July 17, 2009 / 4:33 PM / 10 years ago

UPDATE 3-Verizon says it will limit new handset deals

* Applies to carriers with less than 500,000 customers

* Could also apply to other “small” carriers

* Offer open to Cellular South, not U.S. Cellular (Adds analyst, consumer group comment)

By Diane Bartz and Sinead Carew

WASHINGTON/NEW YORK, July 17 (Reuters) - Verizon Wireless is dialing back on its exclusivity agreements with handset makers after pressure from U.S. lawmakers and smaller carriers.

The biggest U.S. mobile service said on Friday it will limit exclusivity periods with cellphone makers to six months and then allow the country’s smallest wireless service providers to sell the devices.

The move comes after reports that the U.S. Department of Justice was taking a preliminary look into whether U.S. operators had violated antitrust laws by obtaining exclusive deals to sell specific phones.

Exclusivity deals are common among the biggest U.S. carriers but have recently faced strong opposition from small, rural carriers, which say they lack the clout to make deals to carry the most popular advanced phones.

The iPhone has drawn such deals into the spotlight because AT&T Inc (T.N), the second biggest U.S. wireless service, has had exclusive U.S. rights with Apple Inc (AAPL.O) since 2007.

In an apparent effort to preempt any regulatory changes, Verizon Wireless, a venture of Verizon Communications (VZ.N) and Vodafone Group (VOD.L), sent a letter to major lawmakers on July 17 offering to limit exclusivity.

Verizon said the offer would apply to carriers with 500,000 or fewer subscribers. However, Verizon spokesman Jeffrey Nelson said it applies to all “small” operators, without giving a specific definition. Cellular South, a vocal activist against phone exclusivity deals would be able to avail of the offer even though it has roughly 800,000 customers, he said.

However, the offer will not extend to larger companies such as U.S. Cellular Corp (USM.N), which has about 6 million customers and has been a vocal opponent of the practice, Nelson said. U.S. Cellular did not immediately comment.

“Effective immediately for small wireless carriers ... any new exclusivity arrangement we enter with handset makers will last no longer than six months — for all manufacturers and all devices,” Verizon Wireless CEO Lowell McAdam said in the letter.

He said 24 small wireless carriers had asked Verizon to eliminate its long-term exclusive handset agreements with LG (066570.KS) and Samsung [SAGR.UL] in February. The company was now expanding that idea to all handsets.

Stifel Nicolaus analyst Rebecca Arbogast described the letter as a “significant move to diffuse the heightening pressure for regulation to curtail” exclusive deals and said it would put pressure on other big carriers to follow suit.

“It will likely not be the end of the debate, in our view, as US Cellular, one of the more vigorous advocates for eliminating exclusives, will not benefit,” Arbogast said, but she said the move would take pressure off of the U.S. telecom regulator, the Federal Communications Commission, to change laws.

But Consumers Union, a Washington based consumer advocate, said Verizon’s focus on the smallest carriers would mean more phone choices for a very limited number of consumers.

“For the rest of the hundreds of millions of wireless consumers its not nearly enough,” said Consumers Union policy analyst Joel Kelsey. “This is Verizon trying to dodge tough questions about its anti-competitive behavior.”

A spokeswoman for the Justice Department was not immediately available for comment. The DoJ’s