In light of recent news that Apple and AT&T have extended their exclusive partnership until 2010, I want to throw in my two cents on the issue.

In the U.S. exclusive contracts between phone makers and carriers are nothing new. These agreements have been around for years. In late 2004, for example, the RAZR was an AT&T Wireless exclusive. It is a standard of competition between carriers.

Almost every article or opinion on the subject of exclusivity puts it in a very negative light. Most people feel it is a way to snub the consumer and force them to switch carriers.

Well, that's the point.

Sorry folks -- that's just the hard truth of business. Each company is attempting to steal customers away from each other, and what better way to do it than offering a handset that cannot be purchased on any other mobile provider?

Competitive Advantage

It's never really been a huge topic of conversation until the iPhone came out and became such a giant. Now the T-Mobile and Verizon customers who like their cell phone service have to make a choice: do we stick with what we know and like, or do we want the iPhone bad enough we're willing to change our mobile provider?

The market in the US is completely saturated -- in other words, every customer who wants a cell phone has one. In order to gain the edge, every carrier offers exclusive deals on certain phones in hopes that the unique offering will bring interested people. Outside the iPhone, we will witness such deals this year with the Blackberry Bold (AT&T) and the touchscreen Blackberry Thunder (Verizon). The Palm Centro had exclusive rights on Sprint for a few months.

In most cases these carriers will receive a few thousand new customers here and there that they may not have received without those deals, thus making it worth the agreement. The iPhone is the unique phone that has the potential to attract millions of new customers to AT&T.

Talk about a huge competitive advantage! That's why AT&T was willing to do whatever Apple said in order to get the deal.

Exclusive is Like a Beta Test

Anyone who wants the iPhone but does not want to use AT&T is stuck right now. Resourceful T-Mobile customers could unlock the device and make it compatible with their EDGE network (not 3G...yet). But perhaps it's not so bad.

Consider the exclusive time a great beta test for phones. Those that get the phones right away are the ones that find all the bugs, experience frustration, and discover how to fix it and make it work. Generally the phones come out of the exclusive period rolling and ready to go, without as many headaches from that point on.

Thus, when the time comes for the iPhone to be released on other carriers, everything will have been greatly tested and tried, all the bugs worked out and secrets figured out, and the new versions will be even better with greater capacity than the very first model.

Exclusivity forces innovation

My bold statement in this article is that exclusive deals force additional innovation. Innovation has been my theme the last couple weeks because I feel strongly that we need more of it in this industry!

In what way does it force additional innovation? Obviously if Sprint cannot sell the iPhone it will turn to other phone makers and demand something similar, yet different enough to entice customers.

This is what happened with the Samsung Instinct -- instead of getting all down and sad from news of the first iPhone's success, Sprint fought back. The extra competition forces each carrier to find a new way to get customers interested. The iPhone's awesome, sure, but what other awesome phones are out there waiting to be discovered or invented? TONS.

Without competition, innovation takes a back seat. What's the point of thinking of cool new stuff if people are satisfied with the status quo? Our market can stand a greater variety to choose from, and exclusive deals force the competition to get creative.

Is it healthy?

Some may argue that exclusive deals such as the iPhone deal only brings unhealthy competition. AT&T has too much leverage it can use to gain customers.

The biggest losers, critics claim, are the rural carriers. Having few customers compared to the big four, these companies rarely get exclusive contracts. This means that when phones such as the iPhone hit it big, the rural telecoms dwindle even more in size as their customers leave to go with AT&T.Thus the big companies get even bigger and more monopolistic.

I understand this argument. Competition is good, and absolutely essential. Exclusive contracts help generate extra competition, but at the same time it shouldn't be completely unfair. It's just that rural carriers don't have enough customers or revenue to interest phone makers.

Conclusion

In order to attract customers, a critical balance of offerings must exist. Exclusive deals are great, but they aren't the only thing that will help a mobile provider achieve success.

In addition to unique phones a telecom company needs to attract customers by offering a solid network, good customer service, and unique features that no other telecom offers.

While I feel exclusive deals on phones such as the iPhone are essential to achieve optimal competitive advantage in the wireless industry, I do believe 3 years is too long. That amount of time makes AT&T feel more like a monopoly. My concern is that similar monopolistic tendencies are what contributed to AT&T's breakup in the 80's.

Six months is the maximum amount of time any phone carrier should have exclusive rights on any particular handset. This still gives the carrier plenty of competitive advantage, still forces innovation and variety in the market, yet gives other telecoms a fighting chance on game-changing devices such as the iPhone.

The only time I could see 3 years as acceptable is if Apple comes out with a different kind of iPhone for different carriers. Say -- iPhone 3G for AT&T, maybe iPhone Nano for T-Mobile for example?

Just an idea.

Now, sound off. You can agree or disagree with me however you want. Fire off your comments to me!