US telecommunications regulator, the FCC has been asked by a group of US Senators if it can look into whether or not exclusive cellular handset provisions in the US are in the interests of consumers.
The complaint originates among local cellular operators who supply cellular services where the big networks, AT&T, Verizon, Sprint and T-Mobile do not reach. But the concern is for where those markets do in fact overlap with these big guys, on the edge of their networks.
Local customers are in effect being told ‘ if you want to get an iPhone or a Palm Pre you have to move network ‘ but the only reason for the mass exodus to AT&T in these areas may well be the iPhone, and the only reason that has come about is because these networks have national coverage (give or take these few pockets) and so have the reach to attract exclusives.
The exclusive deals were initially considered a backward step when they were introduced by Apple and AT&T, but have been copied widely ever since. Most exclusives are for a brief period, say three or 6 months, and customers can hold out for the exclusivity term and then pick up the new phones – but in the US AT&T has been exclusive with Apple for around 18 months. This has been a bit of an historical accident, and may not be sustainable.
Apple wanted a guaranteed US customer in order to annex the US market and give it a chance against major handset makers like Nokia. The bigger handset makers have a reputation of not allowing exclusives, or if they do, not for long, because no-one offers them enough captive revenue. Nokia for instance ships 100 million devices each quarter globally ‘ more phones than AT&T has live. So Apple was smart to nail down such a deal before it came to market, and now everyone wants to copy it.
But it is unlikely that any new device is ever going to be quite as popular as the iPhone ‘ it came along at a time when all the handset vendors were considering a leap into touch screens and integrated multimedia and App Stores, but were afraid to leap ‘ by making that leap and getting there first, Apple has triggered copycat efforts and the technology race in handsets has been renewed. So you can pick 5 different handsets from different vendors which today are just as good as the iPhone, except for the App Stores, and in about 9 months, they will even match it there.
This doesn’t only affect companies which make up the tiny local incumbents with under 250,000 customers, but also the next tier of US cellular operators such as Qwest, Ntelos, US Cellular, Leap, MetroPCS and Cincinnati Bell, as well as MVNOs such as Virgin Mobile. None of these has more than 7 million customers and could never attract a major handset as an exclusive. Which is why they are slowly falling to the major four operators.
The letter to the FCC came from four members of the Commerce Subcommittee on Communications, Technology and the Internet, who wrote to acting chairman Michael Copps.
The Rural Cellular Association web site has a copy of the letter and it raises some very good points.
Anti-trust happens when a dominant force in an industry uses its weight to get itself an unfair advantage in another market. It’s tough to tell if that it happening here. In the US this means that rural providers are safe in areas where the tier 1 cellcos do not operate, but since their only chance of growing is to deliberately buy spectrum which overlaps the major’s and extends their territory. If they do not grow, they are sitting ducks for acquisition ‘ creating bigger dominant players and distorting the market further. And yet in those areas of overlap any given rival is not entirely dominant ‘ they usually have one of the other 4 major’s to contend with ‘ although none of them have true nationwide coverage.
Collectively the rural group could get together with some of the other tier 2 and tier 3 cellcos and create a buying club and bring together a decent handset exclusive, which would go out to a substantial portion of the US cellular market ‘ such a deal could potentially reach around 25% of subscribers if every small cellco in the US agreed to use the same phone ‘ but of course such a deal would never work in practice and besides they would be a disparate group of brands, and there would be no concerted brand push behind the phone.
One of the key questions the Rurals raise, is whether exclusivity agreements play a role in discouraging innovation within the handset marketplace. This is almost humorous since it is the brave innovation of a newcomer that has created the drift to AT&T in the first place AND a huge number of copycat phones. So the answer to this one is no, at least not so far.
There are two things to consider, will the market correct itself and what would the remedy be if some the FCC found in favor of the complaint.
Eventually there will be lots of touch phones, with App Stores and PC tethering capability and multimedia integration and they can’t all have exclusives. So yes the market is self correcting while there remains competition in the global handset market. Also if Apple thought that AT&T was doing too well out of its deal, it would have to ask itself if other tier 1 players would make it even more money. If the iPhone had that much appeal, then Apple would be better off NOT turning AT&T into a dominant force, but opening its devices up to the rest of the world.
And as for remedies and a ruling, the best outcome for this group would be that it is fine for AT&T to be allowed to have exclusives against its big four rivals, but that such deals should only apply to those rivals and that companies with less than 1 million customers (or a different number like 7 million) could not be prevented from doing a deal with the same supplier. But we’re not sure there is any legal basis for such a ruling, a deal is either exclusive or it’s not and what about all that network tuning etc.. and the deal at AT&T has been done on the basis of long term new customer acquisitions ‘ so how would it be unraveled ‘ who would give who back money out of Apple and AT&T, and would customers be entitled to sue, because they paid in good faith believing they could not get the device elsewhere.
In Europe these exclusives are a different thing. Sure Apple got some of its US terms agreed, but not all of them, and some courts, notably France, have already said that exclusives are not allowed. Most European exclusives are for introductory periods and the operators there accept that the market balance can only be out of alignment for a short while ‘ six to nine months at best and then it turns out that you have agreed to terms which are onerous and a rival has a new phone which is just as good ‘ but without the onerous terms. This is because it is genuinely competitive.
Although we are always on the lookout for anti-trust, and probably see it in the shadow of most major operators, the right solution for smaller purchasers is to get Verizon or more likely Sprint to cut a deal which adds their purchasing power to the table alongside one of the majors for an exclusive, in a pincer movement that is structured to dent AT&T.
If AT&T can draft Apple onto its team, then why can’t the rural cellco incumbents throw in their lot in a combined deal, perhaps involving cheaper data roaming, on a device which offers the same kinds of capabilities and which helps an AT&T rival. A leopard or two might have to change its spots, but commercially it should be viable.