Washington to Question Wireless Companies

Lawmakers have recently been questioning major telecommunication companies such as AT&T (NYSE: T), Verizon (NYSE: VZ), T-Mobile (NYSE: DT), and Sprint (NYSE: S) about two separate issues: Text Messaging Costs and Exclusive Handset Deals.

Issue 1: Text Messaging Costs
CNET reported that since 2005, the cost of text messaging has increased 100 percent from 10 cents to 20 cents for all major Wireless Service Providers.

The reason to increase the rate to text message is unjustified. I would think over time as these Big 4 Wireless Service Providers acquire regional players, the price of text messaging would decrease. We are already seeing the price of unlimited Text Packages decrease, but why not the prices for those without a Text Package? I believe this is because they are trapping consumers into thinking they are getting more for less. By paying $20 for example, consumer do not feel like they have to worry about individual text messages adding up, but over time consumers will text less and the marginal benefit is passed onto these Big 4 Companies. Hence, that is why even though many of these Big 4 Companies stock prices are down from the Market highs in 2007, they are great to have in your Portfolio because they typically yield a comfy 6%+ dividend. They always find a way to make an extra dollar!!

Issue 2: Exclusive Handset Deals
Many Wireless Service Providers have experienced exclusive handset agreements as the Telecommunication industry has evolved. Two recent examples are the Apple iPhone being sold at AT&T, and the Palm Pre being sold at Sprint Nextel.

As consumers often complain about not being able to purchase the gadget of choice because of its offering only on specific networks, Congress has taken notice. John Kerry, Massachusetts Senator, sent a letter to FCC Chairman, Michael Copps on June 17th, 2008, which asked the FCC to examine whether handset exclusivity hampers consumer choice and market competition.

Consumers, especially those whom are tech savvy, oftentimes want the latest gadget. This usually causes them to break a contract, purchase a new phone and ink a new service agreement. Is this good for the marketplace? The cellphone companies generally prefer to sign exclusive agreements with manufacturers to insure the best position in the marketplace for the latest-&-greatest device. Hence, they like consumer competition, but do lose out when their company is not on the right side of the exclusive agreement. For example, AT&T was on the right side of the agreement to sell the Apple's iPhone in AT&T stores, but competitors like Verizon, Sprint, and T-Mobile were not.

The answer is still unknown if Exclusive Handset Deals are the best thing for both consumer choice and market competition. I would argue it only gives the company with the exclusivity rights the edge, and leaves both the competition and consumer out to dry. The competition faces higher churn rates and misses out on sound customer acquisition since Manufacturers are signing these agreements. The customer is the victim too. They are put in a dilemma of constantly switching Wireless Service Providers because the gadget of choice is not offered at their current Wireless Service Provider.

All in all, if one examines this topic from the Consumer and Firm standpoint, both are victims of fierce market competition.