Senators to examine exclusive handset deals

A group of U.S. senators plans to discuss possible issues with handset exclusivity deals this week, and they've asked the Federal Communications Commission to examine the practice.

On Monday, four members of the Senate's Commerce Subcommittee on Communications, Technology and the Internet sent a letter to the FCC expressing their concern around agreements, such as the one between Apple Inc. and AT&T Inc., that allow an operator to exclusively sell a phone for a period of time.

Based on a request that a group of rural operators sent asking the FCC to examine the practice, the senators are questioning whether the exclusive agreements restrict customer choice of handsets depending on the user's geographic location, limit a consumer's ability to use certain technologies like multimedia messaging services and tethering, inhibit the ability of smaller operators to compete and discourage innovation in the handset market. Sens. John Kerry (D-Mass.), Roger Wicker (R-Miss.), Byron Dorgan (D-N.D.) and Amy Klobuchar (D-Minn.) signed the letter.

It's a hot issue in the mobile market particularly since the emergence of the popular iPhone. AT&T has clearly benefited from its two-year exclusive deal for the iPhone. In the first quarter, AT&T signed up 1.6 million iPhone customers, presumably some of whom migrated from other operators.

Other new hot phones have also been tied to a particular operator. Verizon Wireless exclusively sells the first touch-screen BlackBerry, the Storm, and Sprint Nextel Inc. got the new Palm Pre.

Small operators, which often offer services in rural areas where the large operators don't have coverage, say that such deals put them and their customers at a disadvantage.

"Exclusive handset contracts divide wireless customers into 'have's' and 'have not's' with many customers in rural areas having no option to subscribe to the services of the large, national carriers, thus denying these customers access to the most desirable and advanced handsets that are only available through exclusive arrangements with the national carriers," wrote U.S. Cellular, in support of the request for rule-making filed by the Rural Cellular Association.

"Turning rural consumers into second class customers by blocking their access to smartphones and other innovative handsets is not consistent with the purposes and policies of the Act," the operator wrote, referring to the Telecommunications Act.

Rural operators say that the deals could challenge their ability to continue to serve rural customers.

"Handset exclusivity arrangements threaten the ability of Tier II and Tier III wireless carriers and new entrants to compete effectively with nationwide carriers, thereby jeopardizing their ability to continue providing service in remote areas not adequately served by the nationwide carriers," the RCA wrote.

But the nationwide operators argue that the FCC doesn't have the right to regulate such deals, and some say that the exclusive agreements benefit end-users.

"In the absence of exclusivity agreements, wireless carriers would have less incentive to develop and promote innovative handsets, because other providers would have immediate access to the handsets without having made any investment in research and design," Verizon wrote in its comments to the RCA request.

The operator cited its competitor's deal with Apple. "Verizon points to Apple's iPhone as an example of how technological innovation can become widespread throughout the wireless industry, even though the iPhone itself is subject to an exclusivity arrangement. Other vendors are designing their own iPhone-like devices, enabling service providers to compete with the iPhone on price, brand loyalty, and network differences. This provides more choices to consumers," Verizon argues.

The Commerce Committee expects to hold a hearing on the issue Wednesday.

Copyright © 2009 IDG Communications, Inc.

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