iPhone

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.