Rural users rail against exclusive handset deals

Rural America is suffering from a deficiency of top-tier smartphones, according to a number of small wireless operators and advocacy groups. While the tier-one carriers, including Verizon Wireless (NYSE:VZ), maintain that innovation is best served unregulated, a group of small telcos and industry organizations is raising its collective voice against exclusive handset deals, which they say raise prices, hamper innovation and kill competition – all to the detriment of consumers.

This afternoon the Senate Commerce Committee is holding hearings to determine how exclusive handset deals affect competition and consumer choice, but there are plenty of opinions on both sides. On a media call today to explain the rural point of view, Harold Feld, legal director of Public Knowledge, a Washington DC-based public interest group focused on the emerging digital culture, pointed to Research In Motion (NASDAQ:RIMM)’s devices Web site to illustrate the group’s point. A list of different mobile phones is shown, but when users select their carrier, the number of options goes down substantially – depending on which carrier that consumer has. For AT&T (NYSE:T), eight options are shown. For Cellular South, only four pop up.

“With research coming out of places like the Pew Center for the Internet and American Life that show communities that are lacking in adoption of wireline broadband – typically minority communities, the urban poor – these communities are often heavy users of handheld devices in a very sophisticated way, using these as their digital tools,” Feld said on the call. “And so, maintaining this lock on the market, these artificially high prices and lack of competition, has serious implications for the digital divide as well.”

For example, the BlackBerry Tour, announced yesterday as an exclusive to Verizon and Sprint (NYSE:S), won’t be making any stops in rural America, added Hu Meena, president of Cellular South. As with the Tour, the big four wireless carriers – Verizon, AT&T, Sprint and T-Mobile – control more than 90% of the wireless market with long-term, exclusive agreements with handset manufacturers, he said. Of note, however, is that the BlackBerry Curve, the number-one selling device, is the only one out of the top 10 not bound by exclusivity – a practice that wouldn’t fly in other industries, Meena said.

“Would we tolerate our Internet service providers mandating to their customers that they use a Mac instead of a PC or a large Dell desktop instead of a smaller HP netbook? Definitely not,” he said. “Yet this is the absurd consumer policies that consumers face every time they walk into a wireless store.”

Handset exclusivity might have had some benefits in the early days of the wireless industry, but those have all but disappeared, according to Mark Cooper, director of research at the Consumer Federation of America. He said that the ability to port phones between networks would stimulate competition and innovation as evidenced by what happened in the wireline market under the Carterfone decision. Forty years ago, the FCC ruled that AT&T could not pick and choose which phones could and could not connect to its network , which in turn spurred a new wave of innovation on new devices and technologies. The FCC has not clarified that its Carterfone rules apply to wireless as well, added Michael Calabrese, vice president of the nonprofit New America Federation.

A potential limiting factor when it comes to wireless is that most devices today are made with a network in mind, either CDMA or GSM. This isn’t an issue for CDMA carrier CellSouth, according to Meena. He said that last year the company studied moving into the GSM world where there is more device selection but found out that exclusivity prohibited GSM devices even more than with CDMA phones. Meena said CellSouth is still more than willing to put in the capital infrastructure to sell and have access to GSM devices like the iPhone, and Cooper believes that the handset makers would be equally as willing to accommodate.

“If the device manufacturers were untethered, they would, in my opinion, develop a full range of devices for all the technologies [GSM and CDMA],” Cooper said. “They have been throttled by network operators in the past.…Clearly, if there is a technology that doesn’t let you port across to a completely different network, we might have two handset markets – one from each technology, but each of those markets I believe would be fully competitive. Every handset maker would develop the full range of options in each of those markets. This is a total red herring.”

The rural carriers – like the tier-one operators – are anxious to decide this issue soon. Calabrese noted that the wireless data market is converging towards long-term evolution (LTE). As the carriers all move to 4G, mobile devices should be much more readily available across networks, he said. And if the commission goes the route of Carterfone, the industry will also move toward a common interface for devices in the 4G world.

When asked if they thought today’s hearing would yield any real results, Feld responded that handset exclusivity might not be at the top of the agenda, but the question of open networks for consumers is one that the commission will take very seriously. “There is clearly no technical reason why this can’t happen, and I think that the commission is very likely to make an impression on carriers to open their networks,” he concluded.