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Like 2-year contracts, smartphone exclusives need to go away

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Were you looking forward to buying a new Nokia Lumia 920(s nok) with Microsoft Windows Phone 8(s msft)? I hope you are or plan to be an AT&T(s t) customer because on Thursday, the carrier announced it will sell the smartphone exclusively in the U.S. AT&T is hardly the only one to work out these types of deals, which typically last from 3 to 6 months: All of the major U.S. carriers have had and continue to have such exclusives.

Sprint(s s) had one with the Palm Pre; Verizon(s vz)(s vod) with the Motorola Droid, and AT&T’s most famous one was surely the iPhone(s aapl), for example. Frankly, in this day and age, where we applaud the word competition while hardware cycles are spinning faster and faster, there’s no justification for the “exclusive” handset deal any longer. It needs to go away because while it offers no benefit to consumers and may add some potential benefit to handset makers, most of the benefit goes to the network operator.

Let me break down those three points a little more. As a consumer, you likely want choice: Choice of phone and choice of network. Why? Because you have specific personal hardware needs that are unique to you and because network coverage varies completely on where you use your device. With a carrier exclusive phone, however, you can only choose to get the device from a single carrier that may or may offer the best coverage where you work, live and travel. I essentially see zero consumer benefit here.

Nokia Lumia 920 smartphonesNext is the handset maker. In this case, it’s Nokia, which I don’t likely need to remind has big challenges as it transitions from its old Symbian operating system to Microsoft’s Windows Phone platform. Simply put: Nokia needs to grow its Lumia user base as quickly as possible. Early information on the Lumia 920 tells me it has the right combination of hardware and software to do that. But with just a single U.S. carrier selling the phone, Nokia’s U.S. upside is limited to a large degree; at least for the duration of the exclusivity clause, likely 3 to 6 months.

Nokia does benefit from having AT&T tout this as an exclusive flagship phone and from AT&T’s expected marketing to help sell the device, but I don’t think that will add more benefit than the value lost from selling the Lumia 920 on multiple carriers simultaneously. Look at Samsung’s recent Galaxy Note 2 estimates as an example: It expects 3x the number of sales as the first Galaxy Note in the short-term because of a widespread launch on multiple carriers. The device is expected to be on all four major U.S. carriers in the next several weeks and because of that, I wouldn’t be surprised to see Galaxy Note 2 sales in the U.S. rival those of the Lumia 920 by year-end.

The big winner here is the network operator because it keeps current customers happy — look what we offer that nobody else does! — and can add subscribers who absolutely must have the exclusive handset. It’s strictly a numbers game for the carriers: Build up the subscriber base because data usage is rising as is average revenue per user. It’s a win-win for the carrier yet reduces choice for consumers and leaves handset makers in the lurch, hoping that the negotiated exclusive deal works out better than a widespread launch.

It’s time to stop the practice if indeed we want a more competitive wireless market in the U.S. And don’t get me started on 2-year contracts that lock consumers in to service plans….

6 Responses to “Like 2-year contracts, smartphone exclusives need to go away”

  1. Rudy Concepcion

    I agree with the author, Nokia would do well to make their devices available to all carriers instead of giving the good one to AT&T and the gimped version to T-Mobile (Yes I am a T-Mobile subscriber). How does Nokia expect me to jump on their platform when they only offer me a second-rate phone, while Google intelligently offers me the Nexus 4 (which is compatible across all GSM carriers, not just T-Mobile). I think handset makers should follow Google (and Apple, to a lesser degree) and make phones that are compatible with all networks and sell them at a decent price ($300-$400 wouldn’t be bad) and from there let the carriers also sell them. That way, anyone that wants the phone at a subsidized (cheaper) price will lock themselves into a 2 yr contract w/ their respective carrier and those that wish to avoid this will pay outright for the phone. But I digress, my opinion is as likely flawed as the next guy’s opinion. I’m sure Nokia execs must’ve thought things through and seen an AT&T exclusivity deal as the best way (either that or they’re too stupid to see how doing it like Google would be of greater benefit).

  2. txpatriot

    Kevin Tofel writes: “It’s a win-win for the carrier yet . . . leaves handset makers in the lurch”.

    That may be true and yet handset manufacturers continue to make such deals. Apparently they think there’s more upside than downside in making these deals.

    Bottom line: the handset makers are big boys, they really don’t need you to worry about them on their behalf, but I’m sure they appreciate it.

  3. That would be incredible, but the carriers have too much power in America. I’m amazed by how much value you get with pre-paid SIMs in Southeast Asia. Granted those networks are still 3G and don’t cost as much to maintain/build.

  4. John S. Wilson

    I see where you’re coming from, but even the music industry does this. There are sometimes limited releases to boost sales at a specific retailer and create a large buzz. I also think an exclusive carrier relationship can benefit the phone manufacturer because the retailer may do a better job of selling the device. When a device is on all carriers it’s harder for an individual carrier to separate themselves from the pack. Consumers indeed do value choice? But the industry rushing to give consumers unfettered choice doesn’t necessarily benefit with profits.

  5. Gregg Borodaty

    Couldn’t agree more. In fact, let’s use an analogy. What if Verizon got exclusive rights to the next Macbook Air such that it only connected to the internet over Verizon’s FiOS network, and the only way you could buy it was if you signed a 2-year FiOS contract? Then again, maybe I shouldn’t suggest this idea, the carriers will love it!

  6. So basically, phones should be sold unsubsidised (and networks should be dumb pipes). In principle, I agree 100%, but in practice I struggle to imagine any viable path for transitioning to such a system over the short-to-medium term – we’re stuck with what we have until unsubsidised phone prices fall dramatically. Considering that a 32GB iPhone 5 is about 140% the price of a 32GB 3rd-gen iPad and 240% that of the new iPod touch here (France), is it the cellular technology that is so expensive? Or just drastically higher margins acting as massive carrots to keep the phone manufacturers playing ball with the (evil, evil) networks?