Senators challenge AT&T's exclusive iPhone deal

IDG News Service - U.S. senators today struggled at a committee hearing to understand AT&T Inc.'s explanation for how exclusive deals for phones like the iPhone stimulate innovation.

The hearing was called by the Committee on Commerce, Science and Transportation to study the effect of long-term exclusivity deals on the wireless market and particularly on people living in rural areas.

It was called partly in response to a filing that the Rural Cellular Association made last year to the Federal Communications Commission, arguing that exclusive handset deals turn rural customers into second-class citizens because in some cases they have no option to buy the latest and most popular phones.

An executive from AT&T, which has a multiyear exclusive deal to sell the popular iPhone, said the agreements are good for the market.

"I believe consumers benefit from exclusive deals in three ways: innovation, lower cost and more choice," said Paul Roth, president of retail sales and services for AT&T.

But the senators found it difficult to see why a phone maker wouldn't prefer to sell to all customers of all the carriers.

"I accept the benefits you articulated but I'm having a difficult time trying to envision why an innovator, given the size of the market and the number of outlets, is not going to innovate to produce a product that is equally competitive [to an exclusive phone] ... because it wants to appeal across different providers," said Sen. John Kerry (D-Mass.)

Roth argued that exclusive deals enable innovation because the operator and the manufacturer share the risk. He suggested that operators will ask manufacturers for certain features on phones but manufacturers will often only do so if the operator agrees to buy a certain number of phones. "Manufacturers want someone to share the risk," Roth said.

He pointed to the Samsung Propel as a successful example of a phone that was developed in close partnership between the operator and the manufacturer.

However, most of the discussion at the hearing revolved around the iPhone, which most people agree was independently developed by Apple, without input from AT&T. Even Barbara Esbin, senior fellow and director of the Progress and Freedom Foundation, and a defender of the exclusive deals, noted that the iPhone was not co-developed.

"It was Apple, a new entrant with a single handset, that sought exclusivity and tightly controlled product development rather than AT&T," Esbin said. The Progress and Freedom Foundation counts many large telecommunications and media companies among its supporters.

In addition, Apple has created a new scenario in the wireless industry by forging a long exclusivity deal. The rural operators said they could accept the exclusive deals when they covered a matter of months. "This is years, not months," noted Jack Rooney, president and CEO of U.S. Cellular, referring to the iPhone deal.