Congress: Should cell phone exclusivity contracts be illegal?

We're already seeing the initial wave of exclusivity arrangements between carriers and PC manufacturers in the netbook arena, with the arrival of the AT&T-subsidized Acer Aspire One at $99.99 last December, and Verizon Wireless-subsidized HP netbooks last month. This raised the ire of Cellular South President and CEO Hu Meena, who's worried that netbooks will become just one more category of device his customers -- mainly in rural areas in Mississippi -- will be locked out of.

"Will Congress sit by and allow the largest carriers to lock the most attractive netbooks into exclusivity agreements before this segment of the market fully emerges?" Meena asked the Sen. Commerce Committee members last Wednesday. "Left unchecked in this segment of the PC market, the largest wireless carriers will gain control and begin to restrict PC innovation and distribution, just as they have wireless handsets. Furthermore, the claim that exclusivity agreements drive innovation is completely unfounded in this segment of the market. Companies like Dell, Acer, and others were advancing the netbook market well before the largest carriers got involved. How, then, can the largest carriers claim a divine right to exclusivity on netbooks?"

Advancing Meena's argument, Sen. Kerry asked AT&T's Roth why a handset or netbook manufacturer wouldn't be compelled to simply produce the best device it could, given the tremendous size of the US market. Roth pointed to a case in point -- one which continues to leave a bad taste in his mouth.

"The first attempt at a music-centric device is this device...the Motorola ROKR," said Roth, holding one up the way an agricultural biologist holds up a cow chip. "It was our first attempt -- Motorola, Apple, and AT&T went together in 2005 to create a device that we thought would cater to the music-centric, it was the predecessor of the iPhone. Colossal failure. I still have them in inventory. Motorola bore the brunt of that, so did AT&T. It was a huge risk for both companies. Large inventory commitments were made...on a device that we thought would be successful. And it wasn't. That type of risk is what manufacturers are looking for carriers to say, if you want to specify a device, if you want to bring innovation that's not part of their product roadmap, then you need to share the risk with us."

But why shouldn't a customer of Rooney's US Cellular, for instance, have the right to purchase an iPhone for whatever price US Cellular might make it available, Kerry proceeded. Roth responded that the real reason was because US Cellular -- along with Cellular South, which was also represented -- made the wrong choice of network protocols: CDMA as opposed to GSM, which he described as the global standard and the one that AT&T, and any other network that cares about customers, supports. Comparing CDMA to GSM, Roth argued, was like comparing VHS to Beta, in that order.

Sen. Roger Wicker (R - Miss.) then picked up that argument, asking Cellular South's Meena, why shouldn't a carrier like AT&T be entitled to recoup its investment in cellular technology with an agreement that helps ensure the value of that technology? Meena responded by pointing out that AT&T's real investment wasn't in the iPhone so much as the network behind it, turning Roth's argument (that AT&T chose the right network protocol) on its head.

"Their primary investment in the iPhone was in the network. We put in a 3G network without any guarantee from Apple or any other manufacturer that we would have access to a latest technology device. I don't know why they have to be guaranteed success when we're not guaranteed success," said Meena. "We're willing to go out there, put our capital to work, put in 3G speeds throughout the state of Mississippi and other places, and be able to compete in the marketplace."

AT&T's Roth wasn't one to let that argument pass, and in so doing, perhaps lose the point that a carrier should be permitted to purchase guarantees and invest in success. He emphasized his point not only that carriers drive innovation, but that they themselves are the innovators -- the ones coming up with the ideas (again, Apple notwithstanding) that produce the functions that customers crave.

"The manufacturer doesn't come flying over from Korea or Canada, opening up a suitcase and saying, 'Which one of these do you want to buy and monopolize in the US?' That's not the way it happens," said Roth. "You can buy what they want to sell...or you can sit down with them and say, 'I want a touchscreen device when no one has a touchscreen device,' or, 'I want a two-way slider device that allows someone to text, and I want this chipset in it, and I want it in this color, and I want it at this price.' Exclusivity starts with the carrier, not the manufacturer, saying, 'I want you to produce something that's not on your product roadmap.' And the manufacturer says, 'There's significant risk in doing that. You need to share that risk with me. Volume commitments.' You can't make a volume commitment if it's suddenly going to be available to everybody and it's wildly successful. You won't achieve your volume commitments back to the manufacturer."

But Cellular South's Meena argued that because Korean manufacturers such as LG and Samsung come to America to deal with AT&T, he and his fellow rural competitors formed a purchasing association to go to Korea.

"We have been to Korea, we have tried to meet with manufacturers in Korea about purchasing the latest and greatest devices. And it's hard to get a straight answer when we talk with them about those devices," remarked Meena. "It seems like they would be able to make the decision as to whether they could sell their product to us, but they're checking back with somebody. And we think we know who it is."

And US Cellular's Mooney supported Meena's argument by pointing out that it's the volume commitments Roth makes that put carriers such as his out of the game, enabling them to sell 9 of the world's top 14 selling handsets under exclusive arrangements that lock him out. The collective power of the buying consortium, he said, cannot equal so much as one of the Big Four carriers' volume commitments.

"It's a volume game. So if you want to consolidate, you gotta have enough volume to justify the consolidation. And it's just not there," remarked Mooney. "I mean, these guys, they've gobbled up all the spectrum, they've gobbled up the control and manufacturing side of the business. You're building an oligopoly there, and it's already happened.

"I think there's a mythical aura to the idea that there's competition. It's not technical competition," he continued, "when you get a hold of somebody else's technology and don't allow it to be disseminated to anybody else. That says, 'I'm technically good, and the rest of you are technically bad,' or, 'I have a better deal with Apple than you can ever get.'"

Last Thursday, in response to this congressional testimony, FCC Acting Chairman Michael Copps announced he has ordered his agency's Enforcement Bureau to open proceedings as to whether wireless exclusivity agreements are helpful or harmful to consumers.