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Summary:

Verizon’s not merely bowing to federal pressure, it’s using the concessions it is making towards handsets as way to weaken AT&T’s grip on the iPhone. With its willingness to make all of its phones available, (albeit to the nation’s smallest carriers) it’s breaking ranks with AT&T, which now looks like a kid who refuses to share.

[qi:gigaom_icon_mobile] Updated: Verizon said today it will offer smaller carriers access to any cell phone model it uses — even those exclusive to Verizon.  Carriers who have fewer than 500,000 subscribers will have access to phones after only six months, according to a letter sent by Verizon to Rick Boucher, the chairman of the Subcommittee on Communications, Technology and the Internet in the House. In its letter, Verizon doesn’t back down from its pro-exclusivity arguments, but does try to sound reasonable:

Exclusivity arrangements promote competition and innovation in device development and design. We work closely with our vendors to develop new and exciting devices that will attract customers. When we procure exclusive handsets from our vendors we typically buy hundreds of thousands or even millions of each device. Otherwise manufacturers may be reluctant to make the investments of time, money and production capacity to support a particular device. This of course constitutes a major risk for us, because if the device is not popular in the marketplace we end up with excess inventory and potential competitive losses. On the other hand, if the device does well in the market, six months is a reasonable time for us to earn the benefit of our risk and investment.

These concessions on exclusivity are likely a response to heightened federal scrutiny around such deals, whereby larger carriers get exclusive access to hot new handsets for a set time period. The issue drew attention late last year as consumer groups used the infatuation with the iPhone, which is only available on AT&T’s network, to push legislators to investigate these exclusivity deals. Hearings were held last month in Congress, and the Department of Justice is purportedly thinking about at an investigation into the telecommunications companies.

This concession looks a lot like a similar offer made earlier this year to the Associated Carrier Group (ACG), which represents 25 CDMA carriers with a combined 2.6 million subscribers, when Verizon said it would reduce the duration of its handset exclusivity contracts with LG and Samsung phones. Rural carriers claimed that wasn’t enough. This agreement is now an open offer rather than an agreement with a specific group, and it also covers all handsets going forward.

Update: Verizon’s not merely bowing to federal pressure, it’s using it to weaken AT&T’s grip on the iPhone. With its willingness to make all of its phones available, (albeit to the nation’s smallest carriers) it’s breaking ranks with AT&T, which now looks like a kid who refuses to share. Verizon may be forced to give up exclusive access to some of its hot BlackBerry smartphones, but given the size and rural population that the affected carriers serve, Verizon isn’t taking that much of a risk. But if it can force AT&T to release the iPhone, Verizon will have translated its small risk to a big reward.

Text of the letter sent by Verizon:

July 17, 2009

The Honorable Rick Boucher
Chairman
Subcommittee on Communications, Technology and the Internet
House Committee on Energy and Commerce
U.S. House of Representatives
2187 Rayburn House Office Building
Washington, D.C. 20515

Dear Chairman Boucher:

Last February, a group of 24 small wireless providers asked Verizon Wireless to eliminate long-term exclusive handset agreements with LG and Samsung. We agreed to do so for those small providers. Today I am writing to reaffirm that commitment and to let you know that Verizon Wireless is taking an even bolder step to transform exclusive handset arrangements. Effective immediately for small wireless carriers (those with 500,000 customers or less), any new exclusivity arrangement we enter with handset makers will last no longer than six months – for all manufacturers and all devices.

This new approach is fair to all sides. Exclusivity arrangements promote competition and innovation in device development and design. We work closely with our vendors to develop new and exciting devices that will attract customers. When we procure exclusive handsets from our vendors we typically buy hundreds of thousands or even millions of each device. Otherwise manufacturers may be reluctant to make the investments of time, money and production capacity to support a particular device. This of course constitutes a major risk for us, because if the device is not popular in the marketplace we end up with excess inventory and potential competitive losses. On the other hand, if the device does well in the market, six months is a reasonable time for us to earn the benefit of our risk and investment.

