Carriers, Vendors On Exclusive Handset Deals

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New York - In their comments to the Federal Communications Commission (FCC), carriers AT&T, Sprint, T-Mobile, and Verizon Wireless joined BlackBerry maker Research In Motion in calling exclusives beneficial to the market.

The carriers also contend the FCC has no legal authority to ban exclusive contracts, which are also endorsed by the Telecommunications Industry Association (TIA). TIA's members include handset vendors.

Carriers and RIM cite these benefits:

·         Exclusive deals provide incentives to carriers and vendors so they will invest jointly in developing innovative devices. Carriers contribute to the development costs of exclusive handsets and will be less likely to do so if their competitors get the handset at the same time that they do. At the same time, exclusives encourage vendors to develop sophisticated handsets because vendors reduce their development expenses and get assurances that the device will be promoted heavily. Without exclusive contracts, "manufacturers might well invest much more conservatively, focusing exclusively on incremental advances that are much less costly to engineer, and therefore present less risk, but fail to maximize consumer benefits," RIM said.

·         Prices of select handsets could go up. Exclusivity arrangements usually include volume commitments and guaranteed promotion levels by carriers, helping vendors gain economies of scale and savings -that can be passed onto consumers.

·         Exclusive phones have enhanced competition. The exclusive launch of the iPhone on the AT&T network provided incentives to Sprint to launch the exclusive touchscreen Instinct and Verizon to launch the exclusive touchscreen BlackBerry Storm. In fact, the U.S. leads the world in the number of available touchscreen phones and QWERTY-keyboard phones because of carrier demand, carriers said.

·         U.S. CDMA carriers need to incentivize vendors to build iconic phones for their wireless standard. Otherwise, handset vendors will focus on developing cutting-edge models for the GSM standard, which dominates the world. The sale of the BlackBerry Storm exclusively through Verizon marked the first time that a CDMA BlackBerry hit the market before a GSM version, TBR analyst Ken Hyers told TWICE. The volume guaranteed by an exclusive CDMA handset deal will also generate economies of scale that could make their pricing more competitive with GSM models.

·         Exclusivity contracts help small handset makers innovate. These vendors might not be able to launch a major innovation effort without the assistance of major carriers, T-Mobile said.

Also in their defense, large carriers and handset vendors point out that:

·         Periods of exclusivity aren't that long. Exclusivity periods last anywhere from 90 days to 12 months, but they typically end after only six months. One exception is the iPhone, launched in 2007 with "multi-year" exclusivity on the AT&T network, AT&T announced at the time.

·         Small carriers benefit from larger carrier's investments in developing exclusive handsets. In the "vast majority" of cases, T-Mobile said, small carriers "obtain access to new handsets either immediately or, at worst, after a relatively short period of just a few months."

·         Exclusive contracts seed the market with AWS-band handsets. Small carriers don't have the customer base or resources to motivate a supplier to build phones for the AWS band, but AWS-band carrier T-Mobile does.

·         Small carriers could combine their buying power to win their own exclusives. Tier 2 and 3 carriers did that in 2005 to bring one of the first music phones to market, and they could do it again, T-Mobile said.

·         Small carriers and MVNOs, not just the big four carriers, sell exclusive handsets. The MVNO handsets are customized "to meet the needs of their customers and to reflect their distinctive brands," T-Mobile said.

·         The handset market has grown increasingly competitive. Today, more than 40 companies market more than 620 wireless devices in America, T-Mobile said.

·         Rural carriers have plenty of choices. They offer more than two hundred different handsets, including many with touchscreens, Bluetooth, Wi-Fi and Internet browsers, said AT&T.

·         Rural carriers just want government protection from competition. "The petition and its supporting comments are unabashed pleas for a narrow protectionism that would interfere with functioning markets merely to provide highly dubious short-term benefits to a few carriers," AT&T's comments said.

For their part, TBR analyst Ken Hyers of TBR and Precursor Group analyst Scott Cleland dismiss the rural carriers' complaints. Hyers asked, "Will a car dealer in rural Alabama get the first new Porsches? It's not going to happen because the market isn't large enough." Similarly, rural carriers don't have a large enough customer base to get the first whack at a new products, he said.

Said Cleland, "No wireless carrier that wants to stay in business will commit to and execute a big, expensive national ongoing marketing/advertising campaign to sell a high-end smartphone if every one of their competitors could sell the latest smartphone at the same time and profit off the expensive marketing/advertising campaign as free riders."

"The standard and legitimate marketing practice of marketing exclusives," Cleland continued, "results in vastly more combined - manufacturer and carrier/distributor - marketing resources (hundreds of millions of dollars in advertising annually) to drive more sales and growth in this segment than the manufacturers could afford to do by themselves."

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