In Love With Yesterday’s Policies

Economist Thomas Hazlett has a great column in Business Week (also cited earlier by Adrian Moore) on ill-conceived attempts to ban exclusive handset arrangements, such as the AT&T-Apple iPhone deal and the similar, more recent agreement between Sprint and Palm for the Pre.

Hazlett recounts the arguments and observations about how such agreements, far from restricting competition, instead intensify it. He also discusses at length how these models, which subsidize the cost of handset by stretching it out over the course of a one- or two-year service contract, work to keep cost of the latest technology within reach of consumers. Finally, he also addresses how wireless business regulation is loosening up in Asia and Europe, which until recently embraced the regulatory controls Congressional leaders and Obama administration officials suggest we adopt in the U.S. So, in telecommunications, as with environment, trade and taxation, Washington is glomming onto the same progressive policies the rest of the world already tried and is discarding as unfruitful. As Hazlett notes:

In South Korea, regulators have sponsored temporary bans on subsidies, explicitly increasing carrier profits by slashing subsidy costs and thereby cutting a line item that plagues financial results for wireless carriers everywhere. But the policy clearly harms customers.

Restricting subsidies also hurts technology adoption. In Belgium—the sole European Union country to ban phone subsidies (under a 1935 statute banning sales tying a product to a service)—the iPhone went on sale for $1,000, its highest price in the world. The EU recently struck down the subsidy prohibition as anticompetitive in a case brought by Belgian gas stations that objected to a rival offering customers free towing service if they bought so many liters of gas. The EU (correctly) upheld the discount and tossed the law. Now Belgian iPhone buyers will benefit via lower prices. Perhaps they’ll also get free towing.

Finland banned handset bundling until 2006. The rule was scrapped by the Finnish government because individual customers were not buying new, expensive 3G phones. This gave application developers little incentive to design useful add-ons, further reducing 3G handset demand in a vicious circle of stagnation. When the ban was dropped, new technology adoption took off, courtesy of network subsidies—and customer contracts.