U.S. Government Seeks to Solve Non-Existent Smartphone Problems

From the standpoint of the US free markets, we have the most interventionist government regime of any point in the past 60 years — if not ever. There have also been some spectacularly bad government interventions in the past year, as well as profligate deficit spending.

Many have these been justified (or rationalized) as being necessitated by the economic mess — or, as White House Chief of Staff Rahm Emanuel put it back in November, “you never want a serious crisis to go to waste.” Some of the micromanagement has bordered on the banal — meddling just because — which brings us to this week’s news.

A report late Monday said the Justice Department is going to investigate cellphone locking and exclusive distribution relationships, notably those of the iPhone. As one TV light-chasing senator (who served in Vietnam) begged the FCC last month:

We ask that you examine this issue carefully and act expeditiously should you find that exclusivity agreements unfairly restrict consumer choice or adversely impact competition in the commercial wireless marketplace.

An economist arguing for government intervention would claim monopoly distortions of the market, information asymmetries that mislead consumers, or other forms of market failure. None of that applies here: there is no monopoly, everyone knows about the iPHone exclusive and there is no market “failure.”

Yes, if you want an iPhone in the US you are tied to a Cingularly unimpressive network and onerous service plan. I of all people would agree that it would be nice to get an iPhone without paying AT&T (T) $700 for a data plan.

However, a cellphone is not a right (even in the 21st century), a specific cellphone model is not a right, and certainly an iPhone is not a right. Even if it were, anyone can go out and buy an iPod Touch without the carrier contract.

More importantly, this is “solving” a problem that is going to disappear on its own. The iPhone’s been out for 2 years, competitors are responding with models that have comparable features, and increasing competition will be the norm.

Apple (AAPL) is the only major vendor in the US who intentionally has an exclusive — eveyrone else is selling to all players or would gladly do so if the operators owuld let them. RIM (RIMM) is selling the BlackBerry to all the carriers (including many smaller ones) and has twice Apple’s market share in North America.

Microsoft (MSFT) and its Taiwanese friends are selling Windows Mobile to every carrier, while Nokia (NOK) and Symbian would love to sell to every GSM carrier. (OK, Palm (PALM) Pre is exclusive to Sprint (S), but it’s no longer a major vendor and Verizon (VZ) expects a comparable webOS phone early next year.)

Meanwhile, the pending explosion of Android models means that the vendors will have to seek out every carrier (including smaller ones like MetroPCS (PCS) and US Cellular) to meet their market share goals. (Maybe AT&T will skip Android, but if the UK's O2 can carry Pre and iPhone, then why not AT&T?)

Four months ago I said this sort of intervention in France is terrible economic policy — but then what would you expect for France?

Even if it made sense in France, in the US we have four major carriers (one more than most countries) that compete aggressively for customers. It is quite clear that in the US, this bundling increases competition among device makers — which is sorely needed in the high-end smartphone segment.

Apple decided that the best way to get its iPhone to market was through an exclusive with Cingular. This had the utterly predictable outcome that carriers serving 70+% of the US market would aggressively promote competing phones. If Verizon can’t have the iPhone, it has to promote something else, as do Sprint and T-Mobile. The BlackBerry Storm, Palm Pre, HTC G1 were among the respective beneficiaries.

As I said back in March:

We need competition and innovation in smartphones to spur innovation in mobile networks. Despite their denials, the network operators are just running commoditized pipes between devices and the Internet, and as long as we have enough operators competing for business, it’s worth accepting a little bit of switching costs to maximize device choices.

Comments

[Economyst:]

The Iphone is a pretty inelastic product -cutting the price would increase sales but at the loss of total revenue. Also it would change the perception of people that Apple is not a premium product.

I know Apple discounts its products - but that's only for those products that it wants to clear inventory for its latest version. Apple won't go chasing market share for the sake of it.

If the Iphone was available on Verizon - both AT&T would try to differentiate their offerings most likely on price rather than service provision as both don't have stellar customer ratings. So Apple would charge them the same for their phones and then let the two duke it out who would cut their line rental the most. Apple would still win.

Jul 09 12:00 PM

[zergworld:]

Left to their own devices, anti-competitive practices will happen, as proven in history. Hence the need for government intervention. However, can't say much about the efficacy and quality of such intervention.

Jul 09 02:57 PM

[Gregman2:]

The costs are still too here and globally for 3G+ to take off. We have so many great streaming technologies in the wings ready to go, but
the number of people using iPhones and other 3G devices is only about 1% of the total global cell phone users. If Congress feels it's bored and needs something to do, it should consider ways to make 3G more affordable, which would be great for m-commerce as a whole.

Jul 10 12:07 PM