Verizon Loosens Up on Handset Exclusivity

But Only the Smallest Wireless Carriers Can Get Their Hands on the Phones Sooner

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SAN FRANCISCO ( -- A major tool in wireless carriers' marketing arsenal involves locking out competitors' access to a hot cellphone. Just ask AT&T what the iPhone has done for its wireless business.

Verizon is the exclusive carrier of the Blackberry Storm.
Verizon is the exclusive carrier of the Blackberry Storm.
But now Verizon Wireless has volunteered to narrow the window in which it is a phone's exclusive seller. In a letter to lawmakers, Verizon Wireless CEO Lowell McAdam said the top U.S. wireless operator would allow wireless carriers with fewer than 500,000 subscribers access to its exclusive phones after six months.

Verizon's overture is arguably a calculated political and public-relations move, and is unlikely to change the competitive landscape in any meaningful way. As long as the carrier can keep big rivals AT&T, Sprint and T-Mobile off its back, carriers with fewer than 500,000 subscribers are unlikely to present any real threats to it. One of the wireless carriers testifying to members of Congress about anticompetitive practices is U.S. Cellular, which has more than 6 million subscribers.

And even if smaller carriers were to beef up their offerings with the same phones that Verizon has, the large carrier may still draw customers, because it stands to get better pricing from handset suppliers due to its volume of subscribers.

"It's no skin off Verizon's back," said Matt Thornton, analyst at Avian Securities. "They just want to prevent this from going further and make [Congress] feel better."

Government probe
Verizon's response comes after the government weeks ago began looking into whether large carriers were engaging in anti-competitive practices, including striking exclusive handset deals. Lawmakers recently joined the Federal Communications Commission and the Justice Department, which have been investigating anticompetitive issues in the wireless-telecom industry.

Putting a lock on a hot handset has become a key differentiator for carriers, and they're unlikely to let the government stop them from cutting exclusive deals without putting up a fight.

"We're moving to an era where it's not just the carriers that drive consumers to the operator but also the phones they're offering" said Michael Gartenberg, VP-strategy and analysis at Interpret. "There's no doubt the exclusives affect consumer perception and choice. If you can't carry those devices, you're at a disadvantage. It's also the type of exclusive relationships with the carriers that drive the handset makers to create these types of devices and make it worth their while to do so."

AT&T has been able to lure new customers with its exclusive iPhone offer: 40% of its new subscribers in the first quarter bought the Apple handset. It's also been able to leverage the phone to cultivate a crop of loyal customers, as the iPhone has been able to keep its subscriber-attrition rate steady at 1.2%. Sprint said the Palm Pre smartphone, which launched last month, delivered the carrier's best one-day and single-weekend sales. Sprint previously lacked an exclusive smartphone and needed the Pre badly to breathe new life into its flagging portfolio.

Analysts say it's unclear whether Verizon's large competitors will follow in its footsteps; more likely, they will await the government's response before taking any steps.

Aura of scarcity, exclusivity
In theory, competition is good for consumers, while locking up a sought-after phone can give the handset an aura of scarcity and exclusivity.

The Motorola Razr, with its sleek and thin design that made the company cool again in mid-2005, was initially distributed through Cingular. As the iconic phone became widely available through other carriers, its desirability quotient declined.

"The ubiquity of them drove the average selling price down for Motorola and some say was an element of Moto's demise," said Bill Ho, an analyst at Current Analysis.

Others argue that the business is ripe for a new model that frees consumers from being tethered to a single carrier and handset for the duration of a contract. AT&T bore the brunt of this argument last month when iPhone users clamored for the carrier to drop the price on the new iPhone 3GS so they could ditch their old iPhones without paying the hefty unsubsidized price for the new phone. The older 3G iPhone was released last summer, obligating users to stay with their two-year AT&T contracts for at least another year, the logic being that the carrier has to recover that subsidy it paid Apple for the phone.

"This holds back the market for handsets, because when someone's locked up for two years, they can't buy another handset," said Craig Mathias, principal at the Farpoint Group. "IPhone users are now using a phone that's two generations back, when a sexy new phone is available that they can't buy without spending a small fortune."

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