A group of US Senators has sent a letter to the Federal Communications Commission expressing their concern that the exclusive arrangements that are common between wireless service providers and mobile handset manufacturers may be hindering competition and innovation. Senators John Kerry (D-MA), Roger Wicker (R-MS), Byron Dorgan (D-ND), and Amy Klobuchar (D-MN) are worried that the prevalence of such exclusivity arrangements (for example, AT&T and Apple’s iPhone, or Sprint-Nextel and the Palm Pre) restrict consumer choice.
Are consumers getting a bad deal? In an essay published last year by The Progress and Freedom Foundation, Barbara Esbin and Berin Szoka noted that the FCC’s most recent report found that 95% of the US population lives in areas with at least three wireless carriers. Clearly, the market isn’t suffering from a lack of competition. The vast majority of the consumers have a choice when it comes to service providers, and they enjoy a great deal of choice among mobile handsets, too. However, the idea that the government should ensure that every citizen has access to the mobile phone of his or her choosing is plain baloney, as PFF notes:
Simply put, the market is currently working to protect consumer interests and there is no constructive role for government to play here. There is not yet-nor should there be-a governmentally-sanctioned right to obtain a particular handset (no matter how desirable that handset might be). Where both the handset manufacturer and the carrier service markets are not only effectively, but wildly, competitive the lack of availability today of some equipment in certain parts of the country should not give rise to an FCC investigation tomorrow.
There is strong evidence that exclusivity arrangements encourage the development of newer products, contributing to innovation in mobile devices. A wireless carrier that offers a trendy new handset can attract legions of new data plan subscribers. Revenue-sharing agreements between the carrier and the manufacturer direct a significant portion of these new profits back to the manufacturers, which go toward developing newer and better phones. In the case of the iPhone, consumers have benefitted from better performing new models and price reductions (the first model of the phone cost $499-$599; the 3G S model to be released this weekend will cost $199, with last year’s 3G model dropped to a bargain of $99). Developing a new product is a risky venture; without such profit-sharing schemes in place, we could expect the price of high-tech smartphones to be much higher, as manufacturers would be forced to price their handsets without the expected financial returns from their carriers. Further, new products would be slower to come to market, as developers would need to spend considerable time ensuring that their handsets function properly with every wireless carrier’s network. Customer service at the local wireless retail store would be a nightmare, as employees and technicians would need to acquire expert knowledge for hundreds of cell phones, instead of just the handful that most carriers offer.
It’s far from clear that mobile phone exclusivity agreements have made the marketplace less competitive. More dubious still are claims that exclusive agreements are hurting consumers. Were the FCC to declare that exclusivity contracts are somehow anticompetitive, then the effort to benefit a few consumers would result in slower innovation, higher prices, and less overall choice for all consumers. Smartphones in particular, and mobile phones in general, have continued to improve in quality while carrying lower price tags over the last several years, and more options are available today than ever before. Clearly, the industry is doing something right.
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I am a big supporter of most of your ideas, but feel you are way wrong on this one.
Most mobile phones in the US come locked (both so you can’t take them to another carrier or use them for multiple carriers, even if the phone is capable of it, and so you can’t enable built-in features the carrier doesn’t want you to have such as downloading photos). The carriers insist on this, and there’s no reasonable justification for it.
We’d have a better “playing field” with more competition, in my view, if the FCC would issue a “cellular Carterfone decision”. See the complete argument and, if you like, sign the petition at PublicKnowledge.org.
JDG, Thanks for your comment.
My understanding is that the reason phones are “locked” to specific carriers is because the carriers take an initital loss on the phones they sell. Wireless companies have embraced a model of giving us heavy discounts on handsets in exchange for multi-year service contracts. ATT would have little incentive to sell me an iPhone for $199 if I were going to jump ship to T-Mobile after 2 months - they’d lose money. It’s impossible to say whether this is the best business model for all involved, but for now it’s the one we’ve got. It will be interesting to see what effect open platforms like LiMo and Android will have on the wireless comm. industry.
As for certain features being locked on handsets, I agree with you, that’s frustrating. Alltel has made my Motorola RAZR useless for multimedia unless I use they’re own proprietary “app” service (or I could hack the phone, rendering my warranty worthless). I assume this is another way for carriers to recover lost money on the phones. Again, the open LiMo and Android platforms may change this aspect of the game.
The “service” providers have contracts with pricey opt-out charges to prevent customers from leaving before they have re-couped the cost of discounting the phone. If a customer opts-out, they pay for the discount on the phone with the opt-out charge, though I am sure even offering the opt-out option was forced on them by the gov’t.
Sure it would cost Apple extra to develop a CDMA phone for Verizon, but they would sell a ton more phones to all the Verizon customers who are holding out because they don’t want to deal with AT&T’s horrible customer service or questionable service coverage.
Also I would gladly pay more for the iPhone if it meant I did not have to deal with AT&T. After waiting two years for Verizon to get the iPhone, I switched over to AT&T, it has been an absolute nightmare. They lost my order and never even called me back about what happened to it or to apologize and place a new order. I placed a new order with Apple and now had to have it shipped to CA which charged me tax on the full price of the phone instead of the discounted price and AT&T refused to reimburse me even though they lost the original order resulting in the phone having to be shipped out there. Then I looked at my bill and they charged me for service before I even had received the phone.