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Will the Department of Justice Help You Get an iPhone?

By Brian Harris

On July 6, The Wall Street Journal reported that the Justice Department?s Antitrust Division is investigating the wireless telephone industry, looking at least in part at the agreements that give certain wireless carriers exclusive rights to certain devices.  For instance, iPhones are exclusive to AT&T Wireless, the Palm Pre is exclusive to Sprint Nextel, the Blackberry Storm is exclusive to Verizon Wireless, and the Google G-1 is exclusive to T-Mobile.  Two questions spring to mind.  First, should the Justice Department break up these arrangements?  Second, will it matter? 

Superficially, the exclusive arrangements might seem to violate prohibitions against tying. A tying violation occurs if there are two separate products (a tying product and a tied product), a company conditions its agreement to sell the tying product on the consumer?s agreement to buy the tied product, and the seller has market power in the market for the tying product.  Do these arrangements run afoul of this prohibition?  If you want an iPhone ? a tying product ? you also have to sign up for wireless service with AT&T ? a tied product.  But does AT&T have market power, merely because it is the exclusive provider of the iPhone?  Perhaps, if the iPhone has a market all to itself.  But if the market is viewed more broadly, that argument becomes more difficult.  The iPhone is one of about 600 handsets available from U.S. wireless carriers.  Even if the market is narrowed to smartphones, the iPhone still competes with various models of BlackBerries, the Pre, and the G1, among others.  It?s not clear that any one of these phones has a sufficient share of the market to give its carrier any sort of market power. 

Nor is it clear that exclusive arrangements for any of these devices are harmful to competition. Clearly, the wireless market, including the market for smartphones, remains competitive. Consumers have a broad range of options, with new devices coming to market all the time. Some of these devices, marketed by companies like Motorola, HTC, Palm and BlackBerry, are not exclusive to any one carrier. In addition, the exclusivity arrangements give competing wireless carriers an incentive to share in the development of potential competing handsets. Thus, Verizon, Sprint and T-Mobile remain willing to share the cost and speed the development of phones that can compete with the iPhone, leading to a potential benefit for consumers as more devices come to market.   

In any event, it is not clear that breaking up these arrangements will matter.  U.S. wireless carriers operate incompatible networks using various technologies.  Both Sprint and Verizon use CDMA technology developed by Qualcomm, albeit on different frequencies.  AT&T and T-Mobile, by contrast, use GSM standards for their phones, an entirely different technology.  And AT&T and T-Mobile run on different frequencies, as well.  Thus, even if the Justice Department were to break up exclusive deals between carriers and handset manufacturers, the phones might still remain incompatible with different carriers? networks.  Justice might hope that, in the absence of contractual limitations, phone manufacturers will have an incentive to retrofit their phones to work on different networks.  Whether manufacturers would be willing incur that cost, however, is very much an open question.

 Joshua D. Wolson is a member of the litigation department at Dilworth Paxson. He can be reached at (215) 575-7295 or jwolson@dilworthlaw.com.  This posting is for informational purposes only and should not be construed or interpreted as legal advice on any matter.

Full post as published by The Legal Intelligencer Blog on July 31, 2009 (boomark / email).