Consumer groups tell FCC exclusive handset deals limit competition : Professor notes 8 to top 10 handsets are ‘exclusive’

In the Obama era, the telecom and tech industries, consumer advocates, states and other stakeholders will be watching carefully for key policy tendencies emanating from a Federal Communications Commission apt to be headed by tech entrepreneur and former telecom policymaker Julius Genachowski.
Will Genachowski – still awaiting official nomination and Senate confirmation – lean more toward Internet-based companies over traditional telecom operators in considering net neutrality, open access and other issues that divide the two sectors? Will he heed cellular carriers’ call to expand federal pre-emption as part of a new national regulatory framework that addresses early termination fees and other wireless consumer issues? Where will Genachowski find common ground in reforming the universal service fund, intercarrier compensation and special access regimes? And will Genachowski more closely examine wireless issues – such as spectrum aggregation, roaming and carrier-handset vendor exclusivity arrangements – raised by small and mid-sized and regional carriers attempting to coexist in a wireless world dominated by the likes of Verizon Wireless, AT&T Mobility, Sprint Nextel Corp. and T-Mobile USA Inc?
Late last week, a group of public-interest groups reiterated how they believe the new FCC should address handset exclusivity arrangements.
“Handset exclusivity arrangements are harmful to consumers,” the Ad Hoc Public Interest Spectrum Coalition told the agency. “These anticompetitive practices limit consumer choice, raise consumer prices and limit innovation in the device market. The arrangements tie together the markets for devices and services, allowing the market power of wireless carriers to invade a competitive market for devices and to use successful devices as hooks to reduce competition in the wireless services market – they function as artificial restrictions on competition in both wireless service and wireless devices markets.”
As such, the Consumer Federation of America, Consumers Union, Free Press, Media Access Project, New America Foundation, Public Knowledge and U.S. PIRG urged the FCC to initiate a rulemaking with an eye to prohibiting such handset exclusivity arrangements. Last year, the Rural Cellular Association petitioned the FCC to investigate exclusive contracts between top wireless providers and handset manufacturers.
RCA noted at the time that Vermont citizens cannot use Apple Inc.’s iPhone without violating terms of service contracts with AT&T Mobility, the exclusive wireless provider of the device. The trade group said the iPhone is also out of reach to rural residents of Alaska, Arizona, Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Utah and Wyoming.
Where’s the proof?
AT&T Inc., parent company of the No. 2 wireless operator, asserted the U.S. wireless industry is intensely competitive across the board and that exclusive handset deals actually trigger competitive responses in a way that fosters innovation to the benefit of consumers.
So what’s the big deal? AT&T asked.
“In a petition that is remarkably devoid of evidentiary support or even a recognizable theory of harm, RCA nonetheless proclaims this competitive activity ‘anticompetitive’ and asks the commission to prohibit it,” AT&T stated. “RCA has not tried to show that handset deals are either the cause or effect of any sort of market failure, and it never acknowledges a prior commission finding that there is no evidence that they diminish competition in any way. RCA’s unsupported petition flies in the face of the facts, the law, and bedrock wireless policies and economic principles, and it should be summarily denied.”
However, Jim Chen, dean of the University of Louisville’s Louis D. Brandeis School of Law, argues otherwise in a filing prepared at the behest of Cellular South Inc. Chen points out, among other things, that eight of the 10 most popular U.S. handsets last November were exclusive to individual carriers.
“Exclusivity arrangements that restrict the most highly coveted mobile devices to specific carriers represent the most recent way in which nationwide wireless carriers have leveraged the sheer size of their subscriber bases into a clutch of oligopsonistic and highly undesirable practices,” Chen stated. “Restricting advanced handsets to specific carriers is an anticompetitive practice that harms the markets for mobile devices, handset-friendly software applications, and wireless carriage itself. Handset exclusivity steers subscribers away from the nationwide carriers’ competitors, not on the basis of price or service, but strictly on access to devices that would be available through other vendors (including unaffiliated dealers as well as competing wireless service providers) in a market not distorted by the large carriers’ oligopsonistic dominance of the market for handsets. The elimination of competition for the handsets raises those devices’ prices. In turn, carriers with handset exclusivity arrangements recover high device prices through higher subscription fees. As competition retreats and the leading carriers magnify their market power under the cover of those exclusivity arrangements, rival carriers lose the ability to discipline rates and motivate innovation throughout the industry.”
No. 1 wireless provider Verizon Wireless argued the FCC lacks jurisdiction over equipment vendors and their contracts with wireless carriers, though Chen noted the FCC previously prohibited exclusive access arrangements that restricted the ability of commercial and residential tenants to pick from among competing distributors of multichannel video programming and telecom services.
“Wireless service providers do not have sufficient market power to block access to handset models by other providers,” Verizon Wireless stated. “In this market, a provider or group of providers can work with equipment manufacturers to develop competitive products without relying on governmental regulation of equipment distribution to obtain desirable handsets.”
MetroPCS Communications Inc. said it supports an FCC investigation of what it considers the anticompetitive practice of tying products and service. The carrier predicted that as the practice of handset exclusivity arrangements grows, “smaller carriers may be unable to procure handsets that comply with various commission mandates, including disability requirements and any additional E-911 requirements.”