iPhone exclusivity and T-Mobile

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AT&T have moved to take over T-Mobile in the US. That would merge the only two GSM phone networks leaving an effective triopoly in the US mobile phone market.

Now I suspect that examined on its own, the deal is one of those ones that antitrust authorities won’t like but can’t really do anything about. T-Mobile has been struggling for some years (since 2007) while AT&T has well-known capacity and other issues.

But I wonder if that is the case the antitrust authorities should be looking at. This account in the NYT got my interest.

Until Apple introduced its highly popular touchscreen device in 2007, which went on to become the world’s leading smartphone, Deutsche Telekom had been generating decent sales from its American operation, with growth in some years surpassing that achieved in Germany.

But after the iPhone went on sale, sold exclusively at first by AT&T in the United States, T-Mobile USA began to lose its most lucrative customers, those on fixed monthly plans, who defected to its larger American rivals — AT&T and Verizon Wireless, which began selling the iPhone in February.

I’m not in a position to evaluate whether that theory — “it was the iPhone that dunnit” — is correct. But suppose for a moment that it is. The whole problem with exclusive deals is that they might lead to foreclosure and a reduction in competition to consumers. So give AT&T iPhone exclusivity and it wipes out T-Mobile and, regardless of whether you could have predicted it based on AT&T’s original market power or not, you have an anticompetitive effect. In Australia, it is that anticompetitive effect that would be what mattered. In the US, the law is less clear. But the economics are clear. If you undertake an exclusivity arrangement that direct leads to a reduction in competition, that is bad.

Why precisely is it bad? Because the alternative to T-Mobile merging into AT&T or exiting would have been for T-Mobile to be able to sell the iPhone. And while I have read discussions saying that it is incompatible with T-Mobile’s 3G service, it wasn’t incompatible with edge. As Australians travelling to the US know, that works just fine. Given that Apple could make an iPhone compatible with Verizon’s network, it wouldn’t have taken much to have made a T-Mobile version.

Anyhow, if this story is borne out, then this will be additional evidence for those who want to prosecute exclusive deals when they first occur; especially in technologically dynamic industries.

 

2 Responses to "iPhone exclusivity and T-Mobile"
  1. My impression is that the Verizon iPhone can be used with few modifications on CDMA networks in other countries. There are rumors that China Telecom employees hacked it for the Chinese CDMA network:

    http://blogs.wsj.com/chinarealtime/2011/02/16/china-telecom-employees-hack-verizon-iphone/

    CDMA is a much smaller market than GSM globally, but they can still sell the same phone in a dozen or more countries.

    On the other hand, like AT&T, the frequencies T-Mobile uses for 3G in the US are not used anywhere else in the world. Apple could have made an iPhone that works on both T-Mobile and global frequencies, like they did with the iPhone, but there would be a much smaller customer base for such a model.

  2. When the iphone first came out there was a considerable emphasis on functions that required some changes to the carriers network, for example “visual voicemail”, and other that I appear to have forgotten. I suspect Apple may have seen these as potentially key parts of its iphone strategy. As became apparent, the iphone was a raging success and mostly due to capabilities that did not rely on carrier network adjustment.
    but let us place ourselves in the mind of Apple before the launch, where it thought that these carrier network changes were important components of their marketing.
    Negotiating with one carrier to provide the service made sense: it was easier to get one carrier to change, rather than many; and the increased leverage by offering exclusivity was an important part of the bargaining chip in changing the relationships between phone manufactures compared to carriers.
    If a manufacturer was unable to use this leverage and they had to offer the same approach to every carrier, then it may have well allowed carriers to all to stick it to Apple and not make these network changes.
    And thus the supposed benefits of network changing iphone capabilities would never have been realised (obviously we know now that these were not very important, but for this thought experiment we are assuming there are). The competition policy rules would have stifled innovation.
    I am not sure where that leaves us, but I am suspicious that not allowing a new entrant with a highly innovative product to use it bargaining power to leverage changes in the otherwise static relationships between network carriers and handset manufacturers would have been a good thing.

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