Can the FCC Free the iPhone?

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If you're wondering whether FCC Chairman Julius Genachowski finally will pry the iPhone from AT&T's cold dead hands and release it into the wild, you're not alone.

In his "network neutrality" speech this week, Genachowski did not talk explicitly about exclusive deals between handset m

akers and carriers. But what he did say could lay the foundation for unprecedented and, for a group of market-oriented scholars, unneeded FCC regulation of wireless vendor contracts. (The full text of the speech is online.)

But as yet, it's not clear how the proposed rules would actually affect current deals such as the one between Apple and AT&T for the iPhone, or future exclusive arrangements.

"Would the proposed net neutrality rules result in a default ban of exclusivity deals?" asks Ryan Radia, information policy analyst with the Competitive Enterprise Institute (CEI), a public interest organization based in Washington, D.C. "That would not be the case, based on my understanding of the proposed rules."

"It at least implicates handset arrangements," says James Gattuso, senior fellow in regulatory policy for the Heritage Foundation, a conservative think tank also in D.C.

Also from Network World: What the U.S. can learn from international net neutrality, broadband policies

Some network neutrality advocates made a direct connection between Genachowski's speech and exclusive contracts. Andrew Jay Schwartzman, president of Media Access Project, a liberal public interest law group in Washington, was quoted this week in a Bloomberg News report as saying, "The iPhone can't be exclusive under a true net neutrality regime."

But CEI's Radia says exclusivity may still be possible, provided the agreement doesn't carry provisions that would conflict with whatever the final network neutrality rules might be. "[Deals may be legal] so long as the deals do not prevent a consumer from accessing the content of their choice," he says. But, if Apple and AT&T allowed access to only a subset of applications or services, such a practice would likely be illegal.

The FCC in August voted unanimously to look into the general topic of competition in the wireless industry. Previously, in June, it decided to examine the specific issue of exclusive handset deals with carriers, about the time the Palm Pre smart phone was released, only on Sprint's U.S. network.

In his speech, the FCC chairman proposed adopting four existing and two new "network neutrality" principles as formal commission rules, to be applied to Internet service providers, including mobile operators.

Four of the principles are currently in a 2005 policy statement, which in effect says consumers are "entitled," with some general exceptions, to access the Internet content, using the devices, applications, and services, of their choice; and to have competition among all these providers. The new ones Genachowski proposed are "non-discrimination" – providers can not discriminate against specific Internet content or applications – and "transparency" – full disclosure by providers about their network management practices.

"These issues have been tied together throughout the debates about what the extent of mandatory openness should be," says James Speta, a professor at Northwestern University School of Law, who specializes in telecommunications, Internet policy and anti-trust.

Speta, with others, says the arguments either for or against exclusive agreements are not new, but rather reflect the classic competitive debates over topics such as industry integration, concentration, and openness.

That's an important perspective for the critics, because it becomes in effect a demand that advocates for banning exclusive agreements demonstrate how today's deals in today's wireless market are actually harming consumers.

"These kinds of arrangements are not necessarily detrimental to consumers, but they can be potentially [detrimental]," Speta says. They are less likely to be harmful where the market is competitive, and when there are "good or at least neutral" business reasons for signing them. Speta says the evidence is that the U.S. wireless market is highly competitive and the exclusive deals serve valid business reasons, such as ensuring technical compatibility or encouraging investment by handset makers and carriers in new services.

"Generally, exclusivity in competition law is not prohibited," says Gattuso, of the Heritage Foundation. "It's seen as useful and efficient. It provides certainty to providers, and lets suppliers and provides align marketing and product efforts."

"It's hard to remember that in the beginning the iPhone's success was not certain," he adds. "Exclusivity adds [more] certainty that their investments will pay off."

CEI's Radia points out that today consumers can choose between handsets that are exclusive offerings and those that are not. Genachowski's proposed rules could actually result in less consumer choice, needlessly and perhaps damagingly limiting the business models that mobile operators and device makers can make use of.

"Why can't Apple, which offers a closed phone, and Google, which offers an open phone [based on the Android software], co-exist?" Radia asks. "And let the consumer decide."

As the impact of the as-yet-unformulated rules is unclear, so is the question of whether the FCC has authority to regulate these contracts.

"There is no statute or law granting this authority," says Gattuso. "But this lack of explicit authority hasn't constrained the FCC….If you can find a plausible connection, then [likely] the FCC can regulate them. There is an "ancillary jurisdiction" implied in the [telecommunications] act." Courts have tended to interpret the agency's authority rather more broadly, despite the lack of explicit jurisdiction, he says.

Speta suggests the proposed rules are premature, partly because the wireless market is so competitive and partly because the market is about to launch an experiment in what open networks are like. By year end, Verizon plans to begin deploying its LTE 4G network in part of the 700MHz spectrum it acquired last year in the FCC auctions. That block carries mandated open access requirements.

"The whole ecosystem is struggling with the rules of how much openness is desirable," Speta says.

This story, "Can the FCC Free the iPhone? " was originally published by Network World.

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