Friday, March 22, 2013

Apple's contracts with phone companies

are a closely guarded secret.  But now the carriers are complaining about the contracts to the European Commission antitrust regulators, and some of the details of the contracts are starting to appear:

Apple’s contract differs with every carrier that sells the iPhone. Such sales accounted for 56 percent of Apple’s $55 billion in revenue last quarter. In most cases, Apple sets a quota for how many iPhones the carrier needs to sell over a set period of time, usually three years. If it does not agree to the quotas, it does not receive the iPhone.
If quotas are not met, the carrier is obligated to pay Apple for unsold devices, according to one person who negotiated with Apple while at a European carrier.

Rival phone manufacturers, in particular, seem to be concerned:

...Apple’s competitors complain that the big purchases Apple requires from carriers strongly pressure them to devote most of their marketing budgets to the iPhone, leaving little money to promote competing devices, said an executive at one of Apple’s rivals, who declined to be named to avoid jeopardizing carrier relationships. 
Note that harm to competitors is not harm to competition.  Indeed, the marketing requirements can be viewed as a simple, direct way to better align the incentives of carriers with the profitability goals of the manufacturer.  Often retailers invest less than manufacturers would prefer, and the contract could be one way of addressing this incentive conflict. 

There is also the possibility that the carriers are using the threat of antitrust to re-negotiate their contracts so they can make themselves better off, but often at a cost to competition (see my paper on a related topic).  Remember that parties cannot contract around inefficient antitrust rules. The right to sue to void an anti-competitive contract is an inalienable right.   

1 comment:

  1. I think the quote from "one of Apple's rivals" is curious. If the carrier thinks the quota is unworkable and requires too much of their resources, simple logic would dictate that they refuse the quota and the iPhone (i.e. simple cost-benefit). The fact that so many carriers still clamor for the iPhone seems to undermine the competitor's quote.