How ending exclusivity agreements would change the telecom industry

IPhone lovers who want their device freed from AT&T Inc.'s wireless network could soon get their wish.

According to a report by the Wall Street Journal earlier this week, the Department of Justice is contemplating the launch of an investigation into the exclusivity agreements that device manufacturers often sign with big incumbent telecom carriers. At issue, according to the report, is whether having exclusive rights to certain high-profile wireless devices such as the Apple iPhone and the Palm Pre gives larger carriers an unfair competitive advantage over smaller wireless carriers that can't afford to pony up the cash needed to get top devices on their networks.

Although there is some doubt as to whether the Justice Department would be on firm legal standing if it tried to bar companies from signing exclusivity agreements, the fact that it is even considering an investigation raises some interesting questions about the future of the wireless industry. For example, if carriers could not secure big-name devices for their networks, how would it change the ways they compete for customers?

The company most immediately affected by ending exclusivity agreements would be AT&T, as its recent success has been helped largely by the fact that it is the only mobile network in the U.S. to offer the Apple iPhone.

AT&T says the device has helped it substantially since its release in 2007, as the average monthly revenues from its iPhone subscribers are nearly double those of the rest of its mobile subscriber base. AT&T has also received a significant boost in overall subscribers from the device, as the iPhone accounted for an estimated 73% of its subscriber additions in the first quarter .

However, there have been rumblings from iPhone users recently that suggest AT&T could lose a good number of its smartphone customers if the iPhone were to become available on other networks. Complaints over the company's pricing policies and its data speeds mean that some iPhone users would gladly shift over to companies such as Sprint Nextel Inc. or Verizon Wireless if given the chance.

"The iPhone was a homerun for both AT&T and Apple, but at some point it's going to become available on other networks,” says telecom analyst Jeff Kagan, who notes that even if the government doesn't intervene, AT&T will likely lose its exclusive deal with Apple sometime within the next two years.

"Because customers who would rather be on Sprint or Verizon would be able to do that, they may lose a significant portion of their customers to other carriers," he said.

Of course, while big telecom carriers might get hurt by losing exclusive agreements for popular devices, smaller carriers such as Leap Wireless and Metro PCS could stand to gain. Megan Tady, who writes t the Free Press's Save the Internet blog, has argued that untying the iPhone from AT&T would be good for innovation since consumers could have more choice in how they connected their device. Tady says that freeing the iPhone from one exclusive network would not only be beneficial for smaller carriers but also for application developers such as Skype, whose over-the-top VoIP application is barred on the iPhone.

"There's no doubt in my mind that these phone deals are harming consumers and smothering innovation,” she writes. "We need a policy change to unlock cell phones from our wireless carriers and unshackle us from corporations.”

There are barriers that may prevent smaller carriers from getting the iPhone on their networks even if exclusivity agreements are taken off the table. As Nemertes Research analyst Irwin Lazar notes, different wireless networks have different standards and Apple would likely have to manufacture different types of iPhones for different networks.

"Apple may say that it makes sense for us to make a Verizon version of the iPhone but not make a version for the smaller carriers,” he says. "So ending exclusivity agreements wouldn't necessarily lead to greater competition unless you could convince Palm and Apple to make six different versions of their phones.”

But even if freeing smartphones from exclusivity agreements doesn't lead to a windfall for smaller carriers, Lazar says that it will benefit consumers because they'll have more options to choose from for service providers. In particular, he says carriers will focus more on touting the quality of their service and less on the types of devices their networks have.

"From the carrier standpoint the differentiators will be more focused on cost and speed,” he says. "So if I'm AT&T and my 3G service is 20% faster than Verizon's then I still have a competitive advantage. I also expect you'll start to see content partnerships between content providers and carriers, where say if you're using YouTube on one carrier then you don't pay for data minutes while you're watching videos, whereas on other carriers you would have to pay for that data use.”

This story, "How ending exclusivity agreements would change the telecom industry" was originally published by Network World.

Copyright © 2009 IDG Communications, Inc.

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