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					                                                           Progress on Point
Release 15.8 June 2008                                    Periodic Commentaries on the Policy Debate




                        Exclusive Handset Prohibitions:
                       Should the FCC Kill the Goose that
                           Laid the Golden iPhone?
                              by Barbara Esbin and Berin Szoka *


        Since the Apple iPhone first went on sale in June, 2007, the company has sold at
least 5.4 million of the high-end devices and hopes to reach the 10 million mark later
this year. 1 These impressive sales figures testify to the demand that has been building
for years for a smart phone that offers a truly “converged” media experience: rich
Internet browsing, music and video together with email and voice telephony. Yet few
remember that the iPhone’s success follows the failure of Apple’s first attempt to bring
iTunes to the mobile phone: the Motorola ROKR™, launched in September 2005. It
was ROKR’s failure to meet Apple’s expectations that caused the trendsetting company
to realize that, if they wanted to build a phone worthy of iTunes, iPod, and Apple’s highly
polished brand of innovation, they’d just have to do it themselves. Nearly eighteen
months and $150 million later, the iPhone was born. 2

       Today, as millions more Americans eagerly await the release of the 3G high-
speed, second-generation iPhone, one might think that everyone would celebrate the
product as a breakthrough stimulus to innovation in the handset market as well as to the
business relationships between carriers and equipment manufacturers. Yet, on May 20,
2008, the Rural Cellular Association (RCA) petitioned the Federal Communications
Commission (FCC) to investigate whether the agency should prohibit as anticompetitive
the business model that made the iPhone possible: exclusive arrangements between
wireless carriers and handset manufacturers.

      RCA argues that such arrangements harm rural consumers (and, of course,
RCA’s members) because only the “Big 5” (Verizon, AT&T, T-Mobile, Sprint Nextel and


*
  Barbara Esbin is a Senior Fellow and Director of the Center for Communications and Competition Policy
   at The Progress & Freedom Foundation. Berin Szoka is a Visiting Fellow at The Progress & Freedom
   Foundation. The views expressed in this report are their own, and are not necessarily the views of the
   PFF board, fellows or staff.
1
  Eric Zeman, Analysts Rain On Apple's iPhone Parade, The Information Week, May 28, 2008, available
   at http://www.informationweek.com/blog/main/archives/2008/05/analysts_rain_o.html.
2
  Amol Sharma, Nick Wingfield and Li Yuan, Apple Coup: How Steve Jobs Played Hardball In iPhone
   Birth; In Deal With Cingular; He Called The Shots; Flirting With Verizon, The Wall Street Journal, Feb.
   17, 2007, available at http://online.wsj.com/public/article/SB117168001288511981-
   euxzmjNFZTZhA_2z8OBtD6GK900_20070224.html?mod=blogs (“Apple Coup”).

       1444 EYE STREET, NW SUITE 500 WASHINGTON, D.C. 20005 PHONE: 202-289-8928
          FACSIMILE: 202-289-6079 E-MAIL: mail@pff.org INTERNET: http://www.pff.org
Progress on Point 15.8                                                                              Page 2


Alltel) are “able to command these exclusive arrangements,” 3 leaving small rural
wireless carriers and their customers without access to the most innovative handsets
and services, such as Apple’s iPhone and the competitors whose development the
iPhone’s success has spurred. (The combination of Apple’s exclusive U.S. deal with
AT&T and AT&T’s policy of barring its users from spending more than 40% of their time
roaming off-network effectively renders the iPhone “off limits” to many RCA member
subscribers. 4 ) One must ask whether the iPhone or its competitor devices would have
been developed as well and as quickly without such exclusive deals—and ask the same
question about future devices. In other words, would banning such arrangements
effectively spite all consumers by ensuring that, if some customers can’t have the fruits
of device innovation immediately, then none should?

