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Democracy & Technology Blog Exclusivity inspired Smart Phones

Small cellphone operators want Congress or the Federal Communications Commission to prohibit larger carriers from becoming exclusive providers of popular handsets, like the Apple iPhone (AT&T), Blackberry Storm (Verizon Wireless), Palm Pre (Sprint) and Samsung Behold (T-Mobile).
John E. Rooney, President and CEO of United States Cellular Corp., testified at a Senate Commerce Committee hearing this week:

These arrangements harm consumers in rural areas and decrease competition nationwide and do not enhance innovation.

Let’s examine these arguments.
Rural Consumers
Rooney bemoans the fact that

many rural residents of Alaska, Arizona, Colorado, Idaho, Kansas, Maine, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Utah, West Virginia and Wyoming are not served by AT&T network facilities

while Victor H. “Hu” Meena, President and CEO if Cellular South, Inc., claims that

Vast portions of America — including all or part of Alaska, Arizona, California, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire New Mexico, Oregon, Vermont, Washington, West Virginia and Wisconsin — are not served by any of the largest carriers, so Americans in these areas are prohibited from acquiring the newest and most innovative devices.

There are advantages and disadvantages no matter where one chooses to live. The fact that someplace is without a particular amenity traditionally hasn’t justified limiting the ability of private entities to exercise their own judgment as to parties with whom they will deal. While I am fortunate to have the opportunity to own an iPhone, I don’t get to live in a pristine rural setting with a wide open outdoors, low housing costs, etc.
It should be noted that however many rural Americans are unserved by any of the largest carriers, these customers are no threat to United States Cellular Corp. or Cellular South. The threat comes from customers who have the option to switch carriers in pursuit of better devices, and I get the impression there are more of these customers than Rooney and Meena are letting on. According to Rooney,

the Big Four’s control over the most advanced, attractive handsets has made it significantly harder for smaller carriers to attract and retain subscribers, and to effectively compete in rural areas, even with federal universal service support. (emphasis added.)

Meena says,

Cellular South and other regional and rural carriers have competed with the largest carriers for years based on network quality, network coverage and price. These are all factors that are within our control … However, our ability to compete is compromised because the largest carriers lock up devices in exclusivity agreements. Put simply, regional and rural carriers cannot gain access to the latest, cutting-edge devices which gives large carriers a key competitive advantage. Focus groups of customers who have left Cellular South for the largest carriers repeatedly say that they are buying the device, not the network, and certainly not the company. (emphasis added.)

A competitor who can offer something you or I can’t is a frequent hazard of doing business.
Competition and Innovation
The cellphone market is wildly competitive. More than 95 percent of the U.S. population lives in census blocks with at least three competing carriers, according to the FCC. And no carrier has a market share exceeding 27 percent.
The cellphone industry was deregulated by a Democratic Congress — with Al Gore’s tie-breaking Senate vote — and signed into law by President Clinton in 1993.
It was an unregulated market in which handset exclusivity was permitted that Apple sought to transform; undoubtedly at least part of the appeal was the fact Apple would be permitted to earn a commensurate profit if consumers liked its product. “There can be no growth without the investment that is inspired and financed by profit,” as John F. Kennedy said.
Rooney offers no evidence in support of his contention that exclusivity decreases competition nationwide. Instead, he entreats policymakers to shift the burden of proof with the statement “There is no evidence showing that these practices create significant pro-competitive benefits.”
Similarly, he claims exclusivity arrangements “do not enhance innovation”; again, he offers no support for this view — which is untrue.
The iPhone set a transformative new standard for wireless handsets and attracted millions of new subscribers for AT&T. All other handset manufacturers and network operators have been racing to catch up. Before the iPhone, we had awkward devices of limited utility. Now the industry is competing to offer Smart Phones, or “teleputers” as envisioned by George Gilder. It is obvious these developments are a tremendous benefit for consumers. Most consumers will benefit immediately; all consumers will benefit in time.
Rooney and Meena are asking policymakers to reset the basis of competition away from something many consumers apparently value highly (cool devices) back to something that once defined competition in the wireless segment but which these consumers now take for granted (network quality, network coverage and price).
In other words, these executives are asking for protection.
If policymakers proceed down this path, they will be protecting competitors, not competition. There’s a danger where that will lead, as Peter J. Wallison notes

Protecting competitors means blunting the skills of superior players, allowing inferior managers and business models to remain in business and thus preventing better managements and business models from emerging. Again, stability wins out over change and progress.

Voters Get This
On a related note, a Wall Street Journal/NBC poll this week notes that nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama’s decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The poll also found that Mr. Obama’s overall job approval and personal ratings have dropped among independent voters from nearly two-to-one approval to closely divided.
A Pew Poll earlier this month confirmed that independent voters tend to have conservative views about government and regulation, and more liberal views regarding the hot-button social issues, national security and religion.
Democrats deserve much credit for the success of the wireless industry. It’s ironic some of them want to reverse course.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.