Government to Examine Exclusive Cell Phone Deals

Should the FCC regulate who can sell an iPhone?

If you want an iPhone you need to be an AT&T customer. Sprint is the sole supplier of the Palm Pre. Are these exclusive deals between wireless phone companies and handset manufacturers anticompetitive and monopolistic?

Policy momentum against such agreements has been building in Congress since AT&T and Apple rolled out iPhone in June 2007, selling more than 1 million of them in the first few weeks of introduction. Debate in Washington intensified again in recent days; just as the Palm Pre and the new iPhone 3GS were hitting the streets. Federal Communications Commission (FCC) Chairman-designate Julius Genachowski, in response to comments by Sen. Jay Rockefeller (D-WV) during Genachowski’s confirmation hearings, said he would investigate whether such exclusive handset agreements are hurting consumers.

Exclusive sales agreements between service providers and handset makers are not new. For its first year on the market, Motorola’s RAZR, the thin flip phone that became the “must-have” model of 2004, was available only from AT&T. The iPhone, however, with its touchscreen interface, integrated music player, intuitive web browser and library of third-party applications, was truly innovative in terms of design and function. That, along with Apple’s brand name, market clout and a well-cultivated media presence, made the iPhone one of the most hyped wireless devices to ever hit consumer consciousness. But to use the iPhone, you had to sign up for AT&T’s wireless service. If you weren’t an AT&T customer and wanted an iPhone, it meant changing service providers, perhaps incurring an early termination penalty. If you lived in a market that AT&T didn’t serve, you couldn’t get an iPhone at all.

Sen. Rockefeller believes exclusive agreements are anti-competitive and anti-consumer. He claims consumers in markets not served by the major service providers are hurt because they don’t have access to the latest technology, and he argues that exclusive agreements harm regional wireless service providers, such as Alltel, Cellular South and U.S. Cellular. With national coverage and deeper pockets, AT&T, Verizon and Sprint can easily outmuscle the smaller players when it comes to bidding for exclusivity.

Rockefeller, along with along with other congressmen like Rep. Ed Markey (D-MA) of the House Subcommittee on Communications, Technology and the Internet, is seeking legislation or FCC rules that would either ban or regulate exclusive handset agreements. Essentially, no service provider would be able to negotiate an exclusive right to sell one brand or model of handset. This would represent a massive government intrusion into established wireless marketing strategies amid dubious assertions that such agreements are monopolistic.

First, exclusive distribution agreements are a standard competitive practice, not just in cell phones, but across many consumer industries. They add an element of differentiation to products or services that consumers see as easily substitutable. For example, to get consumers to shop at its stores instead of Wal-Mart’s, Target crafted an agreement with designer Isaac Mizrahi to sell his apparel exclusively under the Target brand.

Second, national and global companies have always had a size advantage over regional and local competitors. But rarely has the ability to leverage size or capitalization in and of itself been considered illegal or unfair. Starbucks can afford to market coffee in ways local coffee shops can’t. True, this meant some Mom-and-Pop stores went out of business, but other operations, just as small, thrived by meeting the competitive challenge in other ways.

That’s just what’s happened in wireless. Given the interest in, and demand for, new services, applications and price cuts that the AT&T-iPhone deal touched off, the FCC will have a tough time proving that exclusive agreements are detrimental to the buying public.

For starters, the iPhone model that debuted 24 months ago at $599 now costs $99. Apple priced its latest, new and improved iPhone 3GS offerings at $199 and $299. That’s pricing from a company well-aware it is competing with others.

The iPhone certainly doesn’t have a monopoly on the smartphone market. While it is exclusive to AT&T, it is just one of a number of smartphones that are available to consumers from other service providers. In addition to the new Palm Pre, there’s Research in Motion’s very popular BlackBerry line, and an assortment of highly functional devices from Samsung, LG, HTC, Motorola and Google, whose Android operating system, compatible with any wireless system, makes it something of an anti-iPhone.

Consumer enthusiasm for smartphones, sparked by innovations driven by competition, is a bright spot amid the recession. Even as overall worldwide sales for wireless phones dropped 14.5 percent in the first quarter of 2009, smartphone sales were up 12.7 percent, according to market research firm Gartner.

In light of these facts, it’s hard to see exclusive handset agreements as anticompetitive and anti-consumer. Rapid price declines, a growing number of product choices and double-digit sales growth simply do not occur in a monopoly market.

While it’s true not every consumer can get an iPhone, every consumer has a choice of a number of feature-rich smartphones. No one has locked up the market. Contrary to Rockefeller’s assertion, regional carriers have not been frozen out. U.S. Cellular has the Samsung Delve and the BlackBerry Curve. Cellular South sells the Samsung Finesse. Alltel sells the LG Tritan. They may not have the cachet of the iPhone, but that’s a challenge that should be met with skillful and creative marketing, not intrusive regulation.

Steven Titch is a policy analyst at Reason Foundation.