Responding to concerns expressed on Capitol Hill this week concerning exclusive arrangements between the cellular industry's biggest carriers and handset manufacturers, acting Federal Communications Commission Chairman Michael Copps said Thursday that he has instructed the FCC's Communication Bureau to begin crafting an official investigation.
"The commission as the expert agency should determine whether some of these arrangements adversely restrict consumer choice or harm the development of innovative devices, and it should take appropriate action if it finds harm," Copps said. "In the fast-changing wireless handset market, we must ensure that consumers are able to reap the benefits that a robust and innovative competitive marketplace can bestow."
According to Sen. John Kerry (D-Mass.), the question at the heart of the exclusivity debate is whether the practice "is better or worse for competition, for innovation, and for the American consumer if the carrier controls the decision over what devices can and cannot operate on their network." He added, "I think the Commerce Committee should consider how the wireless industry is functioning and whether current practices are in the best interest of competition and the consumer."
AT&T defended its exclusivity deal for Apple's iPhone before the U.S. Senate Subcommittee on Communications, Technology and the Internet on Wednesday, saying that such arrangements encourage the necessary collaboration that accelerates the delivery of next-generation features and leads to optimal handset performance.
"They increase a carrier's incentives to make purchase commitments and to invest in promotions, network improvements, and special training of sales staff," said Paul Roth, president of retail sales and services at AT&T Services. "They lower manufacturer entry barriers and serve as a key tool to maintain brand value and, as an important form of competition, they encourage other carriers and manufacturers to do better by improving their own handset portfolios or the prices, features and other characteristics of their existing offerings."
However, regional wireless carriers such as U.S. Cellular and Cellular South say there are many areas in Alaska, Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, Oregon, Vermont, Washington, West Virginia, and Wisconsin that aren't currently being served by AT&T, Sprint Nextel, T-Mobile or Verizon Wireless. "In rural areas, where none of the Big Four carriers offer service, their exclusive handsets are simply not available to consumers at any price," said U.S. Cellular CEO John Rooney.
The Downside for Consumers
Cellular South CEO Victor Meena told the Senate subcommittee that exclusivity deals have become so prevalent that nine out of the 10 most popular handsets recently were being offered exclusively by one of the Big Four carriers. "It is ultimately the consumer who pays the price for not having access to the devices necessary to use mobile broadband services," Meena said.
Still, AT&T argued for maintaining the current business and regulatory framework, which it said allows service providers and device manufacturers to partner and share the risks involved in the development of compelling devices featuring innovation, lower prices, and choice. "Calls for the government to dictate the terms of contracts for handset distribution between device manufacturers and carriers should be rejected," Roth said.
But Penn State University telecommunication law Professor Rob Frieden disputed the notion that handset exclusivity arrangements provide the benefits that AT&T claims.
"Understandably, wireless carriers need to recoup subsidies in handsets and to offer new services, in addition to offering the basic commodity of wireless transmission time," Frieden said. "But when carriers and handset manufacturers can readily implement strategies to lock down handsets, and to lock out consumers from competing services and features, the potential for Swiss Army knife versatility in handsets diminishes."