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Is handset exclusivity really the wireless issue of the day?
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Over the past few months, the government's interest in the practice of handset exclusivity has intensified. On the heels of Congressional hearings in July, Verizon Wireless agreed to dial back its exclusive deals with cell phone manufacturers to accommodate smaller carriers. This week the FCC, which has already begun a review of handset agreements, has made the issue a focus of its regular monthly meeting. But no matter what the setting or circumstances, whenever U.S. lawmakers and regulators discuss competition in the wireless industry, the elephant in the room these days is almost always the iPhone.
Since Apple first gave AT&T exclusive rights to carry its groundbreaking device in the United States, concerns about unfair competitive advantages have become a hot-button issue. Apprehensions increased as AT&T sought to extend the deal beyond the 2009 deadline, and reached a fever pitch when Apple rejected a Google Voice application earlier this summer.
Nonetheless, many both inside and outside the industry question the need for more government intervention.
Indeed, before the iPhone came along, far fewer consumers (or lawmakers and regulators for that matter) cared a great deal about handset exclusivity, because most cell phones were utilitarian at best. According to Nielsen's Mobile Insights report, which surveys 300,000 wireless users every year about their opinions and behaviors, in the third quarter of 2006--a full year before the iPhone launched--"device" was only the seventh most important factor in choosing a wireless carrier. The percentage of respondents on device has since increased from 2.9 percent to 6.4 percent in the first quarter of 2009, yet the category remains in seventh place.
There is no doubt AT&T has benefited from the arrangement. New subscribers between the first quarters of 2008 and 2009 who signed up for "a phone not offered by my carrier" (i.e., the iPhone) jumped from 11 percent to 23 percent, and the company has reported that 40 percent of its iPhone customers switched from other services.
Still, the mobile industry is home to many operators that sell a wide variety of handsets. Currently, there are more than 100 different phones offered by the nation's "Big 4" service providers in their retail store, plus hundreds more from the large carrier's websites and the more than 100 smaller carriers that are operating in the United States.
Even if every handset were required to be accessible across all four networks, only the largest of manufacturers could invest in the infrastructure necessary to produce identical products with different technologies. Neither legislation nor regulation could nor should be expected to change that situation.
It can be argued that exclusivity actually enhances innovation and creates more choice. If, for example, Apple's iPhone or Motorola's Razr were initially available on all U.S. carriers, there would have been minimal incentive for handset manufacturers to create rival products. Though competition would exist, the options would be considerably less diverse.
What is more, the iPhone's significant technological lead over virtually every other smartphone would probably have virtually destroyed the market for the other handset manufacturers. T-Mobile, like several other carriers, would have had less reason to invest in the development Android-based devices. Palm would not have been able to build the Pre and sell as many as it did in the first few weeks without the support of Sprint. In fact, Palm would have likely died without the Centro, which was custom built for Sprint under an exclusive pact that has since expired.
Beyond the iPhone's distinct technological advantages, AT&T's infrastructure would almost certainly limit competition as well. Early on Apple had decided to build its phone on a GSM technology path, the most popular standard for mobile phones in the world. But in the United States there are but two GSM networks--AT&T and T-Mobile. Were the iPhone originally available on both, consumers would pick their carrier based largely on price and coverage. Since pricing can be easily matched, T-Mobile's nascent footprint would have a hard time going up against AT&T's more built-out network.
In time--perhaps as early as next year--Apple likely will drop its AT&T exclusivity and build an iPhone in the U.S. that can be used across other wireless technologies. That is about to happen in Europe, where the company is reportedly moving away from exclusive deals because it can now derive greater profitability by not having restricted relationships with only single providers. At that point, new and current iPhone users will migrate to carriers that make that the most sense for them--still driven by the factors other than "device."
Roger Entner is senior vice president and head of research and insights for the Telecom Practice of Nielsen. For ongoing insights from Nielsen on this and other topics, visit NielsenWire.com.
More stories about Wireless Carriers Verizon Wireless roger entner Regulators iPhone Google handset exclusivity
Comments
Posted by Anonymous | August 27, 2009 - 11:32am
Excellent article, finally a voice of reason on this issue.
Posted by Fred Stein | August 27, 2009 - 12:56pm
Agree a voice of reason. And to add to the reason.
There is a major logic or math flaw to the gripe about exclusivity. AT&T is second largest carrier. Eventually, Apple will provide the iPhone through other carriers to reach a larger market.
Much as I hate to take AT&T's side (we all have sob stories about issues with them), they have to make large investment (equipment and spectrum) to support the iPhones; and they have to pay Apple a hefty premium for the iPhone.
Posted by Peter | August 27, 2009 - 1:39pm
You bring up some good points, but I disagree.
The interesting question here is do you have a market for "phones" AND a market for "phone networks" or is there one market, "phone service."
You basically say there is only one market, "phone service," and the battle exists between AT&T, Verizon, T-Mobile, Sprint, West Central Wireless, Cross Telephone Company, etc. These companies compete against each other using whatever they figure will attract customers to their network. Fancy phones, interesting services ("Watch the NFL...on your phone!"), prices, availability, etc. etc.
The downside, of course, is that if you create a phone, you have to deal with the "phone service" people in order to sell it. Apple dealt with Verizon, for example, but Verizon wanted too much control. Apple started dealing with Cingular but then they got bought by AT&T. Now, Apple is a giant corporation, as is Verizon. What chance does a smaller company have?
This is why I don't like the idea of a "phone service" market. I'd rather see two markets exist: phones and network--much like the way that the land-line market exists. Can you imagine Verizon not allowing certain phones on a land-line? Can you imagine having to go to an AT&T store to buy a phone for your house? It's "Ma Bell" all over again...