Moreover, we have no objection to small carriers having full access to any manufacturer’s portfolio of prototypes and products in development, without being informed which may have been selected by Verizon Wireless. Obviously our pre-launch product selections are proprietary and must remain confidential between us and our vendors.

Our actions today are consistent with our long track record of leading the vibrant, highly competitive wireless industry in new and innovative directions that benefit consumers. We would be happy to meet with you or your staff to discuss this further.

Sincerely,

Lowell C. McAdam

cc: Chairman Waxman
Ranking Member Barton
Ranking Member Stearns

  1. I don’t understand the logic in this article. How does forcing AT&T to make similar concessions (offer access to iPhone *only* to smaller carriers) benefit Verizon?

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    1. Stacey Higginbotham Friday, July 17, 2009

      It benefits Verizon primarily because it would hurt AT&T. Even if AT&T created a similar agreement it would still likely lose some percentage of the more than a million new subscribers it has gained with the iPhone and it would take a lot of focus off of this issue.

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      1. “It benefits Verizon primarily because it would hurt AT&T.”

        How would it hurt AT&T? The customers of the rural small carriers want iPhones and BB’s, but can’t get them because the big carriers have them locked up with exclusive deals, and don’t serve these rural areas. The reduction to 6 mo. in the exclusive period would result in more iPhone and BB sales in these areas. AT&T would not be affected, since they don’t serve them. The only way AT&T would be affected is if the Feds forced the major carriers to end exclusivity completely (after say 6 mo.). Then Verizon could get the iPhone.

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      2. Ryan Mickle Friday, July 17, 2009

        I agree that it benefits Verizon by hurting AT&T. This is less of a concession on Verizon’s part, and more of a desire to go toe to toe with AT&T, as I see it.

        Either way, the industry is overdue for a shakeup, one far more substantial than that which resulted from the introduction of the iPhone.

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    2. Cause folks will flock to the best network.

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    3. because Verizon eventually wants iphone. Suddenly this kid realize that sharing would get him some better sweets.

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  2. Stark Ravin Friday, July 17, 2009

    Hey, I’ve got a wacky idea: how about making the carriers standardize on the GSM air interface, then let handset makers and platform makers ship whatever they want, when they want, to any market they want, as long as the device supports that interface. The government could outlaw locking the devices to a carrier, then the carriers could just offer SIM cards that the customers could purchase with any desired amount of voice and data. It’s crazy, I know, but it may just create more innovation and wealth like that in, say, the desktop computer industry. Maybe the carriers are right, though: I mean, why have all the choice and flexibility available when you go to purchase a desktop computer, when we can be locked down to a few, overpriced hobbled mobile devices that only they deem appropriate to pass through their orifice?

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    1. There’s no way Sprint and Verizon will switch from CDMA to GSM, but I think you’re on the right track – let “unlocked” phones (sold directly to consumers) join your network.

      Verizon would have had the iPhone themselves, and never have had to pressure AT&T had they not been so maniacal about locking down features on their network in the first place.

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      1. Stark Ravin Friday, July 17, 2009

        TimB: Verizon IS switching to the GSM standard (that’s what LTE is) and the network will be SIM card based. Expect to see it next year.

        As for Sprint, it’s death spiral will end in WiMAX and their network becoming a vertical air interface tailored to niche needs. Viable and useful, but not something serving the mobile handset market.

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      2. Stark: LTE is neither GSM nor CDMA, and is data-only at the moment, so until they get all the details worked out on IP voice over LTE – both GSM and CDMA will still be around – at least as a hybrid phone.

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      3. Stark Ravin Friday, July 17, 2009

        TimB: Without splitting technical hairs: you’ve got this incorrect and your spreading mis-information. LTE is part of the W-CDMA family of technologies that is part of the GSM standard and backward compatible with all past GSM air interfaces. It is SIM card based.

        CDMA2000 is the Qualcomm promoted air interface which both Verizon and Sprint currently employ. It is effectively dead going forward, certainly in North America. Even the CDMA carriers in Canada are moving to the GSM/LTE standard.

