5 Minutes With Harold Feld: "Handset Exclusivity" or "Why I'm Stuck With a Princess Phone"

Harold is correct that this is a policy choice, but incorrect that it is an obvious or beneficial policy choice.

The thing to remember is that in the larger business world, exclusive arrangements are the norm, not the exception. Why does a Toyota dealership only sell Toyotas? Why does McDonalds only sell Coca Cola soft drinks? Why do Macs only use Intel chips? Why does Costco only accept American Express?

Companies enter into exclusive agreements all the time because it provides advantages both for the partners and consumers.

The example Harold highlights concerning Ma Bell, where policymakers banned a type of exclusive partnership, is very much an exception. This exception applied to a very specific situation. Harold implies that because this exception exists, it must be accepted government policy to forbid all exclusive business arrangements.

As the above examples demonstrate, this is clearly not the case. The [American] government, for instance, has no interest in forcing Apple to build products with AMD chips.

Readers should not be fooled by this clever trick. Because banning exclusive partnerships is the exception, not the rule, it should not be incumbent on wireless carriers to prove that their partnerships are legitimate. It should be incumbent on Harold to prove that the same conditions that necessitated an exception for Ma Bell in 1968 apply to the wireless industry in 2009.

How about it, Harold?

DB, your examples are inapposite. While it’s true that vendors have exclusive agreements with other vendors, these are generally not restrictive by limiting all consumer choice or restrictive by taking the terms of a sale well beyond the date of purchase.

A Toyota dealership sells only Toyotas, but you can then take your vehicle to be serviced anywhere. And you can replace the radio, alarm, hubcaps, etc., with aftermarket items. You don’t buy the Toyota and get stuck with terms from Toyota for the entire time you own the car.

You may only be able to buy coke at McDs, but you can take your happy meal out and eat it with a pepsi in the parking lot. And you can buy the burgers without the soda.

Costco/Amex? You can still use cash or check (and even bankcards but that’s beside the point). In all these cases a consumer isn’t restricted to using just one service or item with purchase.

Your Mac/intel example is even more off point because the consumer buys the chip as part of the computer. That’s like saying the consumer should be able to tell Toyota whether to sell the car with goodyear tires or michelin. Don’t want an intel chip inside your Mac? Pry it open and replace it. They won’t stop you. They will try and stop you from jailbreaking the iphone.

Harold’s example restricts the user to using a piece of hardware with only one service provider for the entire time the consumer owns the hardware. It’s an exclusive agreement that restricts the user to only using one option, not from using one option. It’s also a restriction that changes the entire nature of the transaction from a simple purchase to a long-term restrictive contract between the consumer and the seller.

DB:

CK already responded to the specifics. Allow me to give a broader and more philosophical response.

We have different views on what regulation is for. What I “need to prove” is that allowing wireless carriers to control who attaches to the network produces a less than optimal universe, and that we could have a better one if we created a standard interface as we did in the wireline world. These guys hold their wireless licenses subject to the “public interest, convenience and necessity.”

Now it’s the subject of a whole ‘nother post (or perhaps several) to cover proper framework, the intricacies of market structure, whether or not we should have an “industrial policy” or should let “the market decide” and so forth. And I will be the first to admit that these are complicated matters on which reasonable folk may disagree and that the evidence is often complicated, incomplete, and subject to multiple interpretations. But as a legal matter, what I “need to prove” is that prohibiting exclusivities (or, even better, adopted a full-blown “wireless Carterfone”) serves the public interest, convenience and necessity by giving us a better world than the one we have now.

Harold, the comparison between the PSTN and the cell network is bit simplistic, since there are major differences in how these networks are put together, the function that the phone serves, and about a dozen other things.

This doesn’t strike me a serious issue.

As always, the question is what are the important details — the similarities or the differences. Technically, the problem of a standard air interface is very different from the development of a standard phone jack. But the policy question of how much control to allow to the network operator, and whether we are better off mandating development of a standard, is — IMO — similar.

