Exclusivity and Competition

Last week I wrote a post saying that I view the exclusive contracts that carriers negotiate with handset manufacturers as anti-competitive. I really don't want to see the government wade into this market if there is another way to unwind this practice.

I just saw the news that Verizon is offering to cut is exclusive contracts to six months. This is clearly in response to the threat of government regulation and I hope that voluntary changes in the market like this will get us where we need to go.

The bottom line for me is we should work toward a market where any device can operate with any phone number on any network. That is the architecture that has made the internet such an unbelievable platform for innovation.

The mobile market, if set up properly, may have even greater potential for innovation. The only thing that is currently holding it back is that the business and technical architecture of mobile is based on closed systems and exclusive contracts. It feels like we are moving, slowly but surely, in the right direction. That's good to know as a user of mobile devices and as an investor in the mobile web.

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Comments (Archived):

  1. Elia Freedman

    Here, here! And the goal should be the same for software that runs on these devices.

    1. fredwilson


  2. VintageFilings

    I’m into it… hopefully others will follow suit

  3. RacerRick

    Steve Jobs is probably the only one besides Congress who can bring this about.Until then, AT&T is the biggest road block.

    1. ErikSchwartz

      The only way that Apple will do this is if they become the exclusive gatekeeper rather than the carriers. Apple’s corporate culture does not believe in open systemsI don’t see how that improves the situation.

      1. RacerRick

        I was just saying that the ONLY person who could force the industry to change is Steve Jobs.I’m not saying he will, I’m just saying he could.Because the other carriers would kill for the iPhone.

  4. Guest

    I would like to hope that mobile telcos are the future newspapers of today. They need to be disrupted. The exclusive monopolies on phone models is just the start. There is also room for innovation in data transfer (even as simple as SMS) through wireless. And the biggest hurdle for any upstart mobile provider is getting the physical coverage set up. It’d be great to imagine a future where tower control doesn’t prevent new competition, any phone can exist on any carrier, data transfer prices drop sharply for consumers, and many many carriers compete to differentiate themselves from each other.

  5. paramendra

    The mobile world can hold the tide for only so long. The floodgates will open soon enough.

  6. Paolo

    I don’t really see the problem – Apple could never have launched the iPhone on its own. At the time of its launch it was a total unknown. AT&T had to take a huge risk offering a device like that – and in order to be compensated for the risk they got exclusivity for awhile. It happens all the time in business – for the risk I am taking I am getting a reward.Now just because the iPhone was a huge success and AT&T is making all kinds of money we are supposed to punish them? I think not. They were smart – smarter than Verizon who turned down the deal. Now Verizon is crying sour grapes.When AT&T’s exclusivity is up and if Apple thinks they can do better by offering the device on other carriers then they will. If they think they can do better by continuing with AT&T then they will do that. I would totally understand if Apple decided to stay with AT&T exclusively – they have been dealing with them for a few years now, they probably have a known way of working with each other. If they add Verizon to the mix they’ll start from square one and probably have to fight with them to keep the “Verizon App Store” and all the other awful Verizon junk off the phone.

  7. bombtune

    In other words, a deregulated mobile system much like Europe. I’m up for that.

    1. fredwilson


    2. hanslehmann

      It works fine over in the EU. Easier as a user to get the phone you want and then decide which network works best for you. Also, phone manufacturers are happier because instead of users sticking to one phone for two years, most people are upgrading their phones more frequently. I know I went through a new phone every 6 months in Denmark and that wasn’t too far off the overall turnover statistics.

  8. Ben Atlas

    After the devices get unlocked wouldn’t the next step be the ubiquitous coverage. So if I take my tablet or a phone across the world, I should be able to plug-in on any network (just like the internet). We are back to the monetization issues, right now the exclusive contracts are the biggest source of revenue for the (redundant) networks. There must be some method of micropayments to keeps the entire existing infrastructure afloat. Or we will have another industry to bailout.Fred, it was really nice running into you and the Gotham Gal in NY.

