Wireless industry is anticompetitive? Not so fast

Concerns over the wireless industry's "competitiveness" are heating up once again. The centerpiece issue is handset exclusivity, but there are broader concerns about the industry's structure, such as the size and scale of the major operators and the commonplace "subsidy for contract" practice. FierceWireless Managing Editor Mike Dano's piece a week ago opened up a good debate on this issue, so I thought it might be idea to get into this a little further, particularly given Verizon Wireless' move Friday. (Interesting strategically: pro-active and conciliatory to smaller operators, while at the same time firing a shot across the bow at AT&T and Apple as they consider extending their three-year exclusivity agreement for the iPhone.)

Let me start by saying right up front that I don't think the government has a good case. First, the departure point of many arguments is the 1968 Carterfone decision, which required that the Carterfone and other devices be extended to the AT&T network as long as they "did no harm," thus opening the market for customer premises-owned equipment. Does Carterfone apply to wireless, and by extension, the iPhone and other devices? Wireless is still considered by the FCC as a "commercial mobile radio service," and thus does not fall under the same requirements (such as providing universal service) as the PSTN. Additionally, we should recognize that all cellular phones, no matter the OEM, brand, or network, do offer core functionality--you can make a call, send a text, and in most cases, access content. I do not think the "spirit" of Carterfone applies to visual voice mail, app stores, or other aspects of the mobile "experience."

Second, our industry is healthy and competitive, and its performance is over-indexing most other sectors of the economy. Why mess with it? Sure, there has been consolidation among the operators. AT&T and Verizon have leapt ahead of the pack, size-wise, but consumers still can choose from among four and eight operators in nearly every market, if regional providers and larger MVNOs (Virgin Mobile USA and TracFone, for example) are included. The same cannot be said for related industries--cable, broadband Internet, fixed line and any utility you can think of. We are also now leading much of the rest of the world in many aspects of the customer experience: Wireless voice prices are among the lowest in the Organization of Economic Cooperation and Development; we have three, and soon to be four, national 3G networks; and the tide of innovation--handset design, user interface evolution, apps, content, location services, you name it--has shifted in this direction over the past few years. As for scale, this is in part the government's own making: The FCC is happy to extract the maximum amount possible in spectrum auctions, then it questions the "size" of the operators who spend tens of billions of dollars to buy spectrum and build the world's most advanced networks before they start collecting the first dollar of revenue. That is why we don't have, for example, Google, AOL or Comcast "wireless" (or Joe's Wireless for that matter).

Third, we must recognize that competition has changed in the past few years. Where once the value proposition centered around network coverage and price, the device has become a much more important part of the decision factor, particularly in an era of 85 percent-plus penetration and nickel-a-minute wireless service. If handset exclusivity was outlawed, what would be the primary differentiating factors? Note, too, that wireless operators are among the country's largest physical retailers--they gotta have something to draw customers into stores and to talk about in their tens of billions of dollars in annual ad spend.

Fourth, there are numerous examples of exclusivity arrangements in other, related, industries. Take TV. If I want the NFL Network, I have to subscribe to DIRECTV. The new Red Sox On Demand channel is only available to Comcast subscribers, not FiOS or RCN. Some TV shows are available on iTunes but not Hulu. Certain video game titles are exclusive to particular game consoles. Yes, I can go to the Web on either a PC or a Mac, but I can't use Safari or iPhoto on a Windows machine and conversely many applications and titles available on the PC are not available on a Mac. Some consumer electronics brands are available exclusively at Best Buy. And so on.

Fifth, and most importantly, I can't imagine how a mandate banning handset exclusivity would actually be implemented. The slope gets slippery very quickly. First is the blurry distinction between device and experience. Would the government's requirement, let's say for the iPhone, apply to visual voicemail, or other aspects of the user experience that might be customized or optimized for a particular operator relationship? Would a popular iPhone app have to be made available in the BlackBerry and Ovi app stores as well? Second, to whom would this requirement apply--the operator or the OEM? Would Nokia be required to make CDMA versions of all of its handsets so Verizon and Sprint could sell them? Would all devices be required to work across all spectrum bands? It's great to use the iPhone as a lightning rod for this conversation, since it's a device that a lot of people want. But what about a niche device (such as the G'zOne mil spec PTT phone), or one where Operator A believes there's a good market and Operator B does not? And what applicability would this have at the operating system level, given that we have ten different device operating systems--some tightly linked to the device (iPhone, BlackBerry, Pre), others less so (Windows, Symbian, Android)?

 A further question is whether the government's attempt to "level the playing field" would extend to the price of the device. Smaller operators are frustrated that they can't get devices for the same price as larger operators. While I am sympathetic to this issue, it's no different than in other industries. Home Depot will get that hammer from the supplier at a lower price than the corner hardware store.

Finally, a few words on the handset subsidy issue, which some have argued is part of this industry's "monopolistic practices." If we were to start the wireless business model from scratch, and with the benefit of hindsight, I'm sure that many operator executives would eschew the subsidy model. But let's face it--this is a credit society. Even though there are many more non-subsidy options than before (graduated termination fees, more prepaid choices, clear disclosures of and ability to buy at full retail price), consumers are sticking with the subsidy model for desired phones. And there are tradeoffs with any alternative pricing models, whether it's 0 percent financing or free TV. The pace of innovation in mobile devices is faster than a lot of other industry sectors (PCs, game consoles), hence our sub-two-year average handset replacement rate.

So, a note to the Congressmen and Commissioners: Our industry is not perfect, and there are legitimate, understandable concerns with our business model. But before expending too many calories on the antitrust issue, I'd urge regulators to step back and consider the health, competitiveness, rate of innovation, and level of customer satisfaction of the wireless industry compared with other, far more troubled sectors of the economy.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is managing director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter. Lowenstein will also be hosting a webinar on wireless industry trends Aug. 13 at 2 p.m. EST.  David Barden, Managing Director at Bank of America Merrill Lynch will join Lowenstein for this can't miss web event. Register today.