"Exclusivity deals" between wireless carriers and handset makers to bring new devices to markets

Cellphone Politics. WSJ Editorial
The Wall Street Journal, Jul 07, 2009, p A14

One of the few bright spots in the current economic gloom has been the telecommunications industry, where competition is robust, innovation forges ahead and consumer prices continue to fall. Leave it to Congress and Beltway planners to mess with this success.

Yesterday, the Journal reported that the Justice Department has begun an informal investigation "to determine whether large U.S. telecom companies such as AT&T Inc. and Verizon Communications Inc. have abused the market power they've amassed in recent years." And last month the Senate Commerce Committee held a hearing on so-called "exclusivity deals" between wireless carriers and handset makers to bring new devices to market.

What's going on? Well, AT&T is the exclusive U.S. distributor of the Apple iPhone, and other big carriers like Sprint (Palm Pre) and Verizon (BlackBerry Storm) have cut similar distribution deals. Device makers like such arrangements because they can share the financial risks of developing and marketing new products. The partnerships lead to more choices and lower prices.

Nevertheless, some smaller carriers that lack the scale and resources to cut similar deals want Congress to ban them for everyone. To advance their argument, these carriers claim today's wireless markets are increasingly uncompetitive and underserving rural areas. Hu Meena of Cellular South, a Mississippi-based carrier with about 750,000 subscribers, told Congress that "the industry is trending back towards consolidation and the days of Ma Bell." Regional and rural carriers, he said, can't gain access to the latest gadgets because larger carriers have cut these exclusive deals. Mr. Meena is hoping to get some sympathy from Senators who represent rural states, like Mississippi Republican Roger Wicker and Minnesota Democrat Amy Klobuchar.

In fact, the wireless marketplace has never been more competitive. Eight years ago there were 100 million U.S. wireless customers. Today there are more than 270 million. It's true that AT&T (82 million) and Verizon (72 million) have the lion's share. But the next two largest carriers, Sprint and T-Mobile, have a combined 82 million, and the five carriers that round out the top 10 have another 18 million among them. Merely because Cellular South doesn't threaten Verizon's share doesn't mean other companies don't. As for rural areas, 96% of Americans have a choice of at least three carriers.

What these smaller carriers really want Congress to do is prevent bigger rivals from reaping the benefits of scale. But the government's role is to ensure competition, not protect competitors. AT&T, Verizon and other large carriers have invested billions to build the networks that device makers find so attractive.

There's also no denying that these distribution deals have benefited consumers. More than 30 devices have been introduced to compete with the iPhone since its debut in 2007. The fact that one carrier has an exclusive has forced other companies to find partners and innovate. In response, the price of the iPhone has steadily fallen. The earliest iPhones cost more than $500; last month, Apple introduced a $99 model.

If this is a market malfunction, let's have more of them. Isn't Washington busy enough re-ordering the rest of the economy?