Verizon's Handset Offer Continues to Draw Fire

Verizon's Handset Offer Continues to Draw Fire

Verizon's July 17 offer to limit exclusive handset deals to six months and make the devices available to the nation's smallest carriers continues to be dismissed by critics as an empty political gesture meant only to stave off possible legislation.

The exclusive handset deals offered by carriers have already gained the attention of Congress with the Senate Commerce Committee holding a hearing June 17 questioning the practices of wireless carriers. Unlike wireline services, which are required by law to allow consumers to connect the legal devices of their choice to carriers' networks, the wireless market is pocked with exclusive deals such as AT&T's arrangement with Apple's iPhone.

"Effective immediately for small wireless carriers (those with 500,000 customers or less), any new exclusivity arrangement we enter with handset makers will last no longer than six months - for all manufacturers and all devices," Verizon Wireless CEO Lowell McAdam wrote to Rep. Rick Boucher, chairman of the U.S. House Energy and Commerce Committee's Subcommittee on Communications, Technology and the Internet.

Since the letter was made public, a firestorm of criticism has followed. The latest group to dismiss Verizon's offer is a coalition of MAP (Media Access Project), Free Press and the Consumers Union.

"In response to...political pressure, Verizon Wireless has taken a small step in the right direction. However, the impact of this action is largely insubstantial, and benefits few consumers," the groups wrote to Boucher in a July 20 letter. "Furthermore, industry self-regulation cannot be a substitute for meaningful consumer protection laws, particularly in a market that demonstrates insufficient competition."

MAP Vice President Parul P. Desai added in a statement, "[The] attempt by Verizon to limit concerns over its exclusive handset deals with mobile device manufacturers falls short of serving the public interest. It is clear Verizon continues to embrace and defend unlimited handset exclusivity practices for all consumers, save a small minority. The fight for greater access and innovation in our wireless market is far from over."

The groups note that only five percent of the nation's carriers have 500,000 subscribers or less. The letter to Boucher also points out that a six-month period of handset exclusivity could result in as much as 15 months of exclusivity in practice, considering the time it takes for carriers to bring new handsets onto the market.

"Fifteen months in the handset market is the difference between 'cutting edge' and 'obsolete.' Without the ability to negotiate for all devices, the Verizon Wireless offer does not offset this harm," the groups stated in their letter to Boucher. "The better solution is to encourage manufacturers to make interoperable phones from the outset by doing away with any exclusive deals in the wireless market."

Essential to Promote Competition?

Verizon and other major wireless carriers contend the exclusive handset deals are essential to promote competition and innovation in device development and design.

"This new approach is fair to all sides. We work closely with our vendors to develop new and exciting devices that will attract customers. When we procure exclusive handsets from our vendors we typically buy hundreds of thousands or even millions of each device," McAdam wrote to Boucher. "Otherwise manufacturers may be reluctant to make the investments of time, money and production capacity to support a particular device."

Nevertheless, the practice of exclusive handset deals is drawing the attention of key players in Congress, including Sen. Herb Kohl (D-Wisc.), chairman of the Senate Subcommittee on Antitrust, Competition and Consumer Rights. In July 6 letters to FCC (Federal Communications Commission) Chairman Julius Genachowski and Christine Varney, head of the DOJ's (Department of Justice) Antitrust Division, Kohl wrote, "We on the Antitrust Subcommittee have become concerned with emerging barriers to competition in an already highly concentrated market."

Kohl urged the DOJ and the FCC to begin investigations into the practices of wireless carriers to ensure that the wireless telephone market remains open to competition and to remove barriers to entry and expansion by new competitors. Kohl raised a host of questions about the wireless carriers including price fixing in text messaging, roaming arrangements and prices, spectrum restraints, exclusive handset deals between carriers and cell phone makers and early termination fees.

"The practice of large cell phone companies gaining exclusive deals to the most in-demand cell phones is a serious barrier to competition," Kohl wrote. "Consumers are unlikely to obtain cell phone service from companies if they cannot obtain desired handsets."

Kohl's letters were sent on the same day reports surfaced that the DOJ is opening an antitrust investigation into the consumer practices of such powerhouse providers as AT&T and Verizon.

While accusing companies such as AT&T and Verizon of engaging in anti-competitive behavior has become a popular sport in Washington lately, Harold Feld, the legal counsel of Public Knowledge, thinks it's a tough case to make.

"In a world where even potential competition is supposed to be part of the market analysis, how can a modest 60 percent of the wireless market shared by the two companies, with no evidence of price fixing or coordinated behavior, support any sort of antitrust action?" Feld wrote in a PK blog posting. "But for now, I applaud the DOJ apparently making good on Christine Varney's pledge to reinvigorate antitrust and her recognition of how important antitrust enforcement is to the digital economy."

That said, Feld also dismissed the Verizon offer.

"Verizon's gesture should be seen for what it is - an inadequate attempt to influence legislation and regulation. It should not be up to Verizon to decide the terms and conditions under which consumers can have the benefit of wireless handset competition," Feld said in a statement.   "Corporate charity as momentum builds for a policy that one company does not like is no substitute for legislation or regulation that treats all carriers, of whatever size, alike, and all consumers, of whatever size carrier, alike."