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Exclusivity Agreements for Cellphones: Support Free Markets

By: GregInFla (Diary)  |  September 3rd, 2009 at 12:10 AM  | 

RESIZE: AAA

Parade.com had an article in this past Sunday’s magazine discussing exclusivity agreements between cell phone manufacturers  and cell network providers.

Some lawmakers and industry experts say such arrangements limit consumer choice, stifle competition, and keep rates artificially high. “Consumers should be allowed to access any network with whatever device they choose, just as they do with their televisions and computers,” says Rob Frieden, a law professor at Penn State University.

It is ridiculous to compare cellphone networks, which are built and maintained by the network provider, to over-the-air television signals and the internet. Companies use the exclusivity agreements to provide better service at a lower price to consumers. For example, Apple gets some payment from AT&T for each iPhone customer they get, and AT&T gets a good set of customers and a better economy of scale. Consumers get an iPhone and plan at a lower rate than they otherwise could get. And if they are not happy, sonsumers get get another cellphone from a different provider. It even quotes Sen. Kerry (who served in Viet Nam, as Rush says):

The Federal Communications Commission is investigating whether exclusivity agreements “restrict consumer choice or harm the development of innovative devices.” Sen. John Kerry (D., Mass.) is considering legislation to ban such agreements.

The poll on the page was at 87-13 against the free markets, and for government regulation. Please go to the Parade article and tell them your opinion. Ignore the comments; they are quite predictable in content.

Thinking about this further, perhaps John Kerry would support getting rid of all exclusivity agreements. Erick spoke about one such agreement yesterday. Unions restrict the choice for consumers of labor, those, of course, being businesses who hire people to do things. These restrictions cause increased costs, and thus must also be on Sen. Kerry’s hit list.

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  • vettepilot

    But first, a disclaimer. I work in this industry and have first-hand knowledge of contract negotiations (master agreements that define the relationship between carriers and suppliers) and subsidies.

    The problem with exclusivity agreements is that they are intrinsically tied to subsidies, and those subsidies are what distorts the market. One of the principles of a free market is the ability for a consumer to attach a value to the specific product or service they are purchasing. With cell phone subsidies, it is nearly impossible to de-link the cost of the handset from the cost of the service. To the consumer, the phone costs $149 and the service costs $30/month. Only it doesn’t… The phone actually costs $299, but the carrier eats $150 of it, and the service actually costs $20/month but the carrier chargers the extra $10/month to recoup the cost of the handset. They’re willing to take a loss on the cost of the phone because they know they’ll make it up in monthly fees over the course of your contract (which is why AT&T requires a data plan with the iPhone). Voila! Distortion of the market…

    And just to debunk a couple of misconceptions; in some regards it is exactly like television and the internet… The over-the-air portions of television are run very similarly to wireless telephone providers. The service provider licenses a portion of spectrum, and then is allowed control over the content that is broadcast. Much like how the carrier builds the wireless network, the television station is responsible for building the transmitters.

    The internet is no different. Heck, go look at who owns the backbone here in the US; AT&T and SBC (SBC=Verizon) are two of the key players. The difference is that on the fixed-line internet side the providers can and do compete based upon their service offerings, things such as price, bandwidth, their home portals, etc. Do you have any idea what differentiates Verizon Wireless from AT&T Wireless from Sprint-Nextel from T-Mobile? I would guess that most don’t know that Verizon uses a CDMA 1x/EVDO network, while TMO and AT&T are GSM/EDGE/UMTS based, and Sprint-Nextel uses both CDMA and iDEN. But everybody knows that AT&T has the iPhone. How then are the carriers competing? Product offering and price. Which brings you back around to exclusivity…

    With regards to freedom of choice/mobility in the market, exclusivity and subsidies make sure that doesn’t exist either. Because they offer you a subsidy on the device, the carrier has to make sure that you’re going to stick around long enough for them to recoup the loss they took on selling you the phone. Hence they lock you into a contract and charge you an ETF if you bolt early.

    It’s an interesting industry to be in with a very difficult dilemma to solve. Nobody actually LIKES the subsidies. The handset manufacturers don’t like them because it concentrates all of the power with the carrier. The carriers don’t completely like them because it’s a major cost for them. The problem is that the US consumer is addicted to them. People are so accustomed to paying $49-$249 for a phone, that paying 2 to 3 times that amount would be unfathomable…

    • GregInFla

      I understand what you are saying, and agree with most if not all. My understanding is that Verizon owns/leases its own cell towers and network hardware, AT&T its own, and so on. So when you use Verizon, e.g., you are using their system, not another company’s (like landline telephone service). If these companies decide to work together with a contract, what business is that of mine? It’s their equipment; they can control it. They are not preventing competition. Another company can build a iPhone-similar phone and put it on the market with another provider if they so choose. If prices are set too high due to an exclusivity agreement, another vendor will enter the market.

      And if companies want to use different technologies for cellphones, so be it: more choices for consumers. I’ll do my homework before buying one.

      • vettepilot

        I don’t have a huge problem with exclusivity agreements. My problem is with how handset subsidies distort the market, and unfortunately exclusivity agreements are part of that (exclusive devices tend to have larger carrier subsidies). It’s actually kind of funny, because when it comes down to it, there are really very few truly exclusive devices on the market right now. Or at least very few large volume exclusive devices… The only ones I can think of off the top of my head are the iPhone at AT&T, the Blackberry Storm at Verizon, the HTC G1 and myTouch at TMO, and the Palm Pre at Sprint. All four of those products are smartphones, all four require the customer to purchase a data plan, and all four are heavily subsidized. Full circle… :)