Use access key #2 to skip to page content.

TMFEditorsDesk (< 20)

Is the iPhone a Monopoly?

Recs

7

July 07, 2009 – Comments (9) | RELATED TICKERS: VZ , T , AAPL

Meanwhile back at the Department of Justice, the Wall Street Journal is reporting (may require subscription) that the government is looking into anti-competitive practices in the telecom industry.

Specifically, it's trying to determine whether the telecom carriers are flexing monopolistic-ish powers and engaging in anti-competitive practices.  Points that may be explored are:

-  Exclusive phone agreements like AT&T's (NYSE: T) iPhone deal with Apple (Nasdaq: AAPL), Verizon's (NYSE: VZ) Blackberry Storm deal with Research in Motion (Nasdaq: RIMM), and Sprint's (NYSE: S) Pre deal with Palm (Nasdaq: PALM).

- Rumors that the carriers restrict competition on their networks.

- The fact that Verizon and AT&T dominate the market with 90 million landlines and 60% of the U.S.'s 247 million wireless subscribers (that's about 150 million).

A few points to keep in mind before we declare a monopoly:

- Anti-competitive practices like restricting content is one thing, but is it really a monopoly when there are four major U.S. wireless carriers and landlines face stiff competition from cable, Vonage, and Skype?

- Do we care that AT&T, for instance, has an exclusivity agreement with Apple? Sure, I'd love the competition and lower prices that opening up the iPhone without a jailbreak (may require WSJ subscription) would provide.  But I'd also love not having to use DirecTV to get the NFL Sunday Ticket.  That doesn't mean I want the NFL (except the Lions) or DirecTV brought up on anti-competitive charges.

- As investors, a lot of us are leery of telecoms because of increased competition, the possibility of rulebreaking technology from upstarts, huge capital expenditures just to keep up, and the commoditization of services.  That certainly doesn't sound like a business model that's taking advantage of the consumer.

I'm still mulling all these things over.  What do you all think?  Will the DOJ find anything untoward?  Do you think exclusive phone agreements are anti-competitive?  Are there any monopolistic or anti-competitive practices in the telecom industry (besides dreadful customer service) that should be ended?  Comment below...

-Anand Chokkavelu (AT&T wireless subscriber, Comcast landline)

More telecom content:

More iPhone Killers? Yawn. 

RIM's Riding the Storm Out 

Fool Poll: Best Smartphone Investment 

9 Comments – Post Your Own

#1) On July 07, 2009 at 11:50 AM, TMFEditorsDesk (< 20) wrote:

Forgot to mention that I own shares of Apple.

-Anand

Report this comment
#2) On July 07, 2009 at 12:17 PM, JakilaTheHun (99.93) wrote:

I don't think the DOJ's trying to make the case that the telecom companies by their very nature are "monopolies."  Rather, they are claiming they are using their market position to engage in specific anti-competitive actions, that arguably amount to price fixing. 

I'm not sure I'd consider the exclusivity agreements to be "anti-competitive" or not.  It's probably an issue that ought to be explored.  When you consider the extraordinary market power of AT&T and Apple, it's certainly a legitimate issue to raise.  

Either way, I'm happy the Obama Administration is signaling a shift on anti-trust policy.  The Bush and Clinton Administrations got overly lax on this stuff, despite some very obvious manipulation going on during those years.  I'm not sure if this telecom stuff amounts to much, but better anti-trust enforcement is good.  You can't have free markets when companies engage in monopolistic practices. 

That reminds me --- I'm curious to see what happens with Intel in Europe.  I think it's difficult to make a case that Intel is *NOT* a monopoly despite some token opposition from AMD.  

Report this comment
#3) On July 07, 2009 at 12:21 PM, JakilaTheHun (99.93) wrote:

Then again, as far as Intel goes, I think the question is whether or not they are able to exploit their dominant position within the industry to set prices significantly higher than they would be in a reasonably competitive market.  I'm not sure if that's the case or not, as I'm not all that familiar with their particularly familiar with that sector.

Report this comment
#4) On July 07, 2009 at 1:44 PM, speedybure (< 20) wrote:

As long as government interference stays relatively tame, there will never be a monopoly for free market forces prevent abnormal profits from being a long lived scenario. I tend to see blakberry's being more popular among the business crowd while apple taps the younger generation. Either way there will likely been another participant(s) to successfully enter the smartphone market, thus driving down margins across the smartphone industry. The trouble lies in what is the monopoly price relative to what the free market price would be. Here is a great example that it would be impossible to exploit their position with higher price: But remember we are more of a socialist than a capitalist nation now so who knows

"The assertion that free markets lead to monopoly is wildly incorrect. If the market is allowed to work freely over time, an apparent monopolist soon discovers that it indeed has competition. A company operating in a market economy looks like a monopoly only under myopically static analysis. A broader definition of any industry will show that there is plenty of competition, just as a narrow enough definition will show that any brand name product has some monopoly characteristics, such as a popular brand of ice cream.

The airline industry is an example. There are now two manufacturers of large passenger jets: Boeing and Airbus. Punditry has expressed inevitable fears over monopoly profits and passenger safety. However, Boeing's actions in the last three years--most notably, attempts to cut costs by modernizing the entire production process --suggest that Boeing believes it has competition.

Boeing is right, and the competition is not just from Airbus. Suppose Airbus closes its doors, and only Boeing remains. Suppose also that Boeing faces no government regulation. Can Boeing raise prices at will? If it does, in the short term, people who have to travel will find alternatives to air flight in increasing numbers. Airlines would use smaller planes as much as possible. In the long term, companies such as Beechcraft and Cessna, seeing higher than normal profits available to an interloper, might build larger jets.

Consider too the electricity business: As reported by The Economist (August 2000), deregulation in many places around the world is bringing about huge changes in the industry, including movement toward smaller local producers. Most countries and communities value a pristine environment, and smaller power plants can be "greener" than large ones. And sending power over smaller distances means that local plants, with higher at-source costs, are competitive with giant, distant plants because they save the costs imposed by distance. Thus, smaller local plants may be competitive with large producers very soon.

Automobile manufacturing provides another good example. In the early, less-regulated years of the 20th century, there were dozens of small automakers, from Deusenberg to Rambler. Now, with the purchase of Chrysler by Daimler Benz, it would appear the United States is down to two. Worldwide, Ford, General Motors, Daimler Benz, BMW, and others (even Fiat!) are buying out such storied makers as Rolls Royce, Land Rover, Jaguar, and Lamborghini.

These acquisitions seem superficially to suggest that monopolies are forming. Looking more closely, we see that the four acquired companies mentioned above were all suffering financial difficulties when purchased by others, and notably, the acquired represent marques many automobile enthusiasts consider worth saving. They were purchased because they weren't making money, yet offered appealing products that should be profitable. That someone was losing money building popular cars suggests not that the industry tends toward monopoly, but that there were management shortcomings.

The automobile business continues to be stiffly competitive. Startups such as Hyundai and quasi-independent marques such as Saturn and Geo show that the high cost of entry into this capital-intensive industry is not enough to dissuade newcomers. Further, new trends such as the SUV and specialty vehicles such as the popular retro-kitsch Chrysler PT Cruiser show that even established automakers still must innovate to survive.

These three industries--planes, automobiles, and electricity--are three of the most capital intensive, and all show that when the market is free, there is no monopoly. But for the sake of argument, let's assume that your electric company decides to triple its rates. What would happen? In the short term, people would use candles for light, turn down their thermostats, and find other ways to use less power. In the longer term, we would find alternatives to our current provider, and the freer the market, the less time this would take. Economic profits attract entrepreneurs from under rocks, and some of these new competitors will offer truly good deals." 

Report this comment
#5) On July 07, 2009 at 1:51 PM, TMFKopp (97.88) wrote:

You know what? They're right! And forget the telecom companies, what about Apple?? Why is it that only they are allowed to sell iPods? That stinks of monopoly if you ask me.

Matt

Report this comment
#6) On July 07, 2009 at 3:09 PM, TMFEditorsDesk (< 20) wrote:

A few names come to mind: Boost Mobile, Virgin Mobile, Helio, and now cricKet. So yes, I think if you're trying to compete in just the wireless carrier environment, it is impossible and therefore anti-competitive if you don't have an exclusive phone agreement.

That being said, mobile carriers need exclusive agreements to compete. Since we're dealing with a handful of big-time wireless carriers, it's not a monopoly. And if you consider the expanded music landscape (i.e. radio, online streaming, mp3s) that gave way to a Sirius/XM merger, it's easy to argue that a monopoly isn't going on here.

But, what if...
what IF the DOJ thought it was a monopoly and the companies had to change things up. Would that be so bad? I'd like to see innovations among the wireless carriers to differentiate themselves. Bundle service with other things (similar to how cable has its triple play). Create a stronger competitive advantage beyond things like rollover minutes. Strike partnerships to provide free music. Lower your data pricing. Anything! If consumers can jump ship to a new provider just for a phone (and possibly a cancellation fee), you know that your business model is no good.

If you're interested, we're running a poll on Fool.com about the most attractive telecom as an investment. Vote to let us know!

- Katrina

Report this comment
#7) On July 07, 2009 at 4:17 PM, TMFEditorsDesk (< 20) wrote:

Interesting points, Katrina.  Increasingly, I tend to think of the wireless space converging on commodity.  If you can choose any phone and the networks all start evening out, all I'll care about is price. 

-Anand

Report this comment
#8) On December 12, 2009 at 6:50 PM, MattP33 (< 20) wrote:

Thanks a lot for the interesting entry. It was really interesting and even useful to read abou the iPhone monopoly. Very well written I think. Reading your post I have found some interesting ideas. Thanks a lot one more time for sharing this attractive information and I will be waiting for other great posts from you in the future.

Regards, 

Matt Peterson from  iphone application development

Report this comment
#9) On January 11, 2011 at 10:39 AM, JeffMarson (< 20) wrote:

There is no surprise for me at all. While the whole world is facing a huge crisis now, it harder and harder to find a normal job. Every company is seeking for specialists in every sector so it is hard for young people to apply for the nice payed job. What they have to do is to gain a better degree. The higher degree - the better you chances are in the job market nowadays. I don't know if colleges and universities will cope with that but let's hope that they actually do Sincerely,

Jeff Marson from iphone application development

Report this comment

Featured Broker Partners


Advertisement