       RCA insists that these deals are driven by the market power of the “Big 5”
wireless carriers, who use exclusive arrangements as a weapon against their
competitors, including rural carriers. (Never mind the fact that, if the iPhone is
unavailable in certain rural areas, that’s because AT&T does not compete in that area.)
Yet the hard truth for RCA is that it was Apple who sought its exclusive arrangement
with AT&T (then Cingular)—not the other way around. 5

       While some carriers had reached exclusive arrangements prior to the 2005
Apple/Cingular iPhone deal, most of those deals concerned mobile virtual network
operators (MVNOs), whose business model as resellers required that distinguish
themselves from the underlying carriers whose services they resold by offering unique
devices and service features. These early exclusive arrangements largely failed in the
marketplace. But today other smart phone manufacturers are following Apple’s lead
and demanding exclusive deals with sharing of revenue from customer data plans
rather than the traditional model of simply try to sell as many units as possible. 6 The
reason? Such devices can attract huge numbers of new customers to a carrier—with
each new customer paying for data as well as voice service. In an industry with high
fixed costs and low marginal costs, this translates into large potential profits for a carrier
with an attractive new device. 7 This dynamic gives companies like Apple the leverage

3
  Rural Cellular Association, Petition For Rulemaking Regarding Exclusivity Arrangements Between
   Commercial Wireless Carriers and Handset Manufacturers (filed May 20, 2008), at 3 (“RCA Petition”),
   available at
   http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6520010759. Since the
   filing of the RCA Petition, Verizon has announced its intention to acquire Alltel. See Amol Sharma,
   Dennis K. Berman and Serena Ng, Verizon in Talks To Acquire Rival Alltel, The Wall Street Journal,
   June 5, 2008, available at http://online.wsj.com/article/SB121260855426646057.html.
4
  RCA Petition at 6-7.
5
  Apple Coup, supra note 2.
6
  See, e.g., Thomas Ricker, Nokia, Like Apple, Will Seek Its Slice of the Revenue Sharing Pie, Engadget,
   Dec. 11, 2007, available at http://www.engadget.com/2007/12/11/nokia-like-apple-will-seek-its-slice-of-
   the-revenue-sharing-pi/.
7
  “The big financial leverage [for AT&T] is on the people who switch carriers. It’s not like you have to add
   new cell towers for them; they’re almost all profit. And those people are hard to come by, because you
   have to switch them off somebody else’s network.” Alex Mindlin, iPhone’s Hold on Users Not
   Exclusive, May 19, 2008, available at
   http://www.nytimes.com/2008/05/19/business/19drill.html?_r=1&oref=slogin.
Page 3                                                                              Progress on Point 15.8


they need to fund expensive, risky efforts to develop revolutionary products like the
iPhone. 8

        Exclusive distribution arrangements with a carrier also provide the equipment
manufacturer the freedom to innovate. Motorola’s ROKR failed, in part, because
Motorola insisted on loading the phone with its standard software. Apple’s initial efforts
to cut a deal with Verizon failed for a similar reason—Verizon’s reluctance to give up
use of its proprietary VCast service to sell music 9 —while AT&T recognized that only by
letting Apple take the lead on technological development could a truly revolutionary
device be created. The resulting partnership allowed the two companies to make
significant investments to develop a radically innovative device while ensuring that the
phone and its new features (such as visual voicemail) would function properly on
AT&T’s network.

         Other exclusive handset arrangements that have followed the iPhone’s success
include LG’s Voyager (offered exclusively by Verizon Wireless), Samsung’s Ace™
(offered exclusively by Sprint Nextel), Samsung’s Katalyst (offered exclusively by T-
Mobile), LG’s AX565 (offered exclusively by Alltel Wireless), the soon-to-be-launched
RIM Thunder (the long-awaited touchscreen BlackBerry that will be offered exclusively
by Verizon Wireless) and the Samsung Instinct (also to be offered exclusively by Sprint
Nextel). All are targeted by RCA as significantly and unfairly diminishing the ability of
smaller carriers to effectively compete “due to their limited handset selection, thereby
further enhancing the market power of the ‘Big 5’” and “essentially creating another
‘digital divide’ between urban and rural America.” 10

