Barbara Esbin: Exclusive Handset Deals Are Pro-Competitive

by on June 20, 2009 · 10 comments

Last summer, my PFF colleague Barbara Esbin and I explained that, while many consumers dislike not being able to get popular smartphones like the iPhone on the wireless network of their choice, such exclusive deals actually benefit consumers. Barbara summarizes her testimony (PDF) as follows:

the dynamic created by the exclusive arrangement between Apple and AT&T that produced the iPhone allowed the two companies to bridge the gap between the technologies of today and the disruptive innovations of tomorrow. Moreover, it is undeniable that the breakthrough success of the iPhone has spurred a wave of competitors. If every wireless carrier had been able to sell the iPhone when it was initially released, I noted, it seems unlikely there would have been as much carrier support for developing competing products like the Google G1, RIM Blackberry Storm, Samsung Instinct or Palm Pre.

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Berin Szoka / Berin is the founder of TechFreedom. Previously, he was a Senior Fellow at The Progress & Freedom Foundation and Director of PFF's Center for Internet Freedom. He covers Internet and media policy issues including privacy, advertising, neutrality, cybersecurity, free speech, child safety, and various other efforts to regulate the Net. Berin was elected in 2010 to the Steering Committee of the DC Bar Association's Computer & Telecommunications Law Section. Before joining PFF, he practiced communications, Internet and satellite law as an Associate in the Communications Practice Group at Latham & Watkins LLP. Previously, he practiced at Lawler Metzger, a boutique telecommunications law firm in Washington and clerked for the late Hon. H. Dale Cook, Senior U.S. District Judge for the Northern District of Oklahoma. A recognized expert on the legal and regulatory issues associated with space commercialization, Berin is a member of the FAA's Commercial Space Transportation Advisory Committee (COMSTAC). He is a Director, and former Chairman, of the Space Frontier Foundation, a citizens' advocacy group founded in 1988 and dedicated to opening the space frontier by enabling "NewSpace." He received his Bachelor's degree in economics from Duke University and his J.D. from the University of Virginia School of Law, where he served as Submissions Editor of the Virginia Journal of Law & Technology.

  • http://srynas.blogspot.com/ Steve R.

    I get the impression that the “real” issue is not being articulated in your paper with Barbara Esbin “Exclusive Handset Prohibitions: Should the FCC Kill the Goose that Laid the Golden iPhone?” the statement is made: “exclusive arrangements between wireless carriers and handset manufacturers.” The Washington Post, however writes: “Lawmakers yesterday waded into a growing debate on whether the practice of locking in cellphones to exclusive contracts with only one carrier has led to higher prices and fewer choices for consumers and stifled competition in one of the economy's brightest spots — the wireless industry. “

    Based on what the Post has written, it seems that this issue it being mischaracterized as being between the carrier and the manufacturer as opposed to the carrier imposing burdensome requirements on the consumer through onerous contracts.

    I don't have an issue with with AT&T and Apple having an exclusive arrangement, but if that arrangement somehow takes away the consumers freedom to choose; then I do have an issue.

    I am also troubled by the implications of some of the language used. For example in your paper with Barbara Esbin the statement is made: “These impressive sales figures testify to the demand that has been building for years for a smart phone that offers a truly “converged” media experience: rich Internet browsing, music and video together with email and voice telephony.”

    Ok. So how do you reconcile this innovation with: “the disruptive innovations of tomorrow.”. Seems to me that the iPhone, at one time, could have been considered a “disruptive technology”.

    I can accept the premise, that: “If every wireless carrier had been able to sell the iPhone when it was initially released, I noted, it seems unlikely there would have been as much carrier support for developing competing products like the Google G1, RIM Blackberry Storm, Samsung Instinct or Palm Pre.”. However, this misses the point of how a free market is supposed to operate. Products come into existence when there is demand for the product. If the market is not ready, that is the way it is. But to assert that companies should have a right to impose onerous conditions on consumers to “foster” innovation is simply wrong and not in the spirit of free market principles. The free market is based on the consumer freely voting with there dollars.

  • http://www.funchords.com/ Robb Topolski

    If history happened differently, say that every carrier could sell the iPhone, then this sentence also makes sense,

    “As every wireless carrier was able to sell the iPhone when it was initially released, it seems predictable that other handset makers would develop competing products like the Google G1, RIM Blackberry Storm, Samsung Instinct or Palm Pre, thus broadening choice and lowering costs for all.”

  • http://bennett.com/blog Richard Bennett

    It doesn't strike me that the contracts are all that burdensome. Supposing you want to switch carriers to get a spiffy new phone, your termination fee plus the subsidized price of the phone still adds up to less than the phone would have cost you on the open market without any subsidies or termination fees.

    This looks like a phony issue.

  • http://srynas.blogspot.com/ Steve R.

