Democracy & Technology Blog Short life of exclusivity

Morgan Stanley analyst Kathryn Huberty believes iPhone sales could double if Apple ends its exclusive partnership with AT&T.

Huberty cites a 136 per cent increase in the iPhone’s French market share after the ├╝berpopular smartphone became available from SFR and Bouygues Telecom after initially being limited to Orange.
* * * *”In the top six iPhone markets that are still exclusive,” she writes, “we believe that Apple’s market share could rise to 10 percent, on average, in a multiple carrier distribution model from 4 percent today.”

The FCC shouldn’t follow the French example of prohibiting iPhone exclusivity. Appearances to the contrary, this isn’t a regulatory success story. Regulation just happened to be in the right place at the right time.
Generally, exclusive distribution benefits novel products but handicaps established products.
Innovators pursue exclusivity so distributors and retailers can recover investments they make to promote the product and provide optimal service quality. Otherwise, these partners could be undersold by free riding competitors and the investments would end. Exclusivity means that the innovator doesn’t have to bear the entire risk of a product failure.
After a successful product launch, exclusivity tends to foreclose additional sales. When the value of foreclosed sales exceeds the value of the special efforts by distribution or retail partners, the market discourages exclusivity. Huberty apparently believes the iPhone has crossed that line.
French regulators were lucky as a matter of timing. Regulation didn’t boost iPhone sales in France, exclusivity was no longer particularly helpful to drive sales.
If regulation killed exclusivity prematurely, sales would have tanked. If regulators allowed exclusivity to run its course, exclusivity would disappear without government intervention.
Everett Ehrlich, Jeffrey A. Eisenach, and Wayne A. Leighton provide further explanation in a recent paper why exclusivity helped the iPhone.

Promotion and service quality are especially important for new entrants offering new products, and the iPhone was an especially complex case, requiring extensive coordination between manufacturing, software, network and retail activities. Accordingly, contrary to what may be popular perception, Apple sought out an exclusive distributor for the phone — not the other way around — and ultimately chose AT&T. As detailed by Hahn, Litan and Singer, Apple’s demands included maintaining strict control over the applications that would run on the iPhone, controlling branding, and working directly with customers on maintenance and service issues. Ultimately, of course, Apple’s strategy worked: Its de novo entry into the wireless handset business was one of the most successful product launches in U.S. history, with more than one million iPhones sold in 74 days. (footnotes omitted.)

The Rural Cellular Association is urging the FCC to prohibit handset exclusivity arrangements. But Apple doesn’t need the FCC to tell it when exclusivity is no longer in Apple’s economic interest. Apple is capable of figuring that out for itself, and iPhone exclusivity will be terminated when it does. Meanwhile, it would be good for the economy if innovators can continue to make use of exclusivity for legitimate purposes.
Exclusivity drives innovation. Once demand is established, producers have every incentive to cut prices to expand sales of a successful product.

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.