FCC Regulation of Exclusivity Agreements - Term Paper Example

FCC regulation of exclusivity agreements The FCC in recent years, has been looking into exclusivity agreements on cell phone sales and distribution contracts, especially the one entered into between AT&T and Apple, Inc; for the development of models of iphone. The FCC has a regulatory function, as spelt out later in this report and the degree to which they should regulate exclusivity agreements has been the subject of considerable controversy, because the proponents of such agreements cite advantages such as fostering innovation and lower prices while the opponents claim that they create anti trust measures and squeeze smaller operators and manufacturers of cell phones right out of the market. The question that this essay seeks to address is: Should the Federal Communications Commission regulate exclusivity agreements? In general, gaining a monopoly is a trend that is discouraged in organizations because it tends to result in a cornering of the market by one supplier or provider of services and thereby puts a damper on competition. In the past, there have been several instances of companies that have faced legal action because they have been guilty of antitrust measures. Cell phone exclusivity arrangements between cell phone service carriers and cell phone manufacturers could also produce a similar result; i.e., a cornering of the market. This Report discusses how such exclusivity agreements could contribute towards the creation of a monopoly for some organizations and therefore require Governments to intervene to prevent such trends. In the telecommunications sector, antitrust law plays a dominant role. Telecommunications by its very nature, involves the linking up of devices and therefore interoperability is a requirement. As Senator Kerry pointed out in discussing the Federal Communications Commission’s investigation into exclusivity agreements, sitting down at a computer and accessing a broadband connection in the present day does not require that a particular computer must be used in order to access the broadband network (Fulton, 2009). Similarly, purchasing a cell phone does not require that a wireless carrier be used; rather it can be purchased separately and directly from a manufacturer. According to one Professor at Penn State University, when such exclusivity arrangements exist between cell phone service carriers and cell phone manufacturers, it could “limit consumer choice, stifle competition and keep rates artificially high”, whereas consumers should be allowed to choose their own service providers (GreglnFla, 2009). At&T and Apple, Inc recently entered into an exclusive cell phone sales and distribution contract for all the models of iphone. This has fuelled the argument before Congress that such exclusivity has caused a decline in innovation, so much so that it almost constitutes a total demise, while the opposing argument is that such exclusivity is the reason for improvements in innovation (Fulton, 2009). For instance as Paul Roth, the It has also been argued that exclusivity tends to lead to lower prices. According to Paul Roth, the President of AT&T retail sales and Services points out, exclusivity is the very criterion which prompts manufacturers to during the period 2007-2009 when the iphone became exclusive to AT&T, its price has dropped from $399 to $199 and further to $99. With this drop in prices, all the other devices, including the other exclusive devices have continued to drop (Fulton, 2009). The Federal Communications Commission in the United States regulates telecommunications within the country and works towards six different goals, i.e., broadband, competition, the media, the radio spectrum including radio and television broadcasting , homeland security and public safety. The Telecommunications Act of 1996 sets out the mission of the FCC as being to "make available so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, rapid, efficient, Nation-wide, and world-wide wire and radio communication services with adequate facilities at reasonable charges” (FCC Report at pp 7). In so far as competition is concerned, the Act specifies that the competitive framework set up to foster and promote communications should be such that it promotes innovation while also ensuring that consumers are provided with a range of reliable, meaningful and affordable services (FCC Report at pg 12). The FCC would play an important role in the context of regulation of exclusivity agreements, especially if such agreements could end up compromising the aims and objectives Hahn and Singer (2009) have examined in detail, all the various developments which have occurred in the mobile phone segment and the vast and varies metamorphoses which have taken place over the past twenty years with new developments occurring all the time. In examining whether or not the FCC should be involved in regulating exclusivity agreements in the mobile phone market, these authors have argued in favor of them, contending that they can play an important role in ensuring that more innovations and developments take place, such that the iphone which is the current most recent development in the mobile phone market is supplanted by a better device. The arguments they offer in support of their position are that such agreements encourage risk taking by manufacturers and service providers and may thus actually increase the available choices for consumers, while lowering the prices as