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Senate Panel Digs In on Wireless Exclusivity Deals

WASHINGTON -- A Senate panel today heard two very different stories about the effect of exclusive arrangements between wireless carriers and device makers, like the one that makes Apple's iPhone available only to AT&T subscribers.

"Exclusive device deals lead to lower prices," Paul Roth, AT&T's president of retails sales and services, told members of the Commerce Committee. He referred to the "standard industry practice" of carriers subsidizing the cost of the device, an expense they recoup over the course of the obligatory two-year service agreement.

Smaller carriers see it differently.

"These arrangements deny consumers the ability to select a handset, access popular software applications, and use it on the network of their choosing," said Jack Rooney, president and CEO of U.S. Cellular. "Who would accept such a proposition for their laptop or personal computer?"

Today's hearing comes amid increasing concern among lawmakers over the largely unregulated wireless market. Yesterday, the Senate Subcommittee on Antitrust held a hearing looking into the text-messaging rates wireless carriers charge their subscribers, specifically asking why each of the four major providers doubled the price of an individual message within three years.

At today's proceeding, Rooney cautioned the panel that simply banning the exclusivity agreements would not be enough to set the market right, but that regulators need to examine the consolidation that has left about 90 percent of the market in the hand of the four largest carriers, and left his, No. 5 in terms of subscribers, a competitive also-ran.

That consolidation, which saw Nextel, Cingular and Alltel each snapped up by larger carriers, has essentially created a two-tier system, leaving many rural areas served only by smaller carriers that can't access the hottest new smartphones, he said.

Hu Meena, president and CEO of Cellular South, joined in the criticism of the wireless "oligopoly," noting that nine of the 10 best-selling phones on the market today are limited to a single carrier through exclusivity agreements, a claim that AT&T's Roth disputed.

"The situation with exclusive is bad and only getting worse," Meena said.

Roth counterpunched, arguing that without exclusivity deals, many of the most popular phones wouldn't have ever made it to the market. Many of the devices available today originated from a collaboration between the carrier and the manufacturer. In such arrangements, the carrier often pushes the device maker out of its comfort zone, pressing it to mix and match features to create a custom device that the carrier must then subsidize.

"Manufacturers want someone to share the risk when you're asking for something that's not on their product roadmap," he said.

"Because these devices are exclusive, competitors are forced to innovate or risk losing customers," he said. "Without exclusive deals, the iPhone, and whatever follows next, might not have occurred."

From a policy perspective, much of the debate concerns whether a landmark ruling the Federal Communications Commission made in four decades ago concerning wireline providers should be updated to hold sway over the mobile world. In the 1968 Carterfone ruling, the FCC directed AT&T to enable other devices to its network. That not only broadened the choice of telephones consumers could use, but paved the way for new devices like the fax machine and, more significantly, the computer modem.

In a conference call with reporters prior to the hearing, Michael Calabrese, vice president of the New America Foundation, called the current debate over exclusivity deals "one part of a larger problem, which is the fact that the FCC has not clarified that its Carterfone rules apply to the wireless space as well."

He added, "Now we're at that same juncture in the wireless market where the carriers want to control the adjacent market in devices and applications."

Indeed, VoIP provider Skype filed a petition with the FCC in 2007 to update the Carterfone rule, but the commission has not acted on the request.

Despite Roth's claims that exclusivity deals drive down prices and spur competition and innovation, the carriers, who are bitterly opposed to anything that smacks of regulation, might be hurting their cause by not being more forthcoming about their business practices.

"I have to tell you, it was not easy to find witnesses willing to testify about the benefits of these arrangements," said John Kerry, D-Mass.

Kerry said he extended an invitation to every major handset manufacturer to testify at today's hearing. Each declined. Roth was the lone representative of the big four carriers.

Verizon and AT&T were invited, but declined, to send representatives to a House hearing on the subject last month.

Meena also noted that the duration of exclusivity agreements has been steadily increasing in recent years, but secrecy surrounds those deals, too. In general, he said that while the deals used to be measured in months, most are now multiyear agreements, and some carriers have struck lifetime agreements with device makers.

AT&T's deal with Apple, for instance, is believed by many to lock the iPhone into its network for five years, though Roth declined to disclose the length of the confidential contract.

In the first part of the hearing, before the panel of witnesses began their testimony, Chairman John Rockefeller opened a broader inquiry into the general consumer practices of the wireless industry, one of the fastest-growing sectors of the economy.

"In light of this success we have a serious responsibility to ask what are the consequences of an industry that has grown up so fast, in such a short period of time," Rockefeller said. "Have our regulatory models kept up?"

The Government Accountability Office has opened a probe into the wireless industry with an eye toward how the FCC should proceed. The GAO has conducted a preliminary survey that found that most Americans are generally satisfied with their providers, but that many respondents expressed concerns about issues like call quality, billing and the service agreements. It also found that many wireless customers weren't aware that the FCC offers a mechanism for consumers to complain about their carriers.

Some of the senators took issue with the methodology of the GAO's survey, which polled a random sample of Americans, so it offered no insight into disparities in the quality service between rural and urban areas, for instance.

"When people tell me that wireless service is ubiquitous, I have my doubts, and that's what this hearing is about," Rockefeller said.

He asked Mark Goldstein, the GAO's director of physical infrastructure issues, to conduct a second, more targeted survey.

The GAO is planning to release a comprehensive report, including recommendations to the Federal Communications Commission, in November, the agency's Mark Goldstein said today.