Handset Exclusives Drive Growth & Broadband Adoption

-By Scott Cleland

Why regulate tech/computer sales?

Handset marketing exclusives are a pro-competitive wellspring of wireless growth and broadband adoption. Marketing exclusives are also a legitimate, proven and widespread marketing practice that marshals maximum marketing resources for selected, potentially-hot-new-products in order to drive maximum sales and adoption.

Pro-regulation proposals calling for the FCC to ban smartphone/netbook marketing exclusives are unnecessary, and would also be highly counter-productive as they would undermine the Government’s important goals of stimulating the economy and promoting broadband adoption.

Moreover, this radical proposal oddly calls for regulating the most expensive, high-end, wireless market segment — smartphones — which happens to be among the most competitive, highest-growth and most innovative segments of the wireless market today.

(This odd proposal is akin to asking the government to ban Lexus from having exclusive sales dealerships and requiring that Ford or GM dealers be able to sell the latest Lexus vehicles in order to ensure consumer choice.)

Furthermore, given that all the devices with marketing exclusives are basically wireless-enabled hand-held or laptop computers, serious FCC consideration of a ban on handset exclusives would signal to investors and capital markets that the FCC may have an interest in regulating how computers are sold and marketed. That would be a stunning reversal of a several-decade-old bipartisan FCC policy to resist calls to regulate the competitive computer industry.

Investors are keenly aware that the U.S. wireless handset/computer segment is among the most competitive in the world with over 30 manufacturers offering over 600 different handsets for sale; in contrast, the UK market offers less than 150 different handsets for sale.

In addition to the pro-regulation groups discussed above, the Rural Cellular Association also falsely claims that handset marketing exclusives are anti-competitive basically because rural carriers can’t afford their own expensive handset marketing exclusive.

If the RCA’s antitrust logic made any sense, the DOJ would have to investigate Lexus and every other luxury carmaker for being anti-competitive because it doesn’t have a dealership in every rural community.

Bringing home the relevance of this analogy, now U.S. Government-owned General Motors just shut down hundreds of rural dealerships because GM could not sell enough cars through them to make them economically viable.

Does the RCA really believe that basic everyday economic constraints are somehow inherently anti-competitive?

Why would a ban on handset marketing exclusives undermine growth and broadband adoption?

First, wireless has long been the growth segment of communications. The FCC is well aware that its own data show that there are more wireless users than than landline users, that there are more wireless minutes of use than wireline, that wireless data growth is rapid, and that wireless broadband is the fastest growing segment of the broadband market.

Second, marketing exclusives are a legitimate, proven and widespread, national marketing-best-practice to prevent the real economic loss of marketing to free riders. It’s really business 101; don’t subsidize your competitors’ cost of sales.

Just like its obvious Lexus would never do a big, expensive, national ongoing marketing/advertising campaign to sell Lexus’ latest vehicle, if every one of their competitors like, Ford, GM, etc., could sell Lexus’ latest vehicle at the same time and profit off Lexus’ expensive marketing/advertising campaign as free riders…

…no wireless carrier that wants to stay in business will commit to and execute a big, expensive, national ongoing marketing/advertising campaign to sell a high-end smartphone, if everyone of their competitors could sell the latest smartphone at the same time and profit off the expensive marketing/advertising campaign as free riders.

This simple business 101 insight is the simple reason why each of the major carriers has a big, expensive national ongoing marketing campaign with a manufacturer to sell its own exclusive handset: AT&T-Apple IPhone, Verizon-Blackberry Storm, Sprint-Palm Pre, and T-Mobile-Google G1.

The standard and legitimate marketing practice of marketing exclusives results in vastly more combined (manufacturer & carrier/distributor) marketing resources (hundreds of millions of dollars in advertising annually) to drive more sales and growth in this segment than the manufacturers could afford to do by themselves.

The simple reality is that it would make no business sense for wireless carriers to spend hundreds of millions of dollars each year to market/advertise high-end handsets, if handset marketing exclusives were banned.

And if it made no sense to heavily market new high-end handsets… there would be less awareness of new products and what benefits they would provide to users. And if there is less awareness there would be less demand, fewer sales, slower growth and slower broadband adoption.

In a nutshell, banning marketing exclusives would be a decision to sell less product; it is as simple as that. This presents the FCC with a pretty easy trade-off. More wireless broadband growth and adoption with less than perfect consumer choice, or Less wireless broadband growth and adoption with marginally more consumer choice?

In other words, is perfecting consumer choice of carriers the only consumer goal here or is a balanced approach of multiple competing consumer benefits and protections a better and more practical overall consumer objective?

Third, handset marketing exclusives are in effect turbo-charging overall broadband adoption in the U.S.

In effect, wireless handset exclusives attract marketing/advertising resources that otherwise would not exist for that purpose.

Ironically these resources serve the same basic function as the hundreds of millions of dollars in the broadband stimulus portion of the economic stimulus package passed earlier this year. Congress recognized that the problem was not just broadband deployment, but also encouraging broadband adoption.

The function of marketing/advertising exclusives for smartphones is to show the functionality, usefulness and benefits of the device and service to the average consumer so that they will demand and buy it.

This marketing/public education function encourages more people to demand broadband by learning the utility of mobile broadband.

Moreover, encouraging wireless broadband adoption will spur more broadband adoption overall because smartphones/netbooks with monthly wireless access can be significantly more affordable than a PC with monthly stationary broadband access.

In closing, the pro-competitive purpose of these exclusive marketing arrangements is neither mysterious nor nefarious. It simply is a distribution innovation to maximize marketing efficiency/effectiveness to drive sales growth of a potentially big selling product.

Adopting the pro-regulation groups’ recommendation to ban handset marketing exclusives would not only undermine our national goal of promoting universal broadband adoption, it also could undercut FCC Chairman Genachowski’s just-stated goal of “seizing the opportunity for the United States to lead the world in mobile communications.”
Scott Cleland is one of nation’s foremost techcom analysts and experts at the nexus of: capital markets, public policy and techcom industry change. He is widely-respected in industry, government, media and capital markets as a forward thinker, free market proponent, and leading authority on the future of communications. Precursor LLC is an industry research and consulting firm, specializing in the techcom sector, whose mission is to help companies anticipate change for competitive advantage. Cleland is also Chairman of NetCompetition.org, a wholly-owned subsidiary of Precursor LLC and an e-forum on Net Neutrality funded by a wide range of broadband telecom, cable and wireless companies. He previously founded The Precursor Group Inc., which Institutional Investor magazine ranked as the #1 “Best Independent” research firm in communications for two years in a row. His latest op eds can be seen at www.precursorblog.com.

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