Some doubt whether DOJ has case to reform exclusive phone deals

But any kind of reversal of the practice would have wide implications

There is keen interest in whether the U.S. Department of Justice Department will investigate large telecom companies for anticompetitive practices, which could prevent exclusive cell-phone deals such as the multiyear contract AT&T Inc. holds to sell the iPhone.

So far, however, the possibility of limits on exclusive agreements seems to be more in the political realm than the legal world. Experts yesterday questioned how solid the government's legal case would be and whether there is the political will in Washington to push that kind of agenda.

Some kind of U.S. government intervention to prevent exclusive deals "could happen," said Ken Dulaney, an analyst at Gartner Inc. Dulaney noted that the Court of Appeals in Paris in February struck down mobile operator Orange's exclusive deal to sell the iPhone. In that case, competing operators fought the exclusive deal in France. A similar effort in Germany was unsuccessful.

Dulaney joined several analysts in voicing doubts that there is the political will to push for action against exclusive deals in the U.S., considering all the major economic issues facing the government.

"Doesn't our government have more important things to worry about now?" Dulaney asked.

The immediate impact of banning AT&T's exclusive agreement for the iPhone would most likely mean a customer could buy an iPhone to use on the other major GSM network in the U.S., which is from T-Mobile USA, Dulaney said. "But that of course would be unsubsidized and thus [the iPhone would cost] about $500, which would dissuade many from buying it," he said.

Senators recently showed in a committee hearing that they are interested in making the Apple Inc. iPhone available to rural customers who can't gain access to AT&T. A major concern at the Senate hearing and before the Federal Communications Commission was also for rural carriers that cannot sell the iPhone and therefore can't benefit from it.

Analysts also said that Senate committee members probably hear plenty in the halls of the Capitol from the lobbyists of AT&T's major competitors that operate nationwide, rather than from the disenfranchised rural population who may have no options for buying the most popular cell phones.

Does antitrust law apply?

But the bigger legal question is whether the Sherman Antitrust Act applies to exclusive smartphone deals. That law, which was used by the government in its antitrust case against Microsoft Corp., is designed to prevent anticompetitive practices by powerful companies.

Several attorneys and analysts have already questioned whether AT&T, or any other single wireless carrier, has abused its power with use of exclusive handset deals. Part of their reasoning is that even if AT&T has the iPhone, competing carriers will come to market with other smartphones that have popular appeal.

AT&T, indeed, could be dominant for now with the iPhone, but its overall dominance as a wireless carrier is hard to establish when other carriers, such as Verizon Wireless, boast new phones and services. All the major carriers have diverse product and service portfolios that make it hard to pinpoint one as being in such a dominant position that it can abuse its powers, analysts noted.

Sprint Nextel Inc.'s exclusive deal to sell the Palm Pre, for example, can be seen as helping prop-up a troubled carrier rather than giving Sprint some kind of unfair market domination, observers noted.

The Justice Department hasn't shown its hand publicly on these questions, although there is a general feeling in Washington that the DOJ will be hard on monopoly operations under the Obama administration.

Still, AT&T has a long-term exclusive agreement for the iPhone, which troubles many bloggers, online forum writers and iPhone users who would like to have another carrier sell the iPhone.

The question before the Senate and the FCC, and even government attorneys, could be as simple as "Who's harmed?" by an exclusive deal. Certainly some customers feel harmed, but the DOJ would seem to be more concerned if a smaller carrier or group of carriers were harmed.

"There have been a few voices shouting for openness and creating more competition, especially around the iPhone, but in the overall scheme of things, I don't think this is a big enough issue right now to have the government take up valuable [time] when so much else is on their plate," said Jack Gold, an analyst at J. Gold Associates.

Gold said it will take many more complaints, especially by cellphone customers rather than smaller carriers, before government agencies will do anything.

"This is a very competitive marketplace," added Jeff Kagan, an independent analyst based in Atlanta. Kagan said that the only thing customers are being deprived of is "early access" to a device like the iPhone on the carrier they prefer.

Still Kagan said with all the federal government involvement in the bailouts of the financial and auto industries, it seems more likely that the DOJ would move forward to take some kind of action on exclusive deals.

While Gold said it seems unlikely an anticompetitive case could be made against exclusive deals, he agreed that doing so would likely have short-term and long-term implications on carriers and customers.

Among those implications: First, phone subsidies that bring down the cost of smartphone hardware would be reduced or eliminated over a period of time, Gold said. Second, monthly voice and data fees would go up initially, but would come down eventually since the carriers would have to compete without the benefit of a lock-in of users for two years.

Third, without the carriers' subsidy, users would be paying more for their smartphones and would hold on to them longer. Fourth, smaller competitors to major carriers would have a level playing field and offer no-name service at a good price, much like a no-name gas station, Gold said.

Fifth, carriers would be more likely to compete to sell applications in online app stores to generate revenues. They would even cross-sell their applications to phones on other networks.

Finally, device makers wouldn't get any money from carriers for exclusive deals, and would need to resort to being more consumer-oriented, selling smartphones like PCs are sold today with extra features and rebates. As a result, carriers would have much less influence with makers on specific features and functions, since manufacturers would try to make universal devices for all of the carriers.

An AT&T spokeswoman said the carrier was unaware of any formal DOJ investigation, adding AT&T had not been asked to provide any information. She also defended the wireless industry in general. "The U.S. wireless industry is highly competitive, and, as a result, delivers terrific innovation, many choices, and attractive pricing for all customer segments," she said.

This story, "Some doubt whether DOJ has case to reform exclusive phone deals" was originally published by Computerworld.

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