What would happen if exclusive handset deals were outlawed?

Much to the vexation of the big operators, the federal government has begun raising questions about potentially anticompetitive business practices in the wireless industry. Congress, the Department of Justice and the newly revamped FCC are all in various stages of diving into the issue--and not surprisingly market leaders have responded with vehemence.

Critics of the industry have raised a number of concerns over the past few months, from the cost of text messaging to the increasingly commanding position of Tier 1 operators. But one gripe seems to have struck a cord among market players and industry pundits: exclusive handset deals.

Such agreements, inked between a carrier and a handset maker, essentially bar other carriers from selling a specific phone for a specific period of time--sometimes six months and sometimes, in the case of the iPhone, more than three years. These deals typically involve a high-end handset, a substantial subsidy on the device from the operator, and a major marketing push from either the operator or the manufacturer or both. Some of today's more notable exclusive handset agreements include the Pre deal between Sprint Nextel and Palm, the BlackBerry Storm agreement between Verizon Wireless and Research In Motion, the G1 arrangement between T-Mobile USA and HTC... oh, and that iPhone thing. Each of these deals has resulted in significant industry buzz and, for all but the Pre, more than 1 million device shipments. (Don't fret, Palm: Forecasters expect the Sprint Pre to reach that milestone within the next few months).

But those are just the exclusives of today. Such arraignments have been a key element of the wireless industry for the past decade; indeed, there was debate around Motorola's distribution of its StarTac phone in 1996 and AT&T had an exclusive on the Motorola Razr in 2004.

And wireless isn't the only industry where exclusivity resides. AT&T spokesman Mark Siegel noted, for example, that McDonald's sandwiches aren't available at Burger King.

Despite such mouth-watering analogies, there remains Senate hearings on the issue, a potential investigation by the DOJ and promises to review the issue by the newly confirmed FCC chairman. The concerns arise from arguments that consumer choice is limited by the deals, a situation that potentially stymies industry competition.

Whether you agree with the validity of exclusive handset deals or not, the question remains: What would happen if the government acts on critics' concerns and outlaws exclusive handset deals?

The arguments

AT&T, the carrier that has the exclusive deal for the iPhone and the operator that has to date most vigorously debated the issue, says that exclusive deals are good for the industry. "These exclusives encourage collaborations" between carriers and handset makers, said AT&T's Siegel, echoing recent, similar comments by carrier executive James Cicconi. "This is a system that has worked."

Siegel said exclusive handset arraignments spark innovation between carriers and handset makers, thereby pushing newer and more inventive phones to market. And such deals also force competitors to respond. "There were dozens of smartphones designed in direct response to it (the iPhone)," Siegel said.

Although Siegel strongly declined to speculate on an industry bereft of exclusive handset deals, his arguments for the practice essentially stand as a warning of what would happen without them...Continued.

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