Washington Weighs Wireless Regulation

The will to regulate the wireless industry may be growing in Washington. On June 17 the Senate Committee on Commerce, Science & Transportation met to consider whether to step up regulation of an industry that has amassed 270 million subscribers in a little more than two decades. "Usually, things don't emerge as quickly without having problems," Senator Jay Rockefeller (D-W. Va.) told the committee. "Our regulatory methods are wholly insufficient."

How might Uncle Sam step in? Committee members aired a litany of complaints unearthed by a government-commissioned survey, ranging from dissatisfaction with wireless contracts to dismay over arrangements that let handset makers sell wares exclusively through a single carrier. While it doesn't appear that legislation would be drafted any time soon, some lawmakers are growing increasingly frustrated over what they consider a lightly regulated industry that has permeated everyday life. Almost one-third of the U.S. population now relies heavily or exclusively on cell phones for calling, and an increasing number of people are tapping wireless networks for Internet access via computers.

One of the biggest concerns for some lawmakers relates to exclusive handset deals, such as the arrangement that makes AT&T (T) the sole U.S. carrier of Apple's (AAPL) iPhone. Consumer groups and smaller rural carriers including Cellular South and U.S. Cellular (USM) say these exclusivity arrangements are among ways the largest carriers exert too much control over the market. After AT&T, the next-biggest service providers are Verizon Wireless, Sprint Nextel (S), and T-Mobile USA. The top four wireless carriers offer a total of 14 exclusive devices. "We view handset exclusivity as one part of a much larger problem of the growing power of service providers," says Michael Calabrese, vice-president of think tank New America Foundation.

What's Best for Consumers?

During the proceedings, Senator John Kerry (D-Mass.) chaired a panel on handset exclusivity. "Frankly, I don't know the answers to some of these questions," Kerry said. "Is [handset exclusivity] better or worse for innovation? Is it better of worse for the American consumer?" On June 15, Kerry and three other senators sent a letter urging the Federal Communications Commission (FCC) to investigate the issue. On June 19, Acting FCC Chairman Michael Copps said the commission will begin examining whether handset exclusivity hampers consumer choice and market competition.

But the FCC may have trouble proving the exclusive arrangements restrict competition, says Rebecca Arbogast, principal at Stifel, Nicolaus. "It will be a tough call for the FCC to make," she says. "I think it will be put off to next year." According to a recent FCC report, there are at least three wireless carriers competing in most of the country's markets. "This is one of the most competitive markets in America," says Jim Cicconi, an executive vice-president at AT&T. "It's the least concentrated wireless market in the world. For people to argue for a major government intervention, you've got to ignore these facts."

Small carriers say competition drops off precipitously in rural markets, and it's hard for them to secure the latest handsets. "We can get some of the lower-end devices, but when it comes to touchscreen devices, we are having trouble getting that [from device makers]," Hu Meena, CEO of Cellular South, said during the proceedings.

The Exclusivity Edge

AT&T argues it's simply reaping the rewards of its business successes and scale. The carrier claims it often co-designs handsets with its manufacturing partners, subsidizes part of the handset's cost, and assumes part of the risk for the phone's introduction. "Sometimes, you can lose your shirt on these [exclusive deals] if you are wrong," Cicconi says. Were exclusive deals to be axed, carriers may not be willing to subsidize handsets as much, and consumers could end up paying more for devices, says Neil Strother, an analyst at Forrester Research (FORR).

Exclusive arrangements aren't the only matters of concern for lawmakers. Rockefeller lamented gaps in wireless broadband coverage in states such as Maine and West Virginia. A Government Accountability Office (GAO) survey of 1,143 Americans found that 10% of cell-phone owners are dissatisfied with their wireless service, and one-third are confused by their bills. The GAO expects to release its recommendations based on the survey in November, and it may conduct a separate survey on the state of competition in wireless.

As part of an ongoing effort to police itself and keep regulation at bay, Verizon Wireless is considering voluntarily limiting its exclusivity contracts on Samsung and LG phones to six months. Sprint Nextel recently announced it will carry the new Palm (PALM) Pre device exclusively for only six months. "What you might start see happening is some of the companies may start, on their own, moving away from real long-term exclusive contracts," Arbogast says. If wireless carriers don't make those and other changes, Uncle Sam may opt to step in for them.

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