    In my case, Sprint attempted to require that I sign-up for a new two year contract when I wanted to change my phone number. A very simple action that would have cost Sprint virtually nothing. Furthermore, no new subsidized equipment was being bought. We refused and we dropped Sprint.

    A little while later, we were informed that Sprint settled a class action lawsuit for “improper” billing and that we were “entitled” to a $15 dollar refund for this incompetent (fraudulent) billing. Did we get our money? NO. In order to get our measly $15 back we would have had to subscribe to a new two year contract! Clearly these contract proposals were onerous and had nothing to do with getting a new subsidized cool smart phone.

    Additionally, in your example there is a deficit of $200. Somewhere, in the cost structure of the phone and how the company earns its revenue that $200 has to be recovered. Subsidies cause distortion to the efficient operation of the economy.

    Also, there is the issue of all those phones that now occupy land fills that are still technologically useful but can't be used because they are “locked”. This is a another type of market inefficiency and a blatant waste of resources.

  • http://bennett.com/blog Richard Bennett

    You can generally get a GSM phone unlocked by the carrier if you want to take it to a different GSM network; AT&T and T-Mobile are both very good about this after a year or so.

    The point is that the charges that are being made against the carriers don't have a genuine factual foundation; it's easy to bring your own phone to a GSM network; try this Nokia E71 for example. It's a perfectly capable phone for under $400.

  • http://srynas.blogspot.com/ Steve R.

    In my case, Sprint attempted to require that I sign-up for a new two year contract when I wanted to change my phone number. A very simple action that would have cost Sprint virtually nothing. Furthermore, no new subsidized equipment was being bought. We refused and we dropped Sprint.

    A little while later, we were informed that Sprint settled a class action lawsuit for “improper” billing and that we were “entitled” to a $15 dollar refund for this incompetent (fraudulent) billing. Did we get our money? NO. In order to get our measly $15 back we would have had to subscribe to a new two year contract! Clearly these contract proposals were onerous and had nothing to do with getting a new subsidized cool smart phone. I am sure that my little horror story is far from unique and that similar examples can be found for every carrier.

    Additionally, in your example there is a deficit of $200. Somewhere, in the cost structure of the phone and how the company earns its revenue that $200 has to be recovered. Subsidies cause distortion to the efficient operation of the economy.

    Also, there is the issue of all those phones that now occupy land fills that are still technologically useful but can't be used because they are “locked”. This is a another type of market inefficiency and a blatant waste of resources.

  • http://bennett.com/blog Richard Bennett

    You can generally get a GSM phone unlocked by the carrier if you want to take it to a different GSM network; AT&T and T-Mobile are both very good about this after a year or so.

    The point is that the charges that are being made against the carriers don't have a genuine factual foundation; it's easy to bring your own phone to a GSM network; try this Nokia E71 for example. It's a perfectly capable phone for under $400.

  • http://bennett.com/blog Richard Bennett

    It doesn't strike me that the contracts are all that burdensome. Supposing you want to switch carriers to get a spiffy new phone, your termination fee plus the subsidized price of the phone still adds up to less than a high-end smart phone would have cost you on the open market without any subsidies or termination fees: we're looking at $200 + $200 = $400 vs a retail price of around $600 for really cool smart phone.

    This looks like a phony issue, so to speak.

  • http://srynas.blogspot.com/ Steve R.

    In my case, Sprint attempted to require that I sign-up for a new two year contract when I wanted to change my phone number. A very simple action that would have cost Sprint virtually nothing. Furthermore, no new subsidized equipment was being bought. We refused and we dropped Sprint.

    A little while later, we were informed that Sprint settled a class action lawsuit for “improper” billing and that we were “entitled” to a $15 dollar refund for this incompetent (fraudulent) billing. Did we get our money? NO. In order to get our measly $15 back we would have had to subscribe to a new two year contract! Clearly these contract proposals were onerous and had nothing to do with getting a new subsidized cool smart phone. I am sure that my little horror story is far from unique and that similar examples can be found for every carrier.

    Additionally, in your example there is a deficit of $200. Somewhere, in the cost structure of the phone and how the company earns its revenue that $200 has to be recovered. Subsidies cause distortion to the efficient operation of the economy.

    Also, there is the issue of all those phones that now occupy land fills that are still technologically useful but can't be used because they are “locked”. This is a another type of market inefficiency and a blatant waste of resources.

  • http://bennett.com/blog Richard Bennett

    You can generally get a GSM phone unlocked by the carrier if you want to take it to a different GSM network; AT&T and T-Mobile are both very good about this after a year or so.

    The point is that the charges that are being made against the carriers don't have a genuine factual foundation; it's easy to bring your own phone to a GSM network; try this Nokia E71 for example. It's a perfectly capable phone for under $400.

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