Phone Exclusivity: An Abuse of Power

One day after the New York Times editorial board weighed in on exclusive handset deals, the paper's tech reporter David Pogue posted a rant about the "irksome cellphone industry."

Pogue describes many of the industry's problems, including exclusivity, exorbitant text messaging fees and -- my favorite -- those annoying 15-second instructions you get when leaving a voicemail ("'To page this person, press 5.” ' Page this person!? Oh, sorry, I didn't realize this was 1980!").

Here's the best part: Pogue is pushing Congress to do something about it. Just as the Senate recently investigated issues like handset exclusivity and phone number portability, Pogue seems to argue that they should take a closer look at things like obscene international calling fees and hidden phone subsidies. As Pogue puts it: “Apparently, persuading cell carriers to treat their customers decently would take an act of Congress.” (Maybe what we need is more competition?)

So far, so good. But on handset exclusivity, which, thanks to Sen. John Kerry's efforts, is one wireless issue being discussed in Congress at the moment, Pogue is off the mark.

According to Pogue, "Exclusivity... is not such a slam dunk." Citing AT&T's exclusive deal with Apple to sell the iPhone, Pogue says:

Sure, everybody would love a Verizon iPhone. But there are some valid arguments against banning exclusivity deals altogether.

First of all, there are two different cell network types in this country: the AT&T/T-Mobile type (called GSM) and the Sprint/Verizon type (called CDMA). Creating a Verizon iPhone isn't just a matter of signing a few papers. It requires new engineering. It takes time and resources.

Second, you could argue (as some of the carriers at the hearings have) that exclusivity arrangements are actually good for innovation. Look at Visual Voicemail, which displays your voicemail list so you can get to them in any order, without being held hostage to your carrier's prompts. That's a very cool iPhone breakthrough that required Cingular (the iPhone's original carrier) to make special changes to its network — collaboration that probably wouldn't have happened if Cingular hadn't had the incentive of exclusivity.

But if you look a little more closely, neither of these points is an argument in favor of exclusive deals for handsets, just more evidence that exclusive deals are closing the door on competition. Let's break it down:

First, Pogue's absolutely right that it would take additional work for cell phone makers to create an iPhone that works on Verizon's network. But Apple -- like Samsung and Motorola and LG and all of the other cell phone manufacturers -- would actually benefit from making multiple versions of its phone to work with any carrier. The cost of making another version of the phone is much less than inventing the phone in the first place, and allowing Verizon users to buy iPhones would increase Apple's user base substantially.

However, Apple is prohibited from producing different versions by a powerful wireless cartel that demands exclusivity when making deals with manufacturers (Verizon recently said it would limit the length of these deals, though that hasn't appeased anyone).

Pogue is right that simply banning exclusive deals won't magically create a Verizon iPhone, but such a move would free up the market to allow Apple and Verizon to work together to make one – if they so chose.

Second, on the innovation point, take it from me: Visual Voicemail is great. We're just lucky that AT&T decided it was an acceptable innovation. If AT&T had decided against the idea -- like when it chose to block Skype calls over its 3G network, or to allow some video apps like MLB but to block others like Sling Media -- then we wouldn't have this pretty cool and useful bit of technology.

But if we get rid of exclusive deals, even if AT&T were to decide it didn't like Visual Voicemail, then Verizon could use it. Or both networks could adapt to include it, and we'd have a real competition to see which carrier could support it best (because AT&T isn't doing such a great job so far). Either way, the result for consumers is more choice, better quality, lower prices and more innovation.

The bottom line is this: Exclusivity isn't a technology problem; it's an abuse of power problem. Get rid of that, and innovation will bloom.