Has Handset Exclusivity Created Smart Phone Promiscuity?
Business people, technical people, and government people all have their inexplicable, annoying, or simply confounding catchphrases. Most either bear no semblance to the ordinary, direct conversational words we use, and some even have the opposite meaning from their everyday context.
Sometimes they aren't even real words--like "incent", or the really annoying "incentivize"--both of which are attempts to turn what was once solely the noun "incentive" into a verb, without "plagiarizing" more grammatically-correct words like "encourage", "motivate", or "inspire."
Other times the words are real words, but they are put together, or used, out of their ordinary context in a way that allows business people to "own" the words for the purpose of creating a slick, cool rap. Consider one of many potential examples. Around the turn of the century, businessmen in the "money business" (sometimes called "investors"), started using the term "space" instead of the previously (and still) correct word "market."
And sometimes, otherwise smart people carelessly use words and phrases in exactly the opposite ways from which these idioms developed their original meaning. For example, how many times have you heard someone use the term "split the baby" when they really mean "split the difference?" "Splitting the baby" may be a fair solution, but it does not refer to a compromise. Rather, it refers to a winner-take-all outcome. Recall from the origins of the idiom--King Solomon's technique for deciding the claims of two women over the same child--that no baby was in any way divided. So where does all this meandering lead?
Earlier this year the Rural Cellular Association filed a petition with the FCC, asking it to declare all "exclusive" deals between handset manufacturers, and wireless network service providers to be anticompetitive and illegal. The FCC solicited comments and now has a pending matter open on this issue. The most famous example of an "exclusive" is the AT&T/Apple iPhone, other successful examples have been the BlackBerry Storm , designed "exclusively" for Verizon Wireless, and the "next-big-thing", highly buzzed about, Palm Pre, designed by Palm "exclusively" for Sprint. Now, my premise here is that in an ordinary relationship context, the opposite of "exclusivity" would seem to be promiscuity (a complete lack of discrimination in partner selection).
Still, what's the point? Well the point is that the current kerfluffle over "exclusive" handset/service provider bundles being anticompetitive is just another example of someone using a word one way, when it has the exact opposite meaning. Let me explain. Competition laws are designed to prevent firms from, either unilaterally or in concert, artificially restricting output, so as to cause a price increase in the product or service affected. Artificial price increases (through output restrictions) cause resources to be inefficiently allocated. For example, we in the United States pay a much higher price for sugar than the rest of the world, because our government severely limits imports--through both high tariffs on most imported sugar, and an outright ban on imports from at least one country. This particular distortion makes it profitable to domestically produce sweeteners from a variety of sources (sugar cane, corn, sugar beets) that might not otherwise be efficient.
In the handset/service provider example, the firms may use the term "exclusive", but the government keeps sufficient network operators in any given market to ensure that the public interest is protected, and the market for handsets is even more competitive. Thus, the word "exclusive" is just another means of hyping products that result from the convergence of two, separately-owned, complementary goods and services. This is akin to retail stores that seek "exclusive" distribution of hot products (examples are the recent Guns 'N Roses, and AC/DC albums that were only sold at WalMart--at least for a period of time). If you didn't live near a WalMart, this was a bad deal, but it was a marketing decision with a transient effect--and, importantly, each party was best served by increasing the supply of the "exclusive" product.
In the "unregulated" world, still governed by competition laws, like the Sherman Act (which forbids any contract, combination, or conspiracy in restraint of trade), the Supreme Court recognized early on that every contract excludes to some degree--if I sell my car to one person, I have foreclosed that car's availability to everyone else. Thus, the Court explained that the law should only restrict practices that "unreasonably" restrain trade. To determine reasonability, courts have been instructed to examine the purpose, scope, and effect of the conduct being challenged. So, let's look at "exclusive" handset/network operator agreements and see if they really restrict commerce, or if they in fact stimulate commerce.
First, consider that each piece of the "exclusive" in the handset/service bundle is being sold by two separate firms, each of which competes with other similarly-situated firms for customers. Additionally, neither firm has any guarantee that their joint "exclusive" will be profitable. Furthermore, each party to the "exclusive" arrangement has an incentive to bargain hard to get the other firm to offer prices at lower than competitive prices, because each party is selling a complementary product (service or handset)--the profit on which is maximized by getting the other partner to offer its piece of the package at an inefficiently low price.
In other words, AT&T benefits if Apple can sell a handset at the lowest possible price, because more people will get the phone and begin using AT&T's wireless voice and data services--and Apple loves offering its users the opportunity to really use (read "abuse") AT&T's network. The "scope" of these agreements is de minimus in that the agreements typically don't prevent the network operator or the handset manufacturer from developing a different product for a different network operator, e.g., BlackBerry has the "Storm" for Verizon and the "Bold" for AT&T. Finally, the effect of these exclusives has been anything but restrictive. Consumer demand has exploded (15 million iPhones and 1 billion iPhone "apps" in three years!), and other manufacturers and networks are eagerly racing to give consumers new choices. This is serious demand stimulation.
The only complaint critics can muster is the temporal result of so much demand stimulation--when will we get the iPhone? A similar question you here all the time in this area is, "when is my neighborhood going to get FiOS?" These questions--while prompted by un-addressed demand--are not the result of artificial demand scarcity (which is anticompetitive), but real demand that outstrips supply. This is a good thing. Where there is money to be made, supply will catch up with demand--even if the wait can be frustrating.
In short, innovation can stimulate demand, and create near-term supply scarcity. Throw in the word "exclusive" to generate marketing hype, and sooner or later someone will accuse you of anticompetitive behavior. But, in the case of handset/service provider "exclusives", it is clear that these "exclusives" have "incented" handset manufacturers and network owners to perpetuate so many "exclusives" that we now have a market characterized by a "promiscuous" level of demand that has put a lot more smart phones in the hands of a lot more users (80% growth rate since 2007), and promises to continue to increase growth. Bottom line: it's hard to argue that increased output is anticompetitive.
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