        Whether the so-called “Big 5” carriers have market power in the geographic
areas served by RCA members is far from evident, as discussed below. However, one
thing is painfully clear: Now that the market has demonstrated the value of exclusive
distribution arrangements as partnerships that make possible the development of new
devices, RCA is seeking the government’s help to ensure that its members may reap
the competitive rewards of others’ investments. RCA’s petition casts the nations’ five
largest carriers (AT&T Mobility, Verizon Wireless, Sprint Nextel, T-Mobile and Alltel
Wireless) variously as “monopolistic,” “dominant,” and “oligopsonistic” 11 villains who use
their market power to “command” exclusive arrangement’s like that between AT&T and

8
  The iPhone was not only a revolutionary product in terms of design and features. The business model
   struck between Apple and AT&T was revolutionary as well: It appears to be the first time a handset
   manufacturer was able to obtain a share of the monthly subscriber revenues generated by its product.
   Apple’s revenue-sharing is certainly unprecedented in its scale: Apple has not disclosed how much it
   receives per iPhone customer per month and estimates vary, but at least one analyst has put the
   estimate at $18/month—or $432 over the term of AT&T’s required two-year contract. See Tom Krazit,
   Piper Jaffray: AT&T paying Apple $18 per iPhone, per month, CNet News.com, October 24, 2007,
   available at http://news.cnet.com/8301-13579_3-9803657-37.html.
9
  Apple Coup, supra note 2 (“Verizon wouldn't give up its ability to sell content like music and videos
   through its proprietary V Cast service,” instead of directly through iTunes, as iPhone users can do from
   their phones.).
10
   RCA Petition at ii, 3, 8.
11
   In this case, the alleged “oligopsony” is a small group of carriers who, as handset buyers, supposedly
   exercise market power over handset suppliers. See id. at 3 n. 5.
Progress on Point 15.8                                                                                   Page 4


Apple. 12 RCA claims that its members are challenged in their ability to compete with
the “Big 5” not only by their inability to access to wireless handsets comparable in
function and style to the high-end exclusive handsets, but by virtue of their inability to
command the same volume discounts from vendors as the largest carriers, creating
what RCA states is a “wireless marketplace bordering on oligopsony.” 13 In addition to
their alleged harms to smaller competitors, RCA claims that the exclusives create two
distinct forms of consumer harm: (i) Consumers in “Big 5” service areas are forced to
purchase service from a carrier they may not wish to use in order to utilize their handset
of choice (which will cost more due to the lack of competition for distribution), and (ii)
consumers in the foreclosed areas (those served by RCA members) are denied the
opportunity to obtain service for the premium devices they desire. 14 Additionally, RCA
argues that exclusive arrangements are disproportionably harmful to rural consumers.

        An unstated premise of RCA’s petition is that consumers in every area of the
country have a legal or perhaps even constitutional right to the smart phone of their
choice, and that any business arrangement that restricts the exercise of this right is, in
essence, “contrary to the public interest.” This is simply preposterous. Consumers
today have an incredible array of wireless devices before them. As CTIA has noted,
there are more than 620 unique wireless devices for sale to consumers in the United
States, designed and manufactured by no fewer than 35 companies. 15 These devices
are sold by both carriers and a vast number of retailers, including “Big Box” and national
electronics stores, independent retail outlets, manufacturers’ stores and websites, and
online auction sites. Indeed, RCA does not claim that the handset markets are
uncompetitive; rather it stretches to claim that consumers and smaller competitors are
harmed by the actions of the “Big 5” carriers in accepting these exclusive deals because
the effect is to deprive some consumers of either their desired handset, or their desired
carrier, or both. Simply put, the market is currently working to protect consumer
interests and there is no constructive role for government to play here. There is not
yet—nor should there be—a governmentally-sanctioned right to obtain a particular