When the iPhone came out, Americans were astounded by it and amazed at it's capabilities. The funny part is that most of the rest of the world had cell phones that were just as capable--if not more so--than the iPhone. We'd never heard of them because no network in the US chose to offer them.
(Not a bust on the iPhone--the iPhone actually made those features usable, versus most other companies that were just adding useful feature after useful feature into a mish-mash of horrible UI.)
So, I don't agree with any kind of exclusivity. I have no problem with AT&T selling phones. I have no problem with AT&T selling iPhones. I don't even have a problem with AT&T selling iPhones for $199 with a two-year contract. But I should be able to go to Apple and pay $599 for an unlocked iPhone and use it on any compatible network I want to.
Posted by JFirestone | August 27, 2009 - 4:16pm
I disagree with Roger Entner on one point he has:
"Even if every handset were required to be accessible across all four networks, only the largest of manufacturers could invest in the infrastructure necessary to produce identical products with different technologies. Neither legislation nor regulation could nor should be expected to change that situation."
I completely disagree with this statement. If you look at the technology inside a handset these days, multiple types of networks are available inside the guts of each handset, and in many cases it's as simple as having a configuration available inside the phone that unlocks the ability to connect. It is well within the power of any handset maker to ensure the 4 major networks and their technology is available. There's no real retooling to be done.
As for access, it would be easy for the Feds to say if you set up a tower, it has to be available to the three major network transmission bands and at least two emerging ones (4G, etc), so long as the companies who wish to come aboard rent access to the tower -- and that tower be accessible at a reasonable price.
Regulation should be the order of the day here, because frankly we need what Peter's suggested, which are device makers making devices and network carriers carrying networks. Now functionality is critical to all involved, otherwise why buy a phone or why use that network.
The devices we use should be completely independent of the data and voice transportation. As for how to tie all that great functionality in, we need a middle ground, a way to link up the network layer to the devices and vice versa. It should be a configuration you download from the network via a standardized interface you have on the device. When I buy my phone I should be able to go to AT&T's Website and get the latest configuration that applies to the network access level I purchased. Once I have that, I'm good to go...If I want to change networks because I want features available on that network, I should be able to cash in my contract at the end of the month, and swap networks and keep my device.
The device should just need to be given the new configuration.
This is not hard and the basics are available on most of today's devices.
Requiring this kind of thing by law and regulation isn't going to be a hardship for these companies and most of them are already considering simplifying the processes anyway so they don't have to reconfigure the world for every new device, or every new network type. But something needs to be done along these lines soon, because the networks aren't playing nice and haven't been for a long time.
Posted by Anonymous | August 27, 2009 - 7:15pm
Roger put a good article but how can he argue for innovation and at the same time promote an exclusivity of the iPhone with ATT under the pretense that it protected the iPhone competitors?
If the iPhone had been available on all networks (assuming all the technos and bands were supported), then the Apple competitors would have had to innovate even more to put different devices on the markets, not just iPhone-like devices with another exclusivity.
Availabilty of devices on all networks will be hard to achieve because of the different networks and bands. Exclusivity is just making it impossible on top of it. This is just more control to the large two operators. They can subsidize their services to intice users into two-year contracts and let users select the best device and the best service!
It seems to me that the more the carrier control the devices, the fewer models of devices a region has. Let's look around at Europe and Asia.
Posted by Anonymous | August 28, 2009 - 1:44pm
As a consumer, i don't care which carriers make the most money. We, as consumers don't give a damm who make the most profit...the bottomline is, this exlusivity hurt consumers...and that's is NOT GOOD from a consumer stand point. I rather see iPhone available to all carriers.
Posted by Anonymous | August 29, 2009 - 11:18am
Isn't it strange that the "Land of the Free" seems to have the most restrictions on what you can buy from whom? I'm not wanting to buy a gun and ammunition from a vending machine, all I want to do is have the power to choose my phone and provider separately. You don't have to put Ford Gas in your new Mustang, and the fact that Ford made the new Mustang didn't keep GM from making the new Camero. So I'm not buying the fact that exclusivity breeds innovation and competition.
I mean, Nokia didn't throw their hands up in surrender when the iPhone came out, and they both use AT&T and T-Mobile (in the US). And remember, all these phone manufacturers are successfully competing and innovating in Europe and Asia, where phones and services are sold separately.
Posted by Bill King | August 31, 2009 - 11:22pm
The time has come where the FCC should establish policies that would lead to "Real-Time Phone Number Portability". Under such a wireless marketing ecosystem, long term wireless contracts would give way to realtime choices as to which wireless network the consumer may wish to patronize for any given time period and empower the consumer to change carriers on the fly should for example connectivity in a certain location be lacking in quality.
Posted by Chris | September 1, 2009 - 7:44am
I have felt trapped since I first bought my Iphones 3 years ago. ATT knows they have a monopoly and do very little to help there customers with issues. My first generation iphone was stolen I contacted ATT 4 different times to ask if it could be traced. I was told no they had no way to do that. It seemed funny that I could travel accross the country and the gps mapping knew exactly where we were at the entire trip. But ATT could not track my stolen iphone. After 3 days with no help I went and bought the new 3g. As soon as I signed the contract for 2 more years the sales person tells me, "oh you can track your stolen phone thru your mobile me account. That is if we had not already deactivated the sim card". They are not in the business of customer service just selling iphone's and new contracts. I hope in 2 years I will be able to take my iphones and money somewhere else.
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