Setting the iPhone free from AT&T

By Olga Kharif

updated 12:29 p.m. ET March 4, 2009

As the exclusive U.S. carrier for the Apple iPhone, AT&T has had a lot to celebrate. Rivals hope to crash the party.

A growing number of public interest groups want an end to the partnership that forces buyers of Apple's iPhone to buy their mobile-phone service only from AT&T. And they're taking their case to the highest levels of government.

The Consumers Union, the New America Foundation, and the Electronic Frontier Foundation, as well as software provider Mozilla and small wireless carriers MetroPCS and Leap Wireless International, are lining up in opposition not only to the Apple-AT&T partnership, but to all manner of arrangements whereby mobile phones are tethered exclusively to a single wireless service provider.

Consumer groups are reaching out to the Federal Communications Commission, the Copyright Office, the Federal Trade Commission, and congressional leaders, asking them to outlaw exclusive handset and software deals. Judging from the track record of Julius Genachowski, the newly nominated head of the FCC, petitioners may get a sympathetic hearing, at least at that agency.

Opponents also take issue with Apple's insistence that iPhone users download software only from the Apple iTunes App Store. The argument is that these and other "exclusivity" pairings are anticompetitive and limit consumer choice. "It is unthinkable that you could only use a Macintosh on an AT&T connection," says Michael Calabrese, vice-president at the New America Foundation, which is chaired by Google Chief Executive Officer Eric Schmidt. Google has helped develop phone software that competes with Apple's.

Apple and AT&T aren't the only tech companies under fire. Every major U.S. carrier including Verizon Wireless, Sprint Nextel, and T-Mobile USA has struck exclusive deals with cell-phone makers such as Samsung Electronics, HTC, and Research In Motion. Companies such as RIM also have their own online application stores tied to particular devices.

Lots at Stake for AT&T
While any ruling would affect many industry players, AT&T and Apple may have the highest stakes in the battle. The iPhone is the No. 1 seller at AT&T, and the iPhone has been key to driving AT&T Mobility subscriber growth as it gets harder for carriers to add new customers. About 40 percent of the 4.3 million AT&T customers who activated the device in the second half of 2008 were new to AT&T, according to the company's latest quarterly filing.

Apple also benefits by extracting key concessions from its partner. For instance, Apple can sell music and applications to iPhone users without sharing revenue with AT&T, an arrangement AT&T doesn't allow with other devices.

AT&T would stand to lose big. Without an exclusive device, all the carriers may have to compete on service or handset price after subsidies. For Apple, "the [iPhone's] price might not drop very quickly, if at all, because the device itself still has great value — it's iconic," says Neil Strother, an analyst at consultant Forrester Research. The impact from opening up the phone to all software could be muted as well, as App Store revenue is minimal.

Friendly Ears at the FCC and FTC
The consumer advocacy groups are pinning their highest hopes on the FCC, which last year asked for comments on the exclusivity issue. Exclusive handset practices "result in a very direct and negative effect on the competitive positions of smaller carriers," wrote the Rural Cellular Association (RCA), which represents smaller carriers, in a Feb. 23 filing submitted in response to the FCC's request. "The large carriers use it as a vehicle to drive customers away from the smaller carriers," which end up getting popular phones years later, says Eric Peterson, executive director of the association.

The RCA hopes that as soon as a new, Democratic FCC chairman is in place, the agency will investigate the issue and rule on it. A former government official familiar with the FCC believes the new Democratic-majority commission will be sympathetic toward smaller carriers' interests. The FCC could prohibit exclusive handset deals outright, or it could impose limits on carriers' ability to restrict what networks a phone works on.

The RCA is also lobbying Congress to get involved and expects a bill that prohibits exclusive carrier deals to be introduced soon, Peterson says.

On Dec. 10, the New America Foundation met with law professor Phil Weiser and former FCC Commissioner Susan Ness from President Obama's transition team. The group asked that the Federal Trade Commission take up the issue of "wireless carrier anticompetitive practices" — namely, the practice of locking handsets to a particular network, and requiring users to buy software from a particular source, Calabrese says. A decision in the foundation's favor could make it illegal for AT&T and Apple to limit new iPhone users to AT&T's network or the App Store from the get-go. Former FTC Commissioner Jon Leibowitz, expected to be nominated for the FTC chairmanship position, is likely to be sympathetic to this view; in a February 2007 speech, he supported allowing any device to attach to any network.

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