There has been a lot of pressure exerted lately to investigate the exclusive arrangements made between U.S. carriers and manufacturers of "hot" wireless devices (Apple iPhone, Palm Pre, BlackBerry Storm, HTC Android G1). Such exclusivity agreements prevent consumers from purchasing a particular model without also committing to a two-year contract with the exclusive carrier (e.g., AT&T for iPhone, Sprint for Pre, Verizon for Storm). But what would be the ramifications if such exclusivity arrangements were regulated out of existence?
First, the traditional subsidies that consumers have grown accustomed to -- often valued at as much as $200 off the price of a new device with a two-year commitment -- would be reduced or eliminated. Carriers would have no incentive if they couldn't lock a subscriber into a long-term plan to recover the substantial acquisition cost. Because of competitive pressures, elimination of the subsidy might not happen immediately, but it would happen relatively quickly.
Data and voice plans
Second, rates for data and voice plans would go up in the short term to pay for the extra churn that open devices would create by allowing users to move to another network. Over the long term, however, rates would probably go down because, without a lock-in, the carriers would truly have to compete for users. There would be competition not only on price but on customer service and network reliability as well.
Longer mobile device lifecycles
Third, users would probably hold onto high-end phones longer, since they would cost more (up to $400 to $500 more), and therefore they would be less likely to trade in on the two-year cycle that subsidies now support. On the other hand, lower-cost devices would be "throwaways," with most users who spent less than $100 on a device likely to replace it quickly if it were not what they wanted or liked. For higher-end unlocked devices, there could develop a substantial "used" market, as currently exists in other parts of the world.
Mobile virtual network operators
Fourth, it would mean that third-party/mobile virtual network operators (MVNOs) would have a more level playing field, as they would no longer need to compete on the device (the user buys the device) and could simply offer good service at a good price. This would also mean that the major carriers would be relegated to being "dumb pipes" even more than they are now, a position they are not keen to attain.
Mobile app stores
Fifth, carriers would be even more likely to compete with the app stores from Apple, Google, RIM, Palm, Microsoft, etc., as this would be a way for them to generate additional revenues. They would cross-sell to phones on other networks, and not just their own. This could be advantageous to consumers because the competition could lower prices and increase variety.
Mobile device manufacturers
Finally, device manufacturers would lose a significant revenue stream from carriers for exclusivity. They would have to be much more directly consumer oriented, selling more like PCs (with extras, rebates, etc.) than they do now. And carriers would have much less influence with vendors on putting in the specific features/functions they want, since vendors would want to make a universal device for all carriers. It would therefore be much harder for carriers to lock in or lock out apps on phones, unlike the situation today where carriers specify what is to go on any device sold by them and often block apps that compete with their own.
Although regulatory changes might bring benefits to consumers, we would be surprised to see any changes in the short term, despite the virtual monopoly positions exclusive deals allow carriers to achieve. There is not enough pressure in the system right now to make this happen because consumers generally are happy with their subsidies and not upset enough with carriers to exert sufficient pressure on regulatory agencies to make changes. A few voices have been shouting for more openness and competition (especially around the iPhone), but in the overall scheme of things, we don't think this is a big enough issue right now for the government to take action. And certainly the major carriers would exert massive political pressure to maintain the status quo.
If Apple has been able to maintain its iTunes monopoly with no government action -- a situation affecting far more people -- we don't expect regulators to go after AT&T and the iPhone (they are not the only offenders, but they are the most visible). Overall, consumers would be unhappy if their subsidies disappeared, so how many would seek change if they understood the ramifications? We don't expect major change to exclusivity agreements to happen anytime soon.
About the Author: Jack E. Gold is founder and principal analyst at J. Gold Associates. He has more than 35 years in the computer and electronics industries, including work in imaging, multimedia, technical computing, consumer electronics, software development and manufacturing systems. Mr. Gold is a leading authority on mobile, wireless and pervasive computing, advising clients on business analysis, strategic planning, architecture, product evaluation/selection, and enterprise application strategies. Before founding J. Gold Associates, he spent 12 years with META Group as a vice president in Technology Research Services. He also held positions in technical and marketing management at Digital Equipment Corp. and Xerox. Mr. Gold has a BS in electrical engineering from Rochester Institute of Technology and an MBA from Clark University. He can be reached at firstname.lastname@example.org.