Small Carriers: AT&T Push to Renew iPhone Deal Shows Need for FCC Action

“Any extension of the agreement for AT&T to market the iPhone exclusively would only prolong the harms to consumers and smaller carriers,” said an attorney who represents small carriers. “With regulators and Congress now considering steps that could ban exclusivity agreements altogether, it seems peculiar that AT&T would try to extend an agreement that requires it to incur a huge cost to implement successfully in the marketplace. Any claim that AT&T resources were needed to bring an innovative product to the market is belied by an extended exclusivity agreement. “

“It does continue to be of great importance to RCA members as a whole,” said an attorney for a medium-sized carrier. “[Reports] talk about how much AT&T’s adds came from iPhone and what percentage of them were new customers to AT&T. Having that kind of iconic device is clearly a real competitive advantage. This just gives [RCA] one more thing to talk about.”

“Apple would be crazy to continue to exclusively tie itself to AT&T,” said Caressa Bennett, attorney for the Rural Telecommunications Group. “It could quadruple its sales of the iPhone if it allowed all wireless carriers to sell it. Handset exclusivity does not drive innovation, it suppresses it … From a rural consumer perspective, it is unfortunate that rural consumers who are unable to receive ATT service are unable to utilize the iPhone. ATT does not have nationwide coverage and is reliant on rural carriers and its other roaming partners in many areas still. Congress and the Obama administration wonder why we are behind in providing broadband services in rural America. Allowing handset exclusivity certainly doesn’t help the cause.”

Meanwhile, Cellular South hired former Rep. Chip Pickering to speak with FCC officials in support of the RCA petition. Pickering, a Mississippi Republican, was a prominent member of the House on telecom issues. He spoke by phone Monday with Commissioner Jonathan Adelstein, Cellular South said in an ex parte filing. “Mr. Pickering suggested that the Commission promptly adopt a Notice of Inquiry or a Notice of Proposed Rulemaking in the referenced matter,” the company said. “Exclusive handset arrangements impede competition among wireless carriers to the detriment of the public, and the arrangements threaten the ongoing viability of small and mid-sized wireless carriers such as Cellular South.”

An AT&T spokesman responded by citing a filing that said the company and others “have submitted extensive evidence that confirms that interfering with market-based decisions how distribution arrangements should be tailored … would reduce competition, innovation and investment by carriers and handset makers alike.”

Rebecca Arbogast, analyst with Stifel Nicolaus, said it’s a difficult issue for the new FCC to work through. “I expect the issue will be given close consideration and will be quite contentious,” Arbogast said. “There are good policy and commercial arguments both for and against, and I would expect the Obama FCC will want to pursue policies that promote innovation and openness, with this issue posing at least an apparent tension between the two worthy goals.”

AT&T’s desire to extend its exclusive hold on Apple’s iPhone is predicated on a belief that wireless data use will continue to grow in a recession, analysts said Wednesday. But iPhone could see wider distribution in the U.S. if Apple teams with other carriers, the analysts said.

AT&T is thrilled with its partnership with Apple, a spokesman for the carrier said. The real growth area in wireless is mobile broadband, he said. ABI Research analyst Kevin Burden said renewing the iPhone deal would be an important boost for AT&T. The exclusive iPhone contract means subscriber growth and improved average revenue per user for AT&T, said Shawn Wu of equity research firm Kaufman Bros. Caris & Co. analyst Robert Cihra said he expects the iPhone - - and derivatives like a rumored tablet -- to account for all of Apple’s profit and revenue growth in the years ahead.

But Apple might look elsewhere since selling the iPhone through more carriers would greatly increase its market penetration in the U.S., analysts also said. Yankee Group analyst Carl Howe named Verizon Wireless as a potential iPhone carrier, with Apple building an EV-DO version of the popular handset. Additionally, AT&T may have to pay dearly to retain the deal, Wu said. The carrier would subsidize the popular phone at the same level or even more and would offer cheaper data plans if it manages to extend the iPhone deal, he said. IPhone subsidies are costing AT&T roughly $450 million per quarter, he said. These costs may have inspired the company to offer the iPhone without a contract at $599 for the 8GB model and $699 for the 16GB version. Some analysts also said AT&T might agree not to sell any number of smartphones made by Apple’s competitors.

Meanwhile, AT&T is expected to make wireless data the marketing priority as wireline continued to decline in a recession, Wu said. Though wireless was the least impacted by the economy, it would be affected as the economic downturn deepens, he said. He saw wireless voice as the next area to see revenue declines. Caris & Co.’s Rob Cihra underlined iPhone and the Apple Application Store’s ability to attract data-savvy subscribers: “IPhone and Application Store might still be under appreciated, shaking up the entire billion-unit cell phone industry.” Piper Jaffray analyst Gene Munster forecast iPhone sales growth and a good overall Q1 for Apple, which will report its earnings next week.