    1. fredwilson

      Thanks for pulling us aside and introducing yourself. Sorry it was so brief

  9. Morgan Warstler

    Its an absolute mess.But it does make sense at least to make sure the networks don’t have a hand in the app market. This needs to be handset and platform – preferably handset (so that apps can all be working with a common feature set).I don’t think it is easy to unwind past that, simply because people get locked into contracts to get phone subsidies.Sure people’d love an iphone on tmobile and sprint, they are much cheaper services, but getting from here to there requires an awful lot of push – do you reallly think people care this much? And if they don’t, I certainly won’t accept government action instead.

    1. fredwilson

      I care

      1. Morgan Warstler

        Well sure, but do you care enough, to create a government gollum that poisons all it touches and abuses free markets to achieve the end?Or do you just personally care as an individual who’ll rely only market forces?Also this is a nice read:http://seekingalpha.com/art…There’s an awful lot of crap like this that comes from CDMA (the guys with the good spectrum) being big here. Makes most fones off limits.

        1. fredwilson

          I’m not as anti govt as you are. The guy who runs the FCC now is an ex VC. I think they can apply pressure without messing anything up

          1. Morgan Warstler

            Noted. However, it didn’t happen with GM. We could of had 500 newcos blossom, all VC funded to feast in the nutrient rich earth of a dead US auto industry. How exciting, how much opportunity would that be?Instead we’ve got Elon with his hand out for Government funding and the UAW killing those 500 entrepreneurs and their new employees who are more than happy to bring new kinds of cars to the table.I’m pretty sure DC trumps VC, and looking at it historically, I don’t know where you get your faith. Remember telecom is really just a unions of wire pullers….

          2. fredwilson

            That’s why you and I are never gonna be in govt and why govt is never gonna think like we do

  10. Jason

    the rollout of the entire 700mhz spectrum for the next generation of mobile broadband will create disruption that i don’t think anyone can accurately predict… at least in regards to a timeline due to such carrier politics (so i call them). and as far as anti-competitive handsets, i hope they are the last of the anti-competitive practices by the carriers, though i doubt we will be so lucky without them slowing rollout speeds (at full deployment 50mbps+ mobile broadband sounds good to me), or some other bs so they suck every drop from us they can…and they say “it’s just business”.

  11. t_armstrong

    I think Fred hit the real point in his last post. The phone subsidies are the only lynch pin allowing the exclusive contract based system to exist. Fred has decided that the subsidy is not worth being locked into a contract. I, on the other, choose the subsidy in exchange for 2 years of exclusivity on my carrier.As far as exclusive contract with handset manufacturers, I don’t really see why this is a problem. It’s really no different than Tiger Woods signing an exclusive deal with Nike. Reebok had the same opportunity to make a deal with Tiger. Just as Verizon had the same opportunity with Apple (and chose to pass). Is it any different than other contract in business? How about CBS signing an exclusive deal with Comcast On-Demand?Now, I completely agree that consumers would benefit if deals like the AT&T-iPhone deal did not happen, but the management at AT&T and Apple are not in business to maximize benefits to the consumer at large, but rather to maximize stakeholder value. Clearly both companies assumed that a temporary exclusive lock up was the way to do that. (As someone locked into a Verizon contract, I certainly wish that weren’t the case).In any event, another thought provoking post, Fred.Best,Tom

  12. vantelimus

    Perhaps you could provide a precedent in some other industry that is a good analogy to help me understand your point.There is no monopoly on smart phones. You can buy a BlackBerry, a Palm Treo or Pre, any number of Window CE phones, and soon a bunch of Android phones. You can use various devices on various networks, but not all devices on all networks (and expect full support).Other carriers were offered the iPhone. Only AT&T agreed to Apple’s terms. Would you force Apple to change their business model to one the other carriers would accept? That seems like unnecessary government interference in the market.You can buy an iPhone for a non-subsidized price and use it on any network. You’ll only get part of the value of the iPhone if you do that because other carriers don’t support the phone fully. Or would force carriers to change their networks and service offerings every time a phone manufacturer has a new idea? That seems like unnecessary government interference with a company.Sorry, I don’t see the anti-competitiveness here. Please make a case and provide a precedent.

