than T-Mobile call 4G.
It turns out that upgraded 3G systems, which can beam data out at speeds of up to 42 megabits per second (but commonly run at a third or half that speed) are more than fast enough for most smartphone apps. The first iPhone wowed users running at 2G speeds, which these days are considered pretty modest if not slow. Even now, the iPhone 4S, the peppiest model yet, has a data radio that peaks out at about 21 Mbps and not the higher speeds provided by phones with LTE radio circuitry. Still, it’s the iPhone that outsells every other kind of mobile phone.
While the iPhone is the reason so many people turn to the largest mobile carriers for equipment and service, it is a very expensive item to buy and to use. The big carriers heavily subsidize the cost of an iPhone to induce customers to sign two-year service contracts at rates that can run to $100 a month (and more if the service includes all the extras, such as ultra-large data volume and permission to use a smartphone as a mobile hotspot). By contrast, Straight Talk sells its most complete service for $45 a month. Also, Straight Talk doesn’t ask customers to sign a long contract; users buy the service a month at a time, paying in advance.
The Straight Talk service prohibits tethering a tablet of laptop to the customer’s mobile phone and also prohibits using a phone as a WiFi hotspot, although there are ways about this prohibition for users who are willing to risk a disconnection if they are caught and punished by Straight Talk.
It’s not entirely clear how Straight Talk came up with its plan, but the market for an inexpensive prepaid mobile phone service for iPhone owners seems to have been born a little over a year ago. In December 2010, discussions among intrepid iPhone enthusiasts and hackers on Howard Forums led to the posting of instructions for using an iPhone on Straight Talk. The original scheme was pretty complicated and involved buying one of two or three Nokia phones used with Straight Talk that had unusual (for Straight Talk) types of SIM cards. Unlike all other Straight Talk SIM cards, these cards could be moved to different phones including iPhones. An iPhone running on the AT&T network using a Straight Talk SIM card had to be either a phone that was already tied to AT&T or one that was unlocked. For some services, users also had to jailbreak their phones, which means they had to defeat some restrictions placed on the phones by Apple’s software. Jailbreaking is a very common practice in the iPhone world.
All during 2011 the population of Straight Talk iPhone users kept growing. These customers bought Nokia phones for as much as $200 just to get hold of the Straight Talk SIM card. They also got hold of iPhones by purchasing them outright from Apple, buying them overseas (where they are sold unlocked), or picking them up used on eBay and in other online markets. As the Howard Forums posts show, these users loved the idea of getting iPhone service for half the price of AT&T contract service and avoiding a two-year contract, too.
Straight Talk, which tracks the identifying number called an IMEI of each phone on its network and which has plenty of employees who follow what’s said on Howard Forums, had to know what was going on. Customers were moving SIM cards from Nokia phones to iPhones all the time and, unless they went wild with downloads and looked like serious abusers of the Straight Talk data plan, just left alone.
The user community not only grew, it positively thrived, and what started as a discussion group among phone geeks and their fans quickly matured into a wiki that provides a pretty good technical foundation for the most independent factions of the iPhone community.
In addition to winning new customers Straight Talk was also gaining power over AT&T, which has been growing weaker with each successive generation of iPhones because the phone subsidies led to additional deferrals of profit. The presence of the Straight Talk caper added to the churn rate because it strengthened the aftermarket for used iPhones, thereby enabling AT&T’s contract customers to migrate ahead as quickly as AT&T’s rules permitted, getting new iPhones and selling their older ones into an eager market.
If you think AT&T might have been outwitted by the Slim family’s company, get ready to think that some more. Nearly a quarter of the voting shares (A shares) of América Móvil have been bought by AT&T. That partial ownership helped open doors for the Mexican mobile giant, doors it has marched through on its way to eat AT&T’s lunch.
So far, the non-GSM iPhone users, whose carriers include Verizon and Sprint, have not been visibly affected. While the iPhones sold by these carriers contain SIM sockets that in theory enable the iPhones to be used in, for example, the EU, where GSM rules, the lockdown that prevents a used Verizon iPhone from working with a Straight Talk SIM in the USA seems to have been kept in force. That situation seems very restrictive and it is possible that a technological and legal assault will at some point change the rules. So, too, would the addition to future iPhones of a more versatile radio, one that would work on T-Mobile’s data frequencies. Even if that doesn’t happen, it might be possible for Straight Talk or another value-added sub-carrier to get its nose under the tent of Sprint or Verizon by supporting the use of used iPhones that can provide voice-over-LTE calling, phones that might begin life as GSM devices but grow up living on networks that provide a mix of CDMA (which the phones could ignore) and LTE (which the phones would use for everything).
Now that a lower-cost iPhone market has come alive, the next step is for it to change the balance of the iPhone ecosystem. Until now, the iPhone, its users and many of its apps have been in a world of big spenders (whether or not they could really afford to be). The basic two-year cost of an iPhone plus service has been running about $2,500 (more with extra features, less for the frugal). That made the iPhone a pretty bourgie toy.
Now here come the 99 percent and then some. If a used iPhone costs $300 (which some models do), that phone plus two years of Straight Talk runs only about $1,500, possibly a bit less. That puts it within the reach of a vastly larger populace. Still, the users who get into iPhone country using first, second and possibly even third generation iPhones really won’t be using the same apps that customers with the iPhone 4 and 4S go for. It’s not just Siri that requires a faster phone and better connectivity. But even the slowest iPhone is fine for playing music and video (although it’s better to do the download on Wi-Fi than with the data radio).
Smartphones with uniprocessors running at well under 1GHz, which means the original iPhone, the 3G, and the 3GS, are still peppy little computers. They can support secure banking apps, online shopping, navigation, messaging, picture taking and all the other activities that led to the smartphone revolution. But that doesn’t mean that the same kinds of apps will be as popular among the emerging generation of lower-budget users as they have been among the early adopters and the wealthier contract customers.
Business app developers, whether inside ISVs or within end user enterprises may not be able to aim ahead of the trajectory taken by the most capable smartphones. On the contrary: As more people go to work packing smartphones, including secondhand models running on budget data plans, corporate IT departments will have to think about reaching employees via phone apps rather than other media. And these same employees in other roles as customers might well become uses of fast food ordering apps at lunchtime and transit advisory apps while they are coming and going. While all the mobile companies want these customers and lots of phone manufacturers are developing lower cost models to service this emerging market, software developers must count on the iPhones in the client mix.
For now, Straight Talk and any other service providers that want to compete in the data-rich but money-poor market have increased the longevity of every iPhone. It’s not yet clear whether a similar phenomenon will occur in the Android market, where the abundance of manufacturers and models at every price level might well militate against the survival of even classic Android phones. However things unfold, it’s probably a bad idea to bet against the Slim family.