Exclusive Wireless Contracts Examined

By Cecilia Kang
Washington Post Staff Writer
Thursday, June 18, 2009

Lawmakers yesterday waded into a growing debate on whether the practice of locking in cellphones to exclusive contracts with only one carrier has led to higher prices and fewer choices for consumers and stifled competition in one of the economy's brightest spots -- the wireless industry.

The Senate Commerce Committee met ahead of Apple's debut tomorrow of its latest version of the iPhone. Critics say the company will once again irritate people who want the gadget but are not subscribers of the company's exclusive partner, AT&T. A similar fate awaits those who want the Palm Pre phone but don't subscribe to Sprint Nextel service, or the new phone running Google Android software and don't get T-Mobile service.

Carriers argue that their contracts with phone makers have spurred innovation in the race to offer the most desired devices of the moment. Yet as the number of major carriers dropped from seven, three years ago, to four today, lawmakers have begun to question if that practice is anti-competitive.

President Obama has promised to step up scrutiny of anti-competitive business practices, particularly in the fast-evolving high-tech and telecommunications sectors.

AT&T has gained 2.5 million subscribers since Apple launched the iPhone two years ago, a small number compared with the 270 million cellphone subscribers in the United States. But such gains have been at the expense of carriers such as Sprint Nextel and T-Mobile and small regional network operators, which are losing customers to the biggest carriers, which are now serving seven out of 10 cellphone users.

"The four largest wireless carriers have hijacked consumer access to handset technology," said John E. Rooney, chief executive of U.S. Cellular, the nation's fifth-largest cellphone service operator with 6.2 million subscribers. "Everyone is going to the big four to get exclusive rights to these phones, so we are stuck with everything other than these. It puts a big dent in our ability to compete and our ability to supply these phones to areas of the country where we serve customers where they don't."

The nation's four largest carriers -- AT&T, Verizon Wireless, Sprint and T-Mobile -- have raised prices between 2005 and 2008 for text messaging even as the costs of sending and receiving texts has not increased, consumer groups complained in a Senate Judiciary Committee hearing earlier this week.

The consolidation has led to overall higher cellphone costs, according to Joel Kelsey of Consumers Union. U.S. cellphone customers paid an average of $506 in 2007, according to Kelsey, compared with about $374 in Britain that year.

Earlier this week, four senators, including John F. Kerry (D-Mass.), wrote a letter to the acting chairman of the Federal Communications Commission, Michael J. Copps, asking him to review a petition filed last year by rural carriers that asked for regulatory action to prevent exclusive handset contracts.

Kerry yesterday said such deals were reminiscent of the days when AT&T held a monopoly as a landline service provider. Consumers could only use one type of phone on its network. When AT&T was forced to open its network to other devices, an explosion of innovation occurred with fax machines, cable modems and answering machines, Kerry said.

Likewise, today's cellular phone deals by device manufacturers and network operators may hamper consumer choices and innovation, he said.

"Today when you sit down at the computer and access a broadband connection, you are not told by your broadband provider that you need a Dell or an HP or an Apple computer to access the network," Kerry said.

The biggest carriers say that the growth of prepaid service providers, such as Leap Wireless and small urban-focused provider MetroPCS Wireless, are examples of greater competition in the industry.

AT&T, meanwhile, played down its hand in crafting exclusive contracts, saying Apple made a decision to create the iPhone solely for AT&T's wireless network standard, which isn't used by Verizon.

Kerry said all major device manufacturers declined invitations to appear as witnesses at the Senate Commerce Committee hearing.

As Americans cut back on dining out and automobile and home purchases, cellphone users continue to snap up new devices, particularly smart phones, to send text messages, watch video clips and post pictures online. About two of every 10 homes have abandoned traditional wall-jack phones and use only cellphones for voice communications.

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