    1. fredwilson

      Computers and ISPs. How ridiculous would it be if the macbook air only ran on earthlink’s network?

      1. vantelimus

        How would it be anti-competitive if MacBook Air were only capable of connecting to Earthlink?

        1. fredwilson

          Its anti innovation.

          1. Aaron Klein

            Back to this one issue I’ve ever disagreed with you on, Fred :)I don’t see that kind of hypothetical as anti-innovation. I see it as stupid.The better question here is — how do we get the mobile ecosystem to find these kinds of decisions as stupid as a MacBook Air limited to Earthlink would be?This whole debate might become moot when open spectrum creates a plethora of networks and levels the telecom carrier playing field. We might actually see some real innovation and “intelligence in the network” if that happened.We will be paying a lot more for devices that can connect to open networks because of no exclusivity subsidies, but that didn’t stop the growth of the PC world.

  13. markslater

    the carriers are the problem. i have met VC’s who wont look at opportunities where carriers play a meaningful part. they stifle innovation by controlling the API to a device. imagine writing a web app and being told or dictated your feature set, billing mechanisms and so on.

    1. fredwilson

      We are one of those VCs. We run the opposite way from any investment that requires direct involvement with carriers to get to market

  14. Roman Giverts

    Could you imagine if computers only worked with a certain internet provider? Seems even more crazy when you think of it that way…

    1. fredwilson

      I just left a reply that said exactly that. Seems like we think alike!

    2. vantelimus

      Yes, I can imagine that. It happened before TCP/IP and Ethernet were adopted as a standard by everyone. There were lots of competing technologies at every layer of the protocol stack. Companies were actively innovating and trying to differentiate their offerings. Somehow we old timers survived even though we didn’t have universal connectivity. Eventually compatibility became a more important business objective than differentiation.If you believe in free markets and that the market knows best, then you only need wait for the carriers to see it is in their best interests to open up to more phones. Misusing anti-trust law to force the issue is taking your impatience for that eventuality to a destructive level.

  15. Rick Webb

    I totally don’t dispute your analysis of phone-carrier lock-in being an annoying problem. I wouldn’t even be sad to see the government step in and make it illegal.I do, however, dispute that carrier lock-in is “the only thing holding it [the mobile market] back.”There are like 5 competing OSs, 4 competing carrier technologies (GSM, CDMA, PCS, etc), a million different browsers with an incredibly low common-technology foundation – many don’t have CSS, or Flash, or Javascript. Building apps for all major phones requires massive development resources – far worse than just re-coding for Mac and PC. Indeed, still, to this day, the only decently-integrated common technology is plain ole SMS.

    1. ShanaC

      So we are in the early days of dealing with the mobile web. As we narrow down some choices (carrier technology/OSes) and broaden others (browsers) life will get better. Market dominance is made by a healthy intermix of these forces, not by having only one or the other. We have lots of browsers, and not very many OSes for that very reason.

    2. Vladimir Vukicevic

      Couldn’t have said it better myself.

