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The Feds have been examining exclusive wireless carrier deals with handset makers—think AT&T (T) and Apple (AAPL) —but the effort is a bit of a farce. Bernstein analyst Craig Moffett says it’s laughable that the wireless industry is anticompetitive and the Feds don’t have to worry about wrecking the wireless industry—Apple already has.

The argument in a research note is an entertaining read and prompts a few “hmm” moments. The biggest one comes when Moffett argues that the Federal Communications Commission and the Department of Justice are wasting their time reviewing the wireless market—especially AT&T. Why? Apple has taken any power that AT&T has. Sure, AT&T has an exclusive deal with Apple, but the iPhone maker owns the customer relationship and holds all the cards.

As background, the Feds are looking into the wireless business and whether exclusive deals are anticompetitive. Last month, Senator Herb Kohl, Chairman of the Senate’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights, implored the Justice Department and the Federal Communications Commission to undertake reviews of the U.S. Wireless business, specifically text messaging rates and other fees. That turned into a hearing on June 16 (webcast).

Kohl’s group, which also spends time on hearings about college football’s Bowl Championship Series system, implored the FCC to look into exclusive deals and whether they are anticompetitive. We’ll see where the FCC goes (probably nowhere), but in the end the probe is a bit of a detour of what’s really going on in the wireless industry. To wit:

  • Wireless prices are falling as carriers compete;
  • Handset makers are working carriers hard;
  • And the wireless game is about apps—a game carriers can’t win.

Moffett writes:

The argument that handset exclusivity is anticompetitive also comes at a curious time. Indeed, a case can be made that handset makers – well, Apple, actually – have played one carrier off against the other in virtuoso fashion, and are on the brink of stealing the wireless business from the wireless carriers. It wasn’t that long ago that AT&T’s exclusive agreement with Apple’s iconic iPhone looked like a customer relations masterstroke for the carrier. AT&T Mobility, a brand that had once been cingular-ly stodgy and tired, was suddenly, well, relevant again. Apple’s iPhone meant that AT&T was the place for cool handsets. Better, it was the place for wireless data.

Somewhere along the way, however, Apple has stolen the march, and in the process has recast AT&T from hero to villain. At Apple’s June developer conference in San Francisco, where Apple unveiled its new 3G “S” iPhone, AT&T was roundly jeered at every mention by the more than 5,000 application developers in attendance. Bloggers at the conference were all a-Twitter (so to speak) about their frustrations with dropped calls and slow data connections. Even Apple itself seemed uncomfortable talking about its U.S. partner.

With breathtaking swiftness, the technology press has painted AT&T to be the (evil) gatekeeper, with sub-par network quality and a hidden (evil) agenda aimed at preventing innocent and only oh-so-well-intentioned technophiles from simply exercising their God-given rights, like Skyping wireless voice (free), embedding high bandwidth video in MMS texting services (free), or bypassing that $40 per month laptop card by tethering their laptops to their iPhones (free, of course). The PR pressure was such that, bizarrely, AT&T felt obliged to defend itself from charges that it was being unfair to existing 3G iPhone subscribers by not agreeing to automatically subsidize upgrades to the newer model – even for customers only a few months into a multi-year contract. AT&T risks surpassing even Microsoft in Apple’s rogue’s gallery.

After reading that passage you wonder if the FCC would be doing AT&T a favor by banning exclusive deals. Moffett then cooks up the iTunes analogy, which really bonks you over the head.

Apple’s direct-to-consumer end run around the wireless industry is in many ways simply a repeat of its brilliant negotiation with the music industry at the dawn of iTunes back in 2001. Less than a decade later, Apple has managed to capture considerable value from the music industry as it sells ever more iPods.

That Apple might pull off the same feat in the Wireless business – without any help from the government, mind you – isn’t as far fetched as it sounds. It bears recalling that the music industry was initially delighted with the early results of their new iTunes partnership, just as AT&T is today, and that most of the early press about the music industry’s deal with iTunes had a triumphalist ring to it. (In another ironic and interesting parallel, the music industry was even being heavily investigated for anti-competitive behavior at the time).

Now AT&T isn’t exactly a victim here. AT&T has landed millions of locked in customers and the iPhone has been a boon for the carrier.

However, the strategic field has been shifted. Customer loyalty is to Apple not AT&T. If Apple took the iPhone to Verizon Wireless (VZ) exclusively customers would leave AT&T. Meanwhile, AT&T’s network is getting crushed over the iPhone’s data appetite. And as more apps and features are enabled AT&T’s network gets crushed more. It’s a vicious spiral—for the wireless carrier.

Moffett continues:

Something more profound than just short term economics is afoot. Apple has radically tilted the strategic playing field away from the network operator in favor of the device manufacturer. Remarkably, Apple has so thoroughly stolen the customer relationship – who would argue that Apple iPhone customers’ first affinity is to the device rather than to the network – that the network is not only irrelevant, it is rather a source of derision.

And that source of derision may even invite more scrutiny from the Feds—once AT&T’s network is swamped again.

The bottom line:

In short, the iPhone seems to be doing just fine at wrecking the Wireless business without the government’s help. And at the end of the day, we would be surprised if anything comes of the government’s saber-rattling about handset exclusivity (even if, ironically, it might actually help save the wireless carriers from themselves). Regulating handset exclusivity would, in practice, mean dictating subsidies and pricing to both carriers and handset makers, something that is very unlikely. And since every network in the U.S. runs on a different technology standard, putting teeth into regulation would mean dictating technology development to the handset makers, which is almost unthinkable (it’s a bit difficult to imagine Apple being forced to design a CDMA compatible iPhone). If there is a risk in the government inquiry into the wireless business, however, it is more likely to be the constraints that carriers have placed on applications, not on devices per se.

And if the Feds did force wireless carriers to offer multiple in some sort of network neutrality scheme then it would be devastating since “wireless capacity constraints are so much greater, and the wireless industry is so much more dependent on low bandwidth voice and text for its revenue,” says Moffett.

Source: Forget the Feds, Apple Is Doing Just Fine Wrecking the Wireless Business