12
   Id. at 2, 7, 3 and 3 n.5.
13
   Id. at 3.
14
   Remarkably, RCA offers not a shred of evidence that the iPhone, for example, would cost less but for
   the exclusive distribution deal with AT&T. Nor would it seem likely that such a case could be made.
   Tellingly, RCA cites only the initial launch price for the 4GB Apple iPhone, which retailed at $499.00.
   RCA Petition at 2 n.4. RCA fails to mention at all uproar among initial purchasers that ensued when
   Apple dropped the price of the 8GB iPhone by $200 two months after it went on sale—causing Apple to
   release an apologetic letter from Steve Jobs himself and offer each initial purchaser a $100 Apple store
   credit. See Letter from Apple CEO Steve Jobs to All IPhone Customers, available at
   http://www.apple.com/hotnews/openiphoneletter/. RCA also fails to mention the steady decline in the
   iPhone prices and the introduction of larger-capacity phones. Current prices for an 8GB phone have
   fallen dramatically from the initial price of $599: $399 through AT&T and $285 through Amazon.com.
   Even the 16GB iPhone—with four times the storage of the 4GB iPhone that sold for $499 less than a
   year ago—now sells for the same price through AT&T and $379 through Amazon.com, while Amazon
   also sells a new 32GB phone for $459. Nor does RCA mention the obvious: Despite these premium (if
   falling) prices, the iPhone has set record sales globally since its introduction. Again, this is the sign of a
   highly desirable product for which consumers are willing to pay a high price—in other words, the sign of
   a healthy marketplace, not one hobbled by anticompetitive activity.
15
   CTIA-The Wireless Association, Written Ex Parte Communication, WT Docket No. 08-27 (Mar. 20,
   2008).
Page 5                                                                          Progress on Point 15.8


handset (no matter how desirable that handset might be). Where both the handset
manufacturer and the carrier service markets are not only effectively, but wildly,
competitive the lack of availability today of some equipment in certain parts of the
country should not give rise to an FCC investigation tomorrow.

       RCA confuses matters by attempting to tie its petition (mandating the ability to
use a single device on any network) to Skype’s February 2007 petition, which seeks to
have the FCC impose “open access” requirements (the ability to use any device on a
single network). 16 In fact, the strongest connection between these issues is that they
both share the same flawed premise about the supposedly “monopolistic” market power
of the “Big 5” wireless carriers. In view of the fact that the FCC may be preparing to
dismiss the Skype petition as unnecessary, 17 one must ask: Do we really want to
increase FCC regulation of an industry that has thrived precisely because it has not
been as heavily regulated as the traditional wireline industry?

       In the 1968 Carterfone decision, the Commission first required that any piece of
“customer premise equipment” (CPE) be allowed to access the telephone network (then
truly a monopoly) so long as it did not cause harm to the network. In the FCC’s
landmark 1980 Computer II decision, the agency de-tariffed “customer premise
equipment” (CPE) as well as data transmission services, but required that both be sold
unbundled from the underlying common carrier wireline service and by separate
corporate entities. 18 The FCC did so in recognition of the fact that the CPE market was
highly competitive such that the imposition of common carrier regulation had serious
and deleterious consequences. In 1992, the Commission created an exception to the
bundling prohibition in its Cellular CPE Bundling Order, allowing wireless providers to
bundle devices and transmission services with wireless voice service. 19             The
Commission justified this exception on the grounds that “most wireless carriers were
smaller and operated in local markets, making it unlikely that they could ‘possess
market power that could impact the numerous CPE manufacturers operating on a
national… basis.’” 20

       In the same 1992 order, and at a time when there were only two cellular carriers
per market, the FCC rejected claims by both cellular resellers and equipment
manufacturers that permitting carriers to enter into exclusive agreements with CPE
providers created the potential for anticompetitive abuse. Two markets were analyzed:
the CPE market and the cellular services market. The FCC had little trouble concluding

