Are Carriers Cheating?

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Do wireless carriers play unfairly? Regulators aren't sure, but they're going to investigate. Last week, the Federal Communications Commission voted to launch an official inquiry into the state of innovation in the U.S. wireless market.


Yes, good. Carriers such as AT&T (NYSE: T  ) , Sprint Nextel (NYSE: S  ) , Verizon's (NYSE: VZ  ) wireless group, and T-Mobile have been followers, rather than leaders, in the march towards mobile innovation.

Handset markets and software developers have led the revolution, most notably Apple (Nasdaq: AAPL  ) , Research In Motion (Nasdaq: RIMM  ) , Palm (Nasdaq: PALM  ) , and Nokia (NYSE: NOK  ) . Every one of them has pushed the boundaries of what a phone can do, forcing carriers to play catch-up.

Consider the iPhone. Users have downloaded more than 1 billion apps from its App Store. AT&T has suffered through dropped calls and disappearing voice mail, among other problems, as it adjusts to the massive data traffic the device creates. The company is investing at least $17 billion this year to upgrade its network.

And it can do so without much risk. No other carriers here in the U.S. are able to resell the iPhone. Sprint still has a few more months left in its exclusive distribution deal with Palm for its Pre smartphone. Fair or not -- that's for the regulators to decide -- exclusive distribution agreements in the wireless world are like no-bid contracts elsewhere.

But that sounds worse than it is. Also, there's a danger to interfering with how the carriers and handset makers shake hands nowadays. Phone subsidies would almost certainly end, were smartphone makers free to carry any software they wanted, and work within any network.

What's more, smartphones aren't exactly cheap to make. Would Apple have sold more than 20 million iPhones since 2007 if customers had to pay $549 per handset? I doubt it. Innovators need cash to spur innovation.

This means that the FCC has to toe a fine line. Carriers aren't exactly flush with profits. Push them, and they'll shift the burden to consumers. Yet there's no reason for iPhone users to not have tethering and Google Voice; AT&T is strangling innovation on the platform it distributes exclusively, and that's wrong.

You've got a big stick to wield, Uncle Sam. Use it carefully.

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Apple is a Stock Advisor selection. Nokia and Sprint Nextel are Inside Value picks. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Nokia at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is all for disclosure-y innovation.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2009, at 11:38 AM, MaBellIsDead wrote:

    Shame on you again.

    You said "Carriers such as AT&T (NYSE: T), Sprint Nextel (NYSE: S), Verizon's (NYSE: VZ) wireless group, and T-Mobile have been followers, rather than leaders, in the march towards mobile innovation.

    The fact is that the Cellular Carriers, Wireline Carriers, AND companies such as Apple, were all involved in creating the National Standards, that have the technical capability to provide the types of services you see today. Without all of their foresight, imagination, and agreement, your cellphone would be only that; a phone.

    You should study more to gain a perspective for writing criticisms of the wireless industry.

  • Report this Comment On August 31, 2009, at 12:28 PM, TMFMileHigh wrote:


    >>Without all of their foresight, imagination, and agreement, your cellphone would be only that; a phone.

    Thanks for writing, but sorry I don't buy your argument. Not even a little.

    The data simply doesn't support carriers leading in this area. Tethering is an easy example. AT&T allows it on some smartphones and not on others. How is that innovative?

    Further, AT&T's push to move up the release date for LTE shows that it is respoding to pressure rather than leading the industry.

    To be fair, AT&T is better than most. Its network delivers a deluge of data daily -- say that three times fast -- and has been a close Apple partner. Sprint Nextel and Verizon could very well deserve harsher treatment. Regardless, with all three, I see zero evidence of them leading in the smartphone revolution.

    Thanks again for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On August 31, 2009, at 1:12 PM, MaBellIsDead wrote:


    I was a Telco representative to the ANSI accredited Technical Subcommittee (TSC), which was responsible for, among other Standards, the Cellular Standard. During that time I personally participated in several of the Working Groups (WG) and sat in on meetings of the cellular WG, which had *very* wide industry representation from the US and abroad.

    In any large organization you will have individuals (companies) who perceive things narrowly and selfishly, but with, sometimes, huge effort, the Groups work things out.

    For a year I was honored to be an officer of the TSC and I know of their generally harmonious and effective work. Please do not casually dismiss their efforts.

    Also, following my retirement from a telco, I worked as a Contractor for one of the Carriers and I know personally, of their work to expand its 2G Network while also building their 3G Network. Staying ahead of public demand for more and better service takes great amounts of money, hard work, and time.

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