The U.S. Department of Justice has begun to look into the way that large operators form exclusivity agreements for popular handsets over concerns that the practice is anticompetitive, according to a report in The Wall Street Journal citing unnamed people familiar with the matter.
According to the report, published online on Monday, the DOJ may be looking broadly at ways that large telecom operators including AT&T and Verizon may be acting anticompetitively. Other issues include ways that operators restrict the kinds of services that can be offered on their networks, the Journal reported.
The DOJ does reveal when it is officially investigating a matter. It hasn't yet in this case, which could mean it is now considering whether to launch an official investigation. The agency declined to comment for this story.
Public interest groups applauded the news of a potential investigation. “The focus of the Department’s investigation should be on the clearly anti-competitive rates, terms and conditions imposed by ATYT and Verizon on the high-capacity broadband market,” wrote the NoChokepoints coalition, a group that urges the Federal Communications Commission to do more to improve competition in the broadband market, in a statement.
Public Knowledge, a public interest group, also supports a DOJ investigation. “Consumers have suffered over the past 10 years as the industry has consolidated and strengthened its hold over which services can be offered and which equipment can be used. Competition is almost nonexistent in crucial services for home and business use,” Gigi Sohn, president of Public Knowledge, said in a statement.
If the DOJ does launch an official investigation, it will be a direct result of the change at the White House, and not because of any specific new kinds of deals or services, said Evan Stewart, a lawyer with Zuckerman Spaeder who practices antitrust law. “Clearly the Obama administration and the people they’ve installed at the Justice Department and the [Federal Trade Commission] have made it clear they view antitrust laws differently than the Bush people,” he said.
While the investigators may be interested in the telecom segment in part because of the way it’s grown, they may ultimately have trouble making a case, he said. When companies in an industry grow primarily through market consolidation, rather than internal growth, antitrust questions arise, he said. The dominant telecom providers have all grown into their positions through acquisitions.
However, particularly in mobile, no one provider has a big enough market share to cause concern, he said. Even the largest operator, Verizon, has less than 30 percent market share.
The DOJ may be specifically interested in the issue of exclusive handset deals, following concern that some members of Congress have recently expressed over the practice. The Committee on Commerce, Science and Transportation held a hearing last month to discuss the effect that long-term exclusivity deals have on the wireless market and particularly on people living in rural areas. Smaller rural operators argue that exclusive handset deals turn rural customers into second-class citizens because in some cases they have no option to buy the latest and most popular phones.
Even though the DOJ hasn’t confirmed that it has launched an investigation, Senator John Kerry, a Massachusetts Democrat who presided over the recent hearing, commended the administration’s review of exclusive cell-phone deals.
“This is the kind of healthy oversight we want to see,” Kerry said in a statement. “During our committee’s examination of exclusive deals between cell phone manufactures and wireless providers, it was clear that we need to know more about how these contracts affect competition in the marketplace and its impact on consumers. As the future of communication continues to move out of the ground and into the airwaves, it is important that we ensure the wireless market remains competitive and consumers are protected.”
Operators like AT&T, which is in the spotlight because its deal for the popular Apple iPhone is unusually long, say that such arrangements promote innovation. AT&T is in the second year of its exclusive arrangement for the iPhone and while the companies haven't revealed how long the deal will last, many people believe it is expected to go on for five years. Before the deal between AT&T and Apple for the iPhone, exclusive agreements more commonly lasted for a period of months, not years.
At the recent hearing, Kerry and other senators struggled to understand AT&T's reasoning for how such deals promote innovation.
AT&T is also among operators at the center of the debate over whether wireless operators should be able to forbid certain applications from running on their networks. The operator is not yet supporting picture messaging on the iPhone or tethering, which would let users connect their iPhones to laptops for Internet access on their computers.
AT&T did not reply to a request for comment about the potential DOJ investigation.
Updated at 3:40 p.m. PT to include comments from public interest groups, an antitrust lawyer, and Senator John Kerry.
Grant Gross of IDG News Service contributed to this report.