Thursday, June 18, 2009 - The Progress & Freedom Foundation Blog

iPhone Envy

In testimony presented yesterday during a hearing on "The Consumer Wireless Experience" before the U.S. Senate Committee on Commerce, Science, and Transportation, I stated that wireless exclusive handset arrangements promote, rather than suppress, competition. Because both the wireless services markets and handset markets are robustly competitive and showing no evidence of market failure, neither Congress nor the Federal Communications Commission should seek to prohibit such arrangements.

The hearing came approximately one year after a group of rural cellular carriers filed with the FCC a Petition for Rulemaking, asking the agency to investigate and outlaw exclusive handset arrangements between wireless carriers and equipment manufacturers. At the time of its filing, my colleague Berin Szoka and I penned a piece entitled, "Exclusive Handset Prohibitions: Should the FCC Kill the Goose that Laid the Golden iPhone?" The Rural Carriers Association argued in its Petition that the exclusives were the result of the exercise of market power by the "Big 4" wireless carriers and that such exclusivity is anticompetitive and limits consumer choice. Unfortunately for RCA, we noted, "it was Apple who sought its exclusive arrangement with AT&T (then Cingular)--not the other way around."

My testimony updated and elaborated upon the points made in the earlier piece. I counseled against government intervention on the grounds that the wireless service and handset markets are quite competitive, and that the dynamic created by the exclusive arrangement between Apple and AT&T that produced the iPhone allowed the two companies to bridge the gap between the technologies of today and the disruptive innovations of tomorrow. Moreover, it is undeniable that the breakthrough success of the iPhone has spurred a wave of competitors. If every wireless carrier had been able to sell the iPhone when it was initially released, I noted, it seems unlikely there would have been as much carrier support for developing competing products like the Google G1, RIM Blackberry Storm, Samsung Instinct or Palm Pre.

In support of my conclusions, I referred lawmakers to evidence in the FCC's most recent Commercial Mobile Radio Services Report and industry data which illustrates there is healthy competition in the wireless services and handset markets. The typical exclusive handset agreement grants the carrier an exclusive distribution right for a particular handset model or set of features for a limited period of time. Exclusive handset arrangements, I explained, augment this competitive mobile environment by allowing manufacturers to quickly bring new products to market and creating incentives for carriers to heavily promote and subsidize the costs of the handsets. A guaranteed minimum order from the manufacturer, another common feature of such agreements, can remove some of the risk associated with a new product offering, thus permitting riskier and more innovative designs. Such agreements also allow experimentation with new business models.

Prohibiting exclusive handset arrangements would likely only harm consumers, without significantly benefiting competition in the wireless market. A prohibition on such arrangements would effectively require each handset manufacturer to develop versions of each phone that would operate with every network technology, thus increasing costs and decreasing product differentiation. Because handset differentiation is a key means of attracting customers in an almost completely saturated market, prohibiting exclusive agreements would force carriers to compete on price alone, making a return on network investment more difficult. Eventually, this could lead to one or more of the current providers exiting the market. In other words, prohibiting exclusivity would likely lessen, rather than enhance, competition and consumer welfare. Even setting limits on the terms for exclusive arrangements, while less disruptive than an outright prohibition, would entail difficult decisions over exactly what the permissible period of exclusivity should be.

In my testimony, I stated that "If the FCC prohibits the exclusive partnerships between manufactures and carriers that make it possible to master the technical challenge of device innovation and to finance such risky ventures, all Americans will miss out on the dramatic benefits of innovation and increased mobility of Internet access."

After charting a "light touch" regulatory course for wireless for the past sixteen years, it would be a shame if policymakers were to let a rampant case of "iPhone envy" dictate regulatory policy for the one sector of the electronic communications industry long held up as the "poster child" of the successful "de-regulatory, pro-competitive" regulatory framework established by the FCC.

posted by Barbara Esbin @ 3:15 PM | Capitol Hill , Communications , Wireless