Carriers, Vendors, Analysts Defend Handset Exclusivity

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New York - Wireless carriers, handset vendors and consumers are the winners when carriers strike deals to offer select handsets on an exclusive basis for a period of time, vendors and carriers claim.

In comments filed with the Federal Communications Commission (FCC), carriers and vendors contend the long-standing practice of offering exclusive products is a best-marketing practice commonly used by many industries. In the case of the wireless industry, it accelerates handset innovation, promotes handset competition, and incentivizes carriers, vendors and participating retailers to launch aggressive marketing campaigns to boost awareness of new products, they said.

In fact, AT&T Wireless contended in its comments, "Virtually every significant wireless innovation reaches U.S. consumers first.''

Counter-intuitively, exclusive deals also help drive down the consumer's price of an exclusive handset, they contend. Exclusivity arrangements usually include volume commitments and guaranteed promotion levels by carriers, helping vendors reduce their risk, defray R&D costs and deliver economies of scale, marketers told TWICE.

As one major master agent told TWICE, "The old way was that manufacturers didn't know which phones would sell well, so their prices were initially high to defray R&D costs." Retailers would also limit their initial inventory of a new phone to wait until the price dropped. The new way, he said, "not only drives costs down but also increases choices."

"Manufacturers do the calculus" to determine the benefit to them of selling a phone exclusively to one carrier or to multiple carriers, the agent continued. Although all of the savings could pass to the carrier's and vendor's bottom lines, he suspects market-share competition forces carriers to pass on some of the saving to consumers.

Key analysts, including TBR analyst Ken Hyers, concur in many of these views. "It's a practice that has befitted operators, and manufacturers and arguably befitted consumers," he said.

Some wireless-industry veterans, however, aren't convinced of the consumer benefit. As an executive for one distributor pointed out, "If availability is more open, it's better for the consumer because they don't have to change networks to get a desirable phone."

The master agent, however, did not view churning to a new network as a major disadvantage for consumers, given the potentially lower cost of exclusive models that offer something distinctive. He also pointed to the diversity of handsets, including exclusive handsets, available from every carrier. "Everyone has alternatives," he claimed.

David Sprosty, a wireless executive formerly with Best Buy and the MobilWorks mobile-electronics chains, agreed that "exclusive products are not necessarily the best for consumers," but "creating awareness sometimes requires an exponential effort," he said. Pointing to AT&T's iPhone and Verizon's BlackBerry Storm, Sprosty questioned whether the carriers would have invested as much in creating awareness if other carriers offered the same models.

Getting scrutinized: Whatever their merits for consumers, exclusive handset deals are under scrutiny by the FCC and, reportedly, by the Department of Justice, which is also said to be taking an initial look at a wide variety of allegedly anticompetitive telecommunications industry practices, including practices by landline and wireless carriers. The FCC solicited comments on the practice but has no timetable for deciding whether to launch hearings to decide whether to ban the practice, a spokesperson said.

The debate arose earlier this year when rural carriers, through the Rural Cellular Association (RCA), complained to the FCC that exclusive contracts prevent them from offering the latest, cutting-edge handsets to consumers. Should the FCC decide to act, however, the impact will extend beyond rural carriers. Regional carriers such as MetroPCS and Cricket and nationwide MVNOs could get quicker access to key handsets. A ruling could also force Apple to offer its iPhone to other U.S. GSM carriers and prevent vendors such as Palm from launching its planned Pre only through a single carrier before offering it to others.

Debate expands: Since the rural carriers complained, consumer groups have piled on to call for the end of exclusive handset deals, as have regional prepaid carriers MetroPCS and Cricket. The organizations include Media Access Project (MAP), Consumers Union, Free Press, Consumer Federation of America, New America Foundation and Public Knowledge. They filed comments on exclusivity and other allegedly anti-competitive practices in conjunction in connection with the FCC's preparation of an annual wireless-market competitiveness report.

In their comments, rural and regional carriers contend that exclusivity periods typically end long after a handset is obsolete. "Many of RCA's member carriers simply do not have access to handsets that are less than two years old - an eternity in the wireless industry," the association said. With equal access to handsets, the rural carriers contend, they would be able to compete better with bigger carriers, generate higher revenues, and pour the additional profits into network expansion and improvements. Only one out of the top 10 selling phones is not part of an exclusive carrier-vendor deal, the association said.

Exclusive deals between T-Mobile and handset vendors have "compromised" the ability of Cincinnati Bell Wireless to get an adequate inventory of 3G handsets using the AWS (Advanced Wireless Services) band, RCA said. That carrier's "ability to deliver advanced broadband wireless services to consumers is severely hampered by the limited number of 3G handsets available using the AWS spectrum," the association said.

"The vibrant competition that these parties claim exists in the U.S. wireless handset market is limited almost exclusively to the nation's four largest national carriers," the association added. Those carriers "can distinguish themselves in the marketplace in a variety of ways - e.g., lowest price plans, best coverage, superior customer service, unique services and features - and still be successful in the marketplace without resorting to exclusivity arrangements."

Rural carriers also assert that handset vendors would prefer not to enter into exclusive contracts but are forced into them because of "the dominant market power exerted by the nation's largest wireless carriers" These suppliers, RCA said, "have told RCA members that they would actually prefer to be able to sell their handsets to as many carriers as possible so as to increase sales."

In the future, the RCA said it's worried that the nation's largest carriers "may decide to steer handset manufacturers to support only the particular frequencies, air interfaces and spectrum bandwidths held by the largest carriers.' As a result, "this could limit the ability of small, rural and regional carriers to deploy these handsets on their frequencies."

A former FCC chief economist, William Rogerson, contended that handset selection helps drive competition among carriers and that exclusivity reduces that competition. "Competition over attributes such as service quality and coverage will be dulled when carriers instead are able to compete by denying their competitors access to handsets and prohibiting their customers from migrating their handsets to a competing carrier," he said in an FCC filing.

Large carriers are in a position to do so, the smaller carriers contend, pointing to the FCC's own statistics, which show the four largest carriers accounted for 92.4 percent of all wireless subscribers at the end of 2007. Large-carrier market power is even higher when considering that Verizon Wireless accounted for more than 55 percent of CDMA subscribers at the time and AT&T Wireless accounted for more than 70 percent of U.S. GSM subscribers, according to comments by regional prepaid carrier MetroPCS.

Innovation without contracts: In its comments, regional carrier MetroPCS also contended that the end to exclusive contracts would not impede product innovation. New devices such as the iPhone and BlackBerry Storm "are a significant driver of customer activation," so "it stands to reason that wireless companies would continue to encourage the development of new devices as a way to attract new customers, whether they were the exclusive provider of the device or not." Carriers without access to such handsets "are disadvantaged."

Vendors will also continue to innovate in the absence of exclusive agreements, MetroPCS contended. "It strains credulity to assume that RIM, for example, developed the BlackBerry Storm due to its exclusive agreement with Verizon Wireless, rather than of its own desire to remain relevant in the wireless handset marketplace and to compete with the iPhone. RIM responded to the iPhone with the Storm because, as a rational market participant, the company recognized the most fundamental of business truths - innovate or perish."

Major carriers and vendors fired a volley of arguments to convince the FCC to leave well enough alone. See How Major Carriers, Vendors View Exclusivity  (MAKE A LINK to 15cellcontracts209)

Also see Retailers See Benefits In Exclusives  (MAKE A LINK to 15cellcontracts309)

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