well. Hence, their argument does not support Government regulation of exclusivity agreements. One of the advantages of exclusivity agreements is that cell phone services providers ask for certain new designs or features, which sparks innovation. But when manufacturers set out to manufacture new products, there is an element of risk involved and they seek partners to share both the financial and technical risks with them (Fulton, 2009). As a result, when the service providers enter into agreements with them, they also arrange to refer their existing customers to the use of the new products and services, while manufacturers also recommend particular services to them. On an overall basis therefore, both sides are able to benefit through mutually sharing their products and services, which allows them to pass on the costs saved on advertising and similar costs to the customers. Moreover, exclusivity agreements provide copyright protection to the inventors of the mobile devices – for instance the value of the iphone results from the exclusivity agreement between Apple and AT&T, for the handset used with the iphone. This provides the monetary incentive for the creators of such innovations to further improve on the new developments. Hence, this is a second advantage offered by exclusivity agreements which would only tend to enhance innovation and provide a greater incentive for new and ever improving products to be developed. One of the criticisms offered against the use of exclusivity agreements is that it results in a situation where a few big telecommunications carriers tend to hijack the industry. In the long run, this turns out to be damaging to rural citizens because the biggest carriers may not offer any service at all, thereby making mobile phone products and services unavailable to rural customers (Fulton, 2009). These customers land up having to use inferior networks where the quality is not that high because the bigger networks do not extend to their areas. Customers in the urban areas also tend to suffer because those who want to use the iphone are not able to choose to use these rural networks if they should choose to do so. This can be compared to the FCC’s regulatory role in the use of the Internet. On this issue, there was hot debate and controversy generated, because the FCC was being pressed to pass laws restricting access on the Internet to undesirable sites, such as those promoting child pornography. The existing FCC principles on the openness of the Internet stated that network operators were not to prevent users from accessing lawful Internet content or services of their choice, nor were they to prohibit users from attaching devices to their networks which would not be harmful. However, another principle had also been added which in effect, prevented Internet service providers from discriminating against particular Internet content or applications, while allowing for reasonable levels of network management. The contention of telephone companies such as AT&T and Verizon was that the policy of non discrimination was to be removed and network providers were to be provided higher levels of latitude in managing their operations with due discretion as to which content should be allowed. The Federal Communications Commission also introduced measures to regulate television programming. The report prepared by the Commission was based upon the results drawn from three years of studies that linked TV viewing to violence. The report recommended that the Government pass laws to regulate the content of television programmes. The Commission did not restrict its recommendations only to the three channels ABC, NBC and CBS but also required the lawmakers to include cable and satellite TV and public television channels as well. The Commission also recommended other measures, such as for broadcasters to restrict violent content to late night hours when children would be in bed, or for parents to be able to regulate the channels that they would permit in the house. The a la carte regulation of TV programming was received favorably from some quarters but opposed in others, because the contention was that providing such selective programming would result in a loss of revenues by restricting the viewing choices available. Moreover, the difficulty was also in determining what exactly would constitute an accurate description of violent which would be applicable on a uniform, standardized basis. Regulation in this instance also raised the same issues as those raised by Internet regulation, i.e, the conflict between freedom of choice and imposing restrictions in everyone’s interest. The same issues are also raised in the case of the regulation on exclusivity agreements which is the subject matter of this study. Conclusions: In conclusion, it must be stated that there are arguments that could be offered on both sides, i.e., in favour of exclusivity agreements as well as against these agreements. Exclusivity agreements could function as monopolizing agents, thereby stifling competition and reducing consumer choice in terms of products and providers. On the other hand, there are also some aspects in favour of exclusivity agreements, such as enabling cell phone manufacturers and cell phone service providers to actually bring prices down for consumers by entering into a mutually beneficial arrangement whereby a sale for one organization runs concurrently with a commission paid to the other organization. Moreover, it can also provide a stimulus