Verizon's Handset Concessions Target AT&T, iPhone

[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

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