The network operators are generally willing to let you bring your own phone to their network, at least the ones with GSM networks, which would include AT&T And T-Mobile. T-Mobile has a 3G interoperability issue because of their use of AWS, but AT&T conforms to the global standard including 3G. I saw the hearing and the complaining carriers use CDMA, which is much less open due to the licensing issues around Qualcomm’s patents. The smaller CDMA network operators simply made a bad business decision and now want the government to protect them from its consequences.

The existing iPhone won’t work on a CDMA network regardless of what anybody in Washington does, and it doesn’t strike me that the government has or should have the power to require Apple to build one that will.

The big problem with this sort of regulation is that its proponents — Washington lobbyists who are ignorant of the technology — seek to extend it to wireless ISPs. Fixed wireless broadband networks have very tight tolerances and MUST be carefully engineered and used with the right equipment to function efficiently. I, as an ISP, simply cannot allow equipment that we have not specified on my network. It could cause performance problems and/or outages for everyone.

“The network operators are generally willing to let you bring your own phone to their network”

But we aren’t really talking about technology limitations are we? We’re talking about a cell phone company specifically buying exclusivity to a product for the sake of exclusivity. If GSM vs CDMA were at issue over the iPhone and AT&T’s exclusivity, then we wouldn’t be talking about this and according to your quick list T-Mobile would be selling iPhone’s right now. At issue is whether it’s ok for AT&T to pay extra to make sure that only they offer a specific phone and set the price for it. I’m typing this on an iPhone and I can tell you that I pay $10 more a month for unlimited Internet and 200 SMS messages than I did on my Samsung phone, simply because it’s an iPhone! I would much rather not have to pay $10 a month to support this exclusivity contract!

As for technology differences, I understand that as I will have to give up my iPhone in September because I’ll be moving from Miami to an area in Michigan with no AT&T service and the only GSM service up there is crap from what I here. I will enjoy the free contract termination but now I have to figure out what other phone I’ll get up there, but that’s for another day.

I don’t know if I’d call this a monopoly, but I don’t know how anti trust law works. I do know that I hate cell phone exclusivity with a passion!

For analogies, here is my take: the car dealership is a bad analogy for several reasons: 1) Toyota has different resellers (as do every single major auto manufacturer in the U.S.), in fact you can’t find a single major city in the U.S. that doesn’t have two Toyota Dealerships owned by different people. 2) The reseller does not stop Toyota from selling different resellers (see #1) 3) Your dealings with Toyota and the reseller can cease for eternity the moment you buy the car (you can service it and gas it anywhere you darn well please)

A car analogy that would work and does lend credence to the PSTD analogy is that this as if the different fuels were all exclusively supplied by one company per type. Cell phone exclusivity like we have now is as if the diesel company paid VW extra to only make diesel cars and the gasoline company paid Toyota to only make gasoline cars and the natural gas company paid Chevrolet to make only natural gas cars and all the other car companies built cars on several of them. I know I’m straining the technology/fuel comparison but it still works and presently I can’t think of a better way to put it without bringing in the gas stations as well and then it’s too complicated to type on my iPhone.

Another aspect to this is that AT&T is able to limit what it allows iPhone users to do(no iTunes over the cell tower, no MMS) without having to worry about competitive pressure from a free market <<< that should prop up the ears of some free marketeers reading this ;)

Defending exclusivity is pro-business free market fundimentalism that’s also anti-consumer. I don’t pay much attention to free market publications but I think the reason for promoting free markets was to encourage market based natural selection that also brings consumer prices lower. I may be wrong on that but if this is were the “fundimentalism” in “free market fundimentalism” comes to play. Free market folks get so blinded by “what’s good for business” that as long as businesses are thriving, then the consumer gets ignored by these folks. Screw “free” markets, consumers need properly regulated “fair” markets and contract law can be a great way to apply consumer protective regulation with virtually no bureacracy to muck it up.

I found this article this post through the opposingviews.com website were a writer from the magazine Reason attempts to rebut the idea that exclusivity is not the same as monopoly. Reason’s motto is “Free Minds and Free Markets” and is a freethinking libertarian magazine. That rebuttal is also were my current disgust over blinded free market fundimentalism comes from. But I may just be a pro consumer, pro fair market progressive liberal.