The Federal Communications Commission (FCC) will hold a meeting on Aug 27 to assess business practices in the U.S. wireless market. The telecom regulator will review various key aspects of the wireless industry including the competitive scenario, factors that stimulate innovation and investment and means to protect consumers from unfair practices.
A major issue that will draw attention is the exclusive handset agreements between the Tier-1 US wireless operators and manufacturers. The US antitrust regulators have reportedly initiated legal proceedings to examine whether large national carriers are involved in anticompetitive practices and abusing their market power by unduly restricting services through exclusive distribution agreements with handset vendors.
Exclusive handset agreements, which allow carriers to sell popular handsets at subsidized prices to attract customers is a common practice in the wireless industry. Most of the leading U.S. carriers are currently selling high-end smartphones through long-term distribution arrangements with manufacturers.
For instance, AT&T (T) is the exclusive distributor of iPhones in the U.S. under a multi-year agreement with Apple Inc. (AAPL). Under similar arrangements, Verizon (VZ) sells Research In Motion’s (RIMM) BlackBerry Storm while Sprint Nextel (S) markets Palm Inc.‘s (PALM) Pre smart phone. These carriers have succeeded in luring subscribers in recent times driven by premium handset offerings.
Smaller operators (especially the rural carriers), however, have appealed to the FCC for a ban on exclusive smartphone deals as inability to sell these devices is negatively affecting their bottom-line and margins. These carriers have argued that handset exclusivity has deprived the rural customers from accessing the latest technologies.
High-end smartphones have higher contribution to ARPU (average revenue per user) than regular handsets, which encourage large operators to invest heavily in promotions and improving network and services that support them. As such, any unfavorable action by the FCC or a potential regulatory overhaul may substantially affect these carriers as they contend with accelerated erosion in legacy landline business.
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