        The long and short is, the lion’s share of carrier air interfaces in North America will be GSM standard SIM card based. Technologically, there is nothing in the way in the near future scenario that is currently playing out from selling unlocked GSM devices which could run on any network just by popping a SIM card in. This partially works in the US now and is standard operating procedure in Europe. It is just a matter of the carriers loosening up control, or being forced to by the government.

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      4. I think we are disagreeing about timing. Whatever the full technical heritage of LTE, and how quickly Verizon pushes it to market – they have to solve the problem of transitioning the existing CDMA voice customers over time.

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      5. Jesse Kopelman Friday, July 17, 2009

        @Stark Ravin

        TimB is correct, not you. LTE is part of 3GPP, which GSM is also part of, but it is not GSM, nor is it compatible in any way with existing GSM networks. Also, as Tim points out, LTE is data only. Verizon’s move to LTE will not enable any GSM handsets to function on their networks. So, even the LTE iPhone that eventually comes out will require GSM for voice and thus will still not work with Verizon, who will continue to use CDMA for voice.

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    2. Sam Moreira Friday, July 17, 2009

      That’s exactly how it works in countries other than United States. We are the only ones who allow carries to lock phones to their networks. While I was in Brazil last year on vacation, I saw phones being sold in stores that use two SIMM cards. The customer could use simm cards from any carrier and have two different numbers in one single device. The government should tackle the way US carriers lock down customers to their networks and stimulate unlocked devices.

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    3. Then you’re $200 iPhone would run $600 and forget ‘free phone’offers……they lock the handsets to networks and require contracts because they are supplementing the purchase price of the handset….in your world there’d be nothing keeping someone from switching immediately after they get their ‘free phone’…….

      It’s the old razor/video game/ink jet printer model……Sell the initial product at or below cost and make money on the recurring purchases……..

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      1. Free market economists might disagree with:

        “Then you’re [sic] $200 iPhone would run $600 and forget ‘free phone’offers……they lock the handsets to networks and require contracts because they are supplementing the purchase price of the handset”

        The makers of $600 phones would find themselves selling many fewer phones, I’d think.

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  3. [...] the original here:  Verizon’s Handset Concessions Target AT&T, iPhone – Gigaom.com tweetmeme_url = [...]

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  4. is there anyway we can see the entire letter?

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  5. [...] Verizon’s Handset Concessions Target AT&T, iPhone [...]

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  6. I still think it’s silly to end exclusivity. To me, that’s like saying that Tiger Woods can’t have an exclusive contract to Nike.

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    1. To me the carriers are saying: “We know you like Tiger, but he plays exclusively for us for x months, and the only way you’re gonna see him is on our private course. And, by the way, his driving game is not compatible with our course, so he will only be putting on our course”.

      If exclusivity and carrier subsidies went away, the price of a non-contract phone would drop substantialy.

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  7. Pathetic, defensive PR pandering from a position of weakness.

    Verizon is just as bad as AT&T, people. Stop giving them underdog pity because they’re getting their A** kicked in the iPhone battle.

    They had a chance to get the iPhone, they passed – their bad. Don’t blame AT&T, despite stunts like this one to make them look like the bad guys.

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  8. Apple will NEVER make a CDMA phone ..

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  9. Interesting theory about weakeing AT&T, but how many other carriers are gonna be willing to pick up the GSM based iPhone? T-mobile likely would, but are there enouth smaller carriers with enough subscriber base, combined or separate, that this even makes sense?

    In Canada, there are essentially 4 big players: Rogers and Fido on GSM (note Rogers owns Fido) and Bell and Telus Mobility using CDMA. The iPhone has shaken up the market here to the point that Bell / Telus are ‘upgrading their networks’ to allow the iPhone. This effectively means that one singular device has managed to hasten the demise of CMDA based systems in Canada and it might even be better for the consumer since we get raped on the plans here fr the iPhone and its data usage.

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  10. [...] Verizon Blinks in Phone Exclusivity Standoff [...]

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