The Smartphone as Messiah?

With the FCC looking into exclusive handset deals and the open mobile Internet becoming a reality, is locking up smartphones still the future for operators?

Some say no. “Battle lines for and against have been quickly and ardently drawn,” said Pike & Fischer senior analyst Tim Deal. “Wireless carriers and handset manufacturers need to prepare for a market environment that – at the very least – limits exclusive handset agreements.”

Deal notes that this effect “won't be just because regulators may step in to restrict those partnerships,” but FCC scrutiny can’t help. The FCC, fresh off the realization that there remain just four main facilities-based nationwide carriers, last week launched an official enquiry into the state of competition in the wireless industry.

At issue is whether the control that AT&T Inc., Sprint-Nextel Corp., Verizon Wireless and T-Mobile USA have is consolidated enough to negatively impact consumer choice and fair pricing. Senator Herb Kohl, chairman of the Senate Judiciary subcommittee on antitrust, says together they own 90 percent of the market.

One issue the FCC will be plumbing is handset exclusivity. Consumer groups argue that the iPhone should become available on any GSM network, as should the other exclusives in the market – anything less inhibits fair market pricing and consumer choice. In the past few weeks, rural carriers and associations have argued that the Big 4 have locked up access to high-end devices through exclusive deals, like AT&T with the iPhone, Sprint with the Palm Pre, T-Mobile with the G1 and myTouch Android handsets, and Verizon with the BlackBerry Storm. Often the big carriers don’t offer service in remote areas, leaving consumers there high and dry when it comes to the latest productivity tools, they say.

Carriers of course argue that the subsidies they’re willing to pony up for exclusive devices brings the price points for those devices down to reasonable levels, and spur innovation by giving developers a strong carrier partner they can learn with and whose network they can leverage.

Deal says the argument won’t hold up over time. “As history has indicated, reliance on hardware as a primary differentiating factor within a service- and content-driven industry weakens a competitive platform over time,” he said. “The commoditization of the handset is occurring much like the commoditization of the personal computer occurred over the past 10 years. As component prices drop and benefit from growing manufacturer volume and consumer demand grows, handset prices will continue to fall, making carrier subsidies obsolete.“