    3. fredwilson

      I stand corrected. You are absolutely right on all counts

  16. Vasudev Ram

    t_armstrong, I’m surprised by your comment:>Now, I completely agree that consumers would benefit if deals like the AT&T-iPhone deal did not happen, but the management at AT&T and Apple are not in business to maximize benefits to the consumer at large, but rather to maximize stakeholder value.Particularly by this part of it:”the management at AT&T and Apple are not in business to maximize benefits to the consumer at large, but rather to maximize stakeholder value”And are consumers of AT&T and Apple not their stakeholders too? Who do you think companies get their sales and profits from?See a recent post of Fred about who the VC’s is customer is. Short answer – but read the post for why – he – Fred – think it’s the entrepreneur (in whom he invests his VC company’s money) who is his customer – NOT the limited partners. Yes, I know AT&T and Apple are not VC’s, at least not in the context of the current discussion, but the same principle applies, IMO – one of the (groups of ) stakeholders of any company supplying a product or service, is (or should be) their set of customers. To make it clear, customers / consumers SHOULD be considered as stakeholders of a company / supplier, at least when it comes to thoughts about “maximizing value”.Who do you think will go away to other suppliers, or not buy at all, if their interests and needs are not kept in mind?Also, you seem to be justifying the lock-in behaviour of companies like AT&T and Apple (ref. your quoted comment fragment above), even though said lock-in is against your own interests as a customer, to quote your own words:”Clearly both companies assumed that a temporary exclusive lock up was the way to do that. (As someone locked into a Verizon contract, I certainly wish that weren’t the case).”- Vasudev

      1. fredwilson

        Umair! I gotta go read that

    1. fredwilson

      Lock in strategies are great for short term profits but not for long term profits. Microsoft beat Apple in PC operating systems because Microsoft broadly licensed its OS to any and all hardware companies. Apple insisted on controlling the entire experience. The desire to control is Apple’s achilles heel and I suspect it will eventually get them again in the phone market. Google’s Android doesn’t look like much of a competitor today but we’ll see what the market looks like in five years

      1. Vasudev Ram

        True. I just saw yesterday that Aloqa seems to have released their app for Android, interestingly: http://aloqa.com/ – not sure if they have it for iPhone or not.TechCrunch has some news about Aloqa too:http://www.techcrunch.com/2

      2. Aaron Klein

        Very true. BlackBerry OS needs to catch up, but it’s another example of an open platform. Anybody can write apps, and users can go to the browser, and download and install. No central control over who can do apps and who can’t.

    2. t_armstrong

      Vasudev,Fair point, sorry if I was confusing.”And are consumers of AT&T and Apple not their stakeholders too? Who do you think companies get their sales and profits from? ” – Yes, customers of both companies are important stakeholders and benefited from the release of the iPhone. I, as a customer of Verizon, am not a stakeholder (except in the broadest sense).”Also, you seem to be justifying the lock-in behaviour of companies like AT&T and Apple (ref. your quoted comment fragment above), even though said lock-in is against your own interests as a customer, to quote your own words” – That’s correct, it is not in my best interest in the particular example. There are probably other examples of such a lock up benefiting me (though off the top of my head, I can not think of one).My point was more that as the market exists today Apple and AT&T thought a Temporary (key word) lock up was most beneficial to their business and their stakeholders. I’m coming to the end of my VZW contract and currently working through my options as far as handset and network are concerned. If I switch to AT&T in order to use the iPhone that may anecdotally bear out the strategy that Apple and AT&T chose. These two companies must operate, at least in the short term, in the business environment that currently exists. I agree that the long term trend toward open platforms and networks would be a very good thing and hope to see it happen in the near future.The example about PCs and ISPs in an interesting one that I’ll have to think through.Thanks for the comments and the thought-provoking discussion.Best,Tom