16
    Skype Communications S.A.R.L., Petition To Confirm A Consumer’s Right To Use Internet
   Communications Software And Attach Devices To Wireless Networks, RM-11361 (filed Feb. 20, 2007)
   (“Skype Petition”).
17
   Brad Reed, CTIA: FCC chair vows to quash Skype open-access petition; He cites recent moves by
   carriers to open up their networks and says the government shouldn't intervene, ComputerWorld, April
   8, 2008, available at
   http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9075681.
18
   Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry),
   Final Decision, 77 FCC 2d 384; modified on recon., 84 FCC 2d 50 (1980).
19
   Bundling of Cellular Customer Premises Equipment and Cellular Service, Report and Order, 7 FCC
   Rcd 4028, ¶¶ 29-30 (1992) (Cellular CPE Bundling Order).
20
   Id. ¶ 13.
Progress on Point 15.8                                                                                 Page 6


that the “cellular CPE market is extremely competitive.” 21 After noting that the record
was not conclusive as to whether the service market was “fully competitive,” the FCC
reiterated that in establishing the duopoly cellular market, it had concluded that “‘even a
marginal amount of facilities-based competition will foster public benefits of diversity of
technology, service and price.’” 22 Accordingly, the FCC refrained from intervening in
these markets where the record before it was devoid of evidence that cellular carriers
were violating their obligations to provide service to customers purchasing other brands
of CPE or that the exclusives were having an anticompetitive impact on competition in
the CPE market. 23 In the face of its 1992 findings that one of the two relevant markets
was “extremely” competitive (wireless CPE) and the other at the very least effectively
competitive (wireless services), it is no surprise that the FCC concluded that exclusive
deals posed no present or foreseeable anticompetitive harm. 24

       Today, the lack of possible competitive harm in both the handset and CMRS
markets should be even more evident. The FCC’s most recent annual report on
competition in the commercial mobile radio services (CMRS) marketplace was released
in February 2008, focusing on “conditions prevailing in the CMRS marketplace as of the
end of the 2006 calendar year and major events in the 2007 calendar year.” 25 The

21
   Id. ¶ 9.
22
   Id. ¶ 11.
23
   Id. ¶¶ 15-17.
24
   Not only did the FCC find that no evidence of anticompetitive effects from the exclusive CPE deals had
   been presented on the record before it, but the agency went on to note that the record did not
   demonstrate a reason to be concerned about future exclusive dealing arrangements, because
   nondiscrimination requirements (still in effect today) precluded cellular carriers from refusing to provide
   services to a customer on the basis of the CPE it owns and it was unlikely that cellular carriers could
   effectively eliminate competition in the CPE market by entering into such agreements. Cellular CPE
   Bundling Order, ¶ 18. In other words, the two markets potentially affected by exclusives—the upstream
   CPE market and the downstream carrier services market—were both sufficiently competitive even in
   1992 to withstand any potential adverse effects from exclusive deals. Certainly today’s exclusive deals
   pose no greater threat in wireless markets served by a multiplicity of carriers.
25
   The 12th CMRS Competition Report appeared in February of 2008, based on data submitted by the
   carriers for the calendar year 2006. See Implementation of Section 6002(b) of the Omnibus Budget
   Reconciliation Act of 1993; Annual Report and Analysis of Competitive Market Conditions with Respect
   to Commercial Mobile Services, Report, WT Docket No. 07-71, FCC 08-28 (rel. Feb. 4, 2008) (“Twelfth
   CMRS Competition Report”). It appears that, for the last several years, previous annual reports took
   roughly nine months to prepare and were generally issued in September. See
   http://wireless.fcc.gov/index.htm?job=cmrs_reports. Although the 12th CMRS Competition Report was
   based upon data gathered for calendar year 2006, it also purported to include significant events
   occurring in calendar year 2007 and appeared nearly eighteen months after its predecessor. The
   FCC’s Public Notice initiating the 13th Annual CMRS Competition Report seeks data on developments
   since the last report, but presumably will reflect data for the calendar year 2007. See Wireless
   Telecommunications Bureau Seeks Comment On Commercial Mobile Radio Services Market
   Competition, Public Notice, WT Docket No. 08-27, DA 08-453 (Feb. 25, 2008), available at
   http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-08-453A1.pdf. It will be interesting to see
   whether this report is released on an “annual” or “bi-annual” basis—given the apparent slowdown in
   production of FCC annual competition reports. See Barbara Esbin and Adam Thierer, The Progress &
   Freedom Foundation, Where is the FCC’s Annual Video Competition Report?, available at
   http://pff.org/issues-pubs/ps/2008/ps4.11whereisFCCvidcompreport.html (discussing the FCC’s failure
   to release its annual video competition report since releasing its last such report in March 2006)
   Indeed, on May 17, 2008, former FCC technologist J. Scott Marcus writing on the “Cybertelecom”
Page 7                                                                              Progress on Point 15.8


report concludes that there is effective competition in the CMRS market and that “U.S.
consumers continue to reap significant benefits – including low prices, new
technologies, improved service quality, and choice among providers – from competition
in the [CMRS] marketplace, both terrestrial and satellite CMRS.” 26 Significantly,
summarized findings of the Report state that approximately 99.8 percent of the total
U.S. population may obtain service from one or more CMRS providers; more than 95
percent live in areas with at least three CMRS providers competition to offer service;
more than half the population lives in areas with at least five competing providers; and
that 99.3 percent of consumers living in rural areas (approximately 60.6 million people)
have a choice of one or more mobile carriers. 27 In short, there is hardly an area of the
country where consumers have a choice of fewer than two CMRS providers, and the
vast majority of the country has a choice of between three and five providers. As FCC
Chairman Kevin J. Martin has succinctly observed: “Today, wireless is the poster child
for competition ... [i]n the early 1990s, there were, at most two providers in every
market. Today, the FCC estimates that 95 percent of the people in the U.S. can choose
form at least three wireless operators competing to offer them service. And almost 90
percent of the people can choose from at least four providers.” 28

       Yet, Skype and RCA both paint a vastly more pessimistic picture of today’s
wireless marketplace. By 2007, according to Skype, the “situation ha[d] changed
dramatically, as the market is now dominated by four, large nationwide carriers with
large enough subscriber bases to exert significant influence on handset manufacturers.
The simple truth is that manufacturers depend upon carriers to market their devices,
and no manufacturer can afford not to ‘play ball’ with the largest wireless carriers.” 29

   listserv, questioned whether recently there hadn’t been “some kind of statistics meltdown at the FCC.”
    Marcus noted that the report on local telephone data as of Dec. 31, 2006 did not appear until Dec. 31,
   2007, which is nearly six months later than predecessor reports of similar data. See
   http://www.fcc.gov/wcb/iatd/comp.html. Marcus noted similar slowness in production of the FCC’s
   Section 706 reports on broadband deployment. Section 706(b), added to the Communications Act of
   1934, as amended, 47 U.S.C. §§ 151, et seq., by the Telecommunications Act of 1996, requires that
   the Commission, “within 30 months after the date of enactment of this Act, and regularly thereafter,
   initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all
   Americans . . . [and] complete the inquiry within 180 days after its initiation. In the inquiry, the
   Commission shall determine whether advanced telecommunications capability is being deployed to all
   Americans in a reasonable and timely fashion.” See § 706, Pub. L. 104-104, Title VII, Feb. 8, 1996,
   110 Stat. 153, reproduced in the notes under 47 U.S.C. § 157. For the first few years after initiation of
   the Section 706 broadband reporting obligation, the FCC kept to a cycle of issuing the report about
   every eighteen months, with the first report issuing in January 1999, the second in August 2000, the
   third in February 2002 and the fourth in September 2004. However, the Notice of Inquiry for the fifth
   report was not issued until April 2007. See http://www.fcc.gov/broadband/706.html. Thus we are
   currently about 45 months out from the fourth to the fifth report, and—as Marcus noted—“still counting.”
26
   Twelfth CMRS Competition Report, ¶ 1.
27
   Id. ¶ 2.
28
   Remarks of FCC Chairman Kevin J. Martin, CTIA Wireless 2008, Las Vegas, NV, April 1, 2008, at 1
   (Martin CTIA 2008 Remarks), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-
   281259A1.pdf. In the same speech, Chairman Martin noted that “the competitive marketplace for
   wireless services continues to bring consumers more choice, better services and lower prices” and
   singled out the iPhone as an “innovative new product” that exemplifies the benefits this competitive
   market has brought consumers. Id. at 2.
29
   Skype Petition at 22.
Progress on Point 15.8                                                                            Page 8


But Skype, like RCA, wildly overstates the market power of the carriers. RCA claims
that the “Big 5” carriers today exercise “monopolistic” control over the iPhone and that
other leading carriers use their market power to force device manufactures into
exclusive relationships that harm the ability of rural carriers to compete. 30 Of course,
the opposite is true: It appears now that it is the manufacturers who “command” the
carriers, and the manufacturers are under no generalized “duty to deal” under our
antitrust laws. Economists have long recognized the benefits of exclusive deals entered
into by companies who lack substantial market power. In the case of these high-end
handsets, it seems that the balance of power between the larger carriers and equipment
manufacturers has shifted in the direction of the manufacturers and away from the
carriers—precisely what one would expect in a dynamic and competitive market. Even
RCA acknowledges that “unique services and features” are a key element of
competition among carriers. 31 The FCC itself has noted that exclusive handset
arrangements are a natural competitive response by carriers to the high customer
“churn” rates they face. 32 In other words, they are a simply feature of an intensely
competitive market, rather than an “unfair” or “anticompetitive” tool.

       According to RCA, this dynamic dooms rural customers to dwell forever on the
wrong side of the so-called “Digital Divide” between socioeconomic or geographic
classes of Americans. But this focus on Internet-era class warfare ignores the “divide”
that matters most: that between the technologies of today and the disruptive
innovations of tomorrow. Companies like Apple should be lauded for bridging the divide
between the “dumb” cell phones of the past and the “smart” phones of the future. If the
FCC prohibits the exclusive partnerships between manufactures and carriers that make
it possible to master the technical challenge of device innovation and to finance such
risky ventures, all Americans will miss out on the dramatic benefits of innovation and
increased mobility of Internet access.

       So what about rural consumers? Apple’s exclusive deal with AT&T will
apparently last another four years. 33 The fact that Apple has begun to back away from
exclusive arrangements as it continues to enter new foreign markets indicates that even
a manufacturer in a strong a position as Apple may ultimately decide that it has more to
gain from maximizing its total sales—after it has gotten past the initial technical and
financial gamble of developing a product like the iPhone. 34 This fact also suggests that

30
   RCA Petition at 3.
31
   Id. at 14.
32
   As the FCC has found with respect to the very issue raised by the rural wireless carriers, “Providers
   have been attempting to differentiate themselves through exclusive arrangements to reduce churn….
   Wireless carriers are hoping that exclusive access to content and desirable handsets will help them
   retain and attract customers.” Twelfth CMRS Competition Report, ¶ 188.
33
   See, e.g., Arik Hesseldahl, Why AT&T May Deep-Discount the iPhone, Top Tech News, May 2, 2008,
   available at http://www.toptechnews.com/story.xhtml?story_id=011000TUG0SH (“‘As far as anyone
   knows Apple is married to AT&T for another four years,’ says John Hodulik, analyst with UBS
   Investment Research.”).
34
   Apple’s continuing efforts to develop foreign markets for the iPhone demonstrate the dynamism of the
   marketplace. Since China Mobile’s refusal to accept any data-sharing arrangement, Apple has
   apparently begun to back away from exclusive arrangements. For the first time, it appears that Apple
   may “allow its operator partners to subsidize the device to juice sales and jump-start increased data
Page 9                                                                              Progress on Point 15.8


market forces may reduce the length of future exclusive deals made by other smart
phone manufacturers. But even if iPhones remain available in the U.S. exclusively
through AT&T until 2012, there are already a wide variety of increasingly sophisticated
alternatives to the iPhone. At the same time, the four largest carriers have all
announced plans to support “open” applications and handsets, with not one but two
open-source mobile platforms—Google’s Android and Linux Mobile or “LiMo”—
emerging. 35 FCC Chairman Martin, recognizing this embrace of more open wireless
platforms following the FCC’s adoption of its 700 MHz services rules, stated that “it
would be premature to adopt any other requirements across the industry,” and indicated
his intent to circulate an order dismissing the Skype Petition. 36

       If the RCA members are determined to get into the smart phone business, they
might do well to follow the example of the Associated Carrier Group (ACG), a group of
small or rural Tier II and III CDMA carriers—by pooling their resources and purchasing
power to make themselves more attractive as development partners to a smart phone
manufacturer. The ACG members actually beat Apple and Cingular’s Motorola ROKR
to market in 2005 with a digital music player smart phone, the Kyocera Slider Remix
KX5 music phone. 37 At the time, ACG’s president proudly declared: “Although other
phones have been launched with MP3 capability, we think this was the first phone to be
centered around music. Shortly thereafter, other carriers launched music-centric
devices,” adding, “This phone is exclusive to us for a limited time.” 38

        Rather than trying to prohibit exclusive handset arrangements, the RCA
members should pick up where the ACG members left off, pool their resources, and
negotiate such arrangements for themselves. Like AT&T, RCA members may have to
be willing to share some subscriber revenue, but that’s simply the market at work. For
its part, the FCC should let the competitive forces of the wireless and handset markets

   revenue for the operators.” Phil Carson, TeliaSonera signs for iPhone in 7 countries; Another domino
   falls: Russia and China remain, RCRWireless News, May 28, 2008, available at
   http://www.rcrnews.com/apps/pbcs.dll/article?AID=2008706948322.
35
   AT&T has released an open source developers kit for the iPhone. See, e.g., Ephraim Schwartz,
   iPhone SDK exceeds developer expectations, InfoWorld, March 06, 2008 available at
   http://www.infoworld.com/article/08/03/06/news-iphone-developer-react_1.html. Verizon has embraced
   LiMo platform. See Eric Eldon, The Industry Standard, LiMo gets new partners including Verizon — an
   open rival to Google’s Android?, May 14, 2008, available at
   http://www.thestandard.com/news/2008/05/14/limo-gets-new-partners-including-verizon-open-rival-
   google-s-android. T-Mobile and Sprint Nextel have joined Google’s Android-based Open Handset
   Alliance. See Open Handset Alliance, Industry Leaders Announce Open Platform for Mobile Devices,
   Press Release (rel. Nov. 5, 2007), available at
   http://www.openhandsetalliance.com/press_110507.html.
36
   Martin CTIA 2008 Remarks at 3.
37
   See http://www.kyocera-wireless.com/slider-remix-phone/.
38
   Sue Marek, Operators Collaborate on Exclusive Devices, Wireless Week, Nov. 1, 2005. (To overcome
   their individual inability to secure exclusive handset deals due differences in network technologies and
   lack ability to place large volume orders, six small independent CDMA carriers formed the ACG in 2005
   to jointly develop their own “upper tier” exclusive handsets with original equipment manufacturers; the
   group launched its first exclusive device, the Kyocera Slider Remix KX5 music phone in August of that
   year. “Small operators may not have the buying power of Tier 1 carriers, but by working together and
   developing innovative purchasing strategies, they are getting access to state-of-the-art devices in the
   same timeframe as their Tier 1 counterparts.”).
Progress on Point 15.8                                                                                                      Page 10


continue to produce devices like the iPhone unhindered by intrusive and unnecessary
government intervention.




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