Verizon (VZ) (Analyst Report), the largest U.S. wireless carrier by subscribers, is reportedly curbing the time period for any future exclusive handset agreements with manufacturers. Under the new policy, small rural wireless carriers with fewer than 500,000 customers will have access to cellular handsets after the expiration of a six-month exclusive deal term between Verizon and any handset vendors.
This new move comes as a defense mechanism in response to increased government pressure on leading U.S. carriers regarding exclusive handset deals. U.S. antitrust regulators have reportedly initiated legal proceedings to examine whether major national carriers are abusing their market power by unduly restricting services through exclusive distribution agreements with manufacturers, especially for high-end smartphones.
Exclusive handset agreements allow large wireless carriers to sell popular handsets at subsidized prices to lure customers. Currently, most of the leading U.S. carriers have their own long-term distribution arrangements for smartphones. These include AT&T’s (T) (Analyst Report) multi-year distribution deal with Apple Inc (AAPL) (Analyst Report) for iPhone, Verizon’s pact with Research In Motion (RIMM) (Analyst Report) for BlackBerry Storm and Sprint Nextel’s (S) (Analyst Report) exclusive right to market Palm Inc.'s (PALM) (Analyst Report) Pre smart phone.
Verizon’s new handset policy will benefit rural customers in the U.S. who were deprived of accessing the latest technologies enabled by the state-of-the-art handhelds as larger carriers often do not offer any service in remote rural areas. Moreover, the company’s decision to concede on exclusivity may also force other big carriers such as AT&T (T) to move in the same direction, thereby further opening up the market.
The impact of the exclusivity concession on Verizon is expected to be modest given the limited number of eligible rural carriers and the small customer base they serve in their respective operating territory. This is also supported by the fact that most of the popular high-end handsets usually generate chunk of the sales lead within the first six months of thier launch.
However, in the worst case scenario, Verizon has to take the losses if a new handset fails to generate the desired market response in that limited time frame.
That said, we reaffirm our Hold rating on Verizon.