      1. Vasudev Ram

        Tom,>Yes, customers of both companies are important stakeholders and benefited from the release of the iPhone. I, as a customer of Verizon, am not a stakeholder (except in the broadest sense).True, but: 1) I did not mean that point, as applying directly to you – I was thinking about customers in general, and meant that customers in general are, or at least, should be, considered as stakeholders by companies – *including* potential customers, who may be driven away, as existing actual customers may be driven away, by the lock-in behaviour of companies. Putting it in human terms, I don’t like it when someone says the equivalent of “if – and ONLY IF – you commit to sticking around with my product/service for a long time, you can get a discount” – the main point against that being that, they have now locked you in, and you can’t stop using their product/service – except at considerable (financial or other) inconvenience, depending on their terms – even if, say, their customer service suddenly goes down the drain. 2) Also, again, not referring to you but to customers in general, I did mean it in the broadest sense, about customers being stakeholders of companies; I’m aware that this is not considered to be the case in a “textbook” economics sense; if they think in a narrower sense, companies may think that their only stakeholders are their shareholders; but if they think in a broader or more holistic sense, they might think that their customers and even their employees are their stakeholders, if you consider a stakeholder to be any person or group, who stands to benefit or lose (and I don’t mean just financially – it could even be environmentally, for example) by a company’s actions in the marketplace. And it’s not just about basing their actions on benefitting their stakeholders – equally important, I feel, is whether they base their actions on only short-term factors (e.g. to look good in quarterly reports for Wall Street analysts, so as to boost the share price, with resultant benefits to the management and others) or whether they take the long term view of trying to create a win-win situation for all stakeholders (meaning stakeholders in the broader sense mentioned above). Because in the long term, if they don’t follow lock-in policies, they are likely to stand to gain, particularly if they publicize it (and also treat the customer well in all other areas), since they can use that fact as a differentiator or competitive advantage (“we keep your interests in mind, we don’t lock you in or penalize you for leaving us”). Who would not like such a company, and prefer to use their product/service?Just my personal thoughts of course. I don’t claim to be an expert on how companies should behave, but am interested in how they do, as a customer myself 🙂 And, having had various bad and good experiences as a customer, these things are important to me.Thanks to you as well for the discussion,Vasudev

        1. t_armstrong

          From a company’s point of view is the lock in contract necessary to ensure the customer sticks around long enough to pay back the phone subsidy? (I have no numbers to back this up, just a hunch). And if so, what is the work around? If a carrier stops with lock in contracts do they need to stop with subsidies as well? Can they remain competitive then? Maybe someone has an answer.

          1. vantelimus

            Your hunch is close to the mark. This is Finance 101 stuff. The subsidy is the present value of a future cash flow. That future cash flow is some portion of your monthly payment for two years. The cancelation fee is a calculated by averaging out the risk of cancellation across the base of subscribers. For all the anti-competitive and anti-innovation rhetoric, this is standard capitalism based on modern financial theory.It is easy to carp about it not being the deal a given set of customers want. But it unarguably has allowed the iPhone to penetrate the market and be profitable faster than would otherwise have been possible. Without these kinds of deals, it is doubtful that Apple would have been able to field the iPhone at a $500 price and be profitable.The iPhone has upped the ante in the mobile device market and stimulated both innovation and competition in the process.

  17. ShanaC

    It is interesting to note the following:The conversation here is about what will cause a change in the market and talking about the phones and the carriers. Meanwhile, you entire Zemanta puts the DOJ front and center. ANd there are hints that the FCC is also involved as well.This will hurt someone when it comes smacking down, and change the industry, but I am not thinking it is going to come from the carriers or the cell phone makers primarily.

  18. Josh Morgan

    This isn’t anti-competitive behavior it is creating competitive advantage or as Warren Buffet likes to refer to it, “the moat.” Companies do it all the time.There are plenty of devices out there that you can get with T Mobile, Sprint, and Verizon with similar features to the iPhone.Imagine if you loved Nikes and you could only get them at Footlocker because Nike and Footlocker had and exclusive agreement. You could buy Nike gear no where else. However, you don’t like the shopping experience at Footlocker, their stores are far away from you, or you just don’t like the referee outfits. Maybe you prefer Dick’s. Is this anti-competitive? No. Companies should be free to do what is in their best interest. If people weren’t buying iPhones I guarantee Apple and ATT would stop. That’s how we regulate this behavior, not with Justice Dept action.To think that the Justice dept should be investigating this is absurd. There are hundreds of devices on the market and several major carriers competing for our dollars…and we are worried about one phone on one carrier?

    1. fredwilson

      Its not just one phone.Its a whole platform that involves an entire app ecosystemIts like saying you can only connect a mac to the internet via earthlinkIts an absurd idea and yet apple and ATT are getting away with it

      1. Josh Morgan

        Fred, in the spirit of debate, I disagree.First, nothing is a platform until people use it. Apple has created a phone that people like and can use through ATT. People buy iPhones and this inspires developers to make apps. If no one used it, the platform, or the apps, no one would care. Would it still be anti-competitive then? At what point does it become anti-competitive? I am not a lawyer, so I don’t have legal answers to those questions.If Apple thought it was in their strategic interest to form an exclusive deal with Earthlink, as dumb as it might be, they should be able to do it. Sooner or later the consumers will regulate this behavior by not buying Macs. Can you imagine how ticked the Apple fans would be? No Justice Dept needed here.I hope I am not sounding cynical, I would just rather the market be the regulating force in this matter. The government would really muck things up in my opinion.

        1. fredwilson

          I’m sure they would mess things up. But the threat of govt interventiom may get it done

      2. andrewscott

        The iPhone is a strange example for this. Even if there was no contractual exclusivity between AT&T and Apple for the iPhone to run on AT&T’s network, it wouldn’t work on Verizon or Sprint’s network anyway because the technology is incompatible.Would you ask for legislation that all phone manufacturers have to produce multiple versions of their phones so that there is one available for every conceivable network technology?To use an analogy that you’ve used elsewhere in this thread, it would be a bit like legislating that Apple should also develop a version of the MacBook Air that has a dial-up adaptor in it, since it currently doesn’t work with dial-up ISPs.Of course, you can add external hardware to the MacBook that lets it use such ISPs, but you can also use a device like the MiFi to have the iPhone run on Verizon’s network…(Disclaimer: I work for a telco, but not a US one!)

    2. Phanio

      You focus on a short sighted view of a company. Sure a company should (and has a duty too) look out for itself – but if you ignor your customers needs and wants (like stores closer to them) – then your long-term prospects are doomed. Eliminating these contracts is not for the benefit of AT&T – but for apple and all phone consumers who wish to purchase an apple phone product. AT&T is looking out for itself and in doing so is strangling the entire market.

      1. vantelimus

        Welcome to capitalism.

      2. Josh Morgan

        Precisely. You made my point. Consumers should be the regulating force in this case, not the Justice Department.I don’t have an opinion on whether ATT and Apple are correct in having and exclusive agreement. I presume they did the appropriate analyses (SWOT, etc). I am an ATT customer and perfectly happy with my service. If I were unhappy, I’d leave it and pick up the next best device on someone else’s network. Maybe they don’t have the apps or the platform on the other network, but I’d surely take that into consideration when leaving.Cheers.

  19. Devlin Dunsmore

    I really think that this is just a ploy to try and start to make AT&T’s iPhone agreement really stand out in the carrier industry. The more the carriers begin to shorten these exclusivity contracts the more pressure it will put on AT&T to give up (or be forced to give up) their stranglehold on the iPhone.

    1. fredwilson

      Well ploy or not, that would be a great result

  20. Alex Hammer

    The thing that I like about Fred is that he never takes things personally, and he never holds a grudge.

  21. Phanio

    I am more concerned about anti-competitive two year service contracts – if companies don’t feel that they have to continually appease their customers – then innovation and competition dies. I know why they started these contracts – to give away phones – but, to you post – if these contracts were not in place – maybe these exclusive agreements would not be either as each carrier would want to offer the largest selection to attract and retain cutomers.

    1. vantelimus

      There are two reasons for the contracts. One is to allow customers to enjoy cheaper rates for longer commitments. The other is to subsidize the purchase of phones so that people can afford them. These contracts have worked. Adoption of mobile phones in general and rapid penetration of the iPhone in particular are due to these subsidies.Do the contracts lock people in? Yes. But if you don’t want to be locked in, buy an unlocked phone and ask for no-commitment phone rates. What, you don’t want to pay those? Hmmm…. sounds like you don’t like capitalism.