Senator John Kerry (D-Mass.) has called for an inquiry into the Apple iPhone and BlackBerry Storm, the Senate Commerce Committee has held hearings, and the U.S. Justice Dept. has opened an investigation. Their concern? Wireless carriers market these expensive, cutting-edge smartphones by subsidizing the handsets and requiring two-year service agreements. What they lose on the phones they make back in monthly fees.
To some, this seems unfair and anticompetitive. But calls for regulation are perverse. Indeed, Senator Kerry performs a great favor by singling out the iPhone and the Storm—iconic examples of dynamic, productivity-fueling innovation—as the root of the problem. These products are precisely the disruptive technologies that policymakers should herald. Yes, we need to investigate them—to figure out how to encourage more of the same...
Restricting subsidies also hurts technology adoption. In Belgium—the sole European Union country to ban phone subsidies (under a 1935 statute banning sales tying a product to a service)—the iPhone went on sale for $1,000, its highest price in the world. The EU recently struck down the subsidy prohibition as anticompetitive in a case brought by Belgian gas stations that objected to a rival offering customers free towing service if they bought so many liters of gas. The EU (correctly) upheld the discount and tossed the law. Now Belgian iPhone buyers will benefit via lower prices. Perhaps they'll also get free towing.
Finland banned handset bundling until 2006. The rule was scrapped by the Finnish government because individual customers were not buying new, expensive 3G phones. This gave application developers little incentive to design useful add-ons, further reducing 3G handset demand in a vicious circle of stagnation. When the ban was dropped, new technology adoption took off, courtesy of network subsidies—and customer contracts.
In the U.S., AT&T similarly seeds iPhone apps by reducing handset prices. The 65,000 Apple App Store programs now available make the exclusive iPhone network more valuable to consumers.
In this deep recession it is curious that iconic innovations demonstrating robust growth are inspiring regulatory attention. In truth, the key policy issues here involve little more than how to control crowds on iPhone model release days and how to discipline State Dept. officials whose "Crackberry" habits disrupt high-level government meetings. When Washington turns its regulatory gaze on the very killer apps we should be celebrating, we've found what needs fixing.