for the development of more innovative products because those who invent the product also get the copyright to their inventions and the concomitant economic incentives as well. The role of the Federal Communications Commission is to regulate such business agreements and to ensure that organizations adhere to a free and fair market trade arrangement. As spelt out above under the mission of the FCC, the objective of this organization on the issue of competition is to ensure that consumers are provided reliable and affordable services, while innovation is also fostered. When this objective is applied in the context of exclusivity agreements, it may be noted that all of the above functions are enhanced and promoted through FCC regulation. For example, since exclusivity agreements as described above tend to lead to cell phone service providers and cell phone manufacturers pooling their respective strengths and reducing their weaknesses in order to derive innovative products at a lower price to consumers, the end result is that in the long run, the consumer benefits. The new and improved phone services are less expensive and therefore more affordable to the consumer because the cell phone service providers and cell phone manufacturers are able to pool their resources and exchange their respective consumers in order to ensure that more cost benefits are passed down to the consumers. Should the FCC regulate such exclusivity agreements or is this an area better left unregulated? This is the question that was sought to be explored through this essay and based upon the discussion above, it appears that this may be an area better left unregulated. As pointed out earlier, there are certain disadvantages to exclusivity agreements, because they result in an appropriation of the mobile phone networks by a few selected carriers who have the financial resources to develop wide ranging networks. But the downside is that rural areas are left out of the coverage of these big carriers because it may not be profitable for them to do so. This does not work out in the best interests of the consumers residing in those areas because it deprives them of service or forces them to take up service with networks that may provide an inferior quality of service. Since it reduces consumer flexibility, choice and affordability to some extent, it may not strictly be in conformance to the FCC Guidelines and objectives. The advantages arising out of the exclusivity agreements however, do contribute towards the objectives of the FCC mission as outlined earlier. They tend to promote and foster innovation because of the mutual financial support and support with resources which mobile cell phone service providers and manufacturers are able to provide each other. This also means that companies are able to provide the necessary services to the consumers at a lower cost, as demonstrated above in the reduction of prices of the iphone. On an overall basis, it appears that consumers may receive greater benefits if this area remains unregulated. There is however, the danger of monopoly of a lucrative market by a few big manufacturers and service providers, which could be grounds for anti trust and interfere with the propagation of a free and fair trading atmosphere and market. It may thus be advisable for the Government to set up some broad parameters within which these companies would be expected to operate. These parameters could specify the limitations within which these companies are expected to operate, and specify activities which could be construed to be illegal and an abuse of the fair market, such as price agreements and similar violations. This would ensure that consumers and organizations alike benefit from the advantages that are offered by exclusivity agreements but that it does not provide unlimited freedom which could lead to an abuse of the privileges arising from the ability to enter into exclusivity agreements. Markets are defined and set through these agreements and it is essential to ensure that no monopoly occurs. It may thus be concluded that extensive regulation of exclusivity agreements may not be necessary, but some limitations may still need to be set by the Government in the interest of consumers and to ensure a fair market. References: “Performance and Accountability Report 2008”, Federal Communications Commission, retrieved March 29, 2010 from: http://www.fcc.gov/Reports/ar2008.pdf Franzinger, Michael R, 2003. “Latent dangers in a patent pool: The European Commission’s approval of the 3G Wireless technology Licensing Agreements”, California Law Review, 91(6):1693-1727 “Federal Government calls for regulation of TV violence”, Retrieved March 30, 2010 from: http://www.pbs.org/newshour/extra/features/jan-june07/fcc_5-02.html Fulton, Scott M, 2009. “Should cell phone exclusivity contracts be illegal? Policy and Law News, June 22, 2009, Retrieved March 29, 2010 from: http://www.betanews.com/article/Congress-Should-cell-phone-exclusivity-contracts-be-illegal/1245705719 GreglnFla, 2009. “Exclusivity agreements for cellphones: Support free markets”, retrieved March 30, 2010 from: http://www.redstate.com/greginfla/2009/09/03/exclusivity-agreements-for-cellphones-support-free-markets/ Hahn, Robert W and Singer, Hal J, 2009. “Why the iphone won’t last forever and what the Government should do to promote its successor”, Social Science Research Network, Retrieved March 30, 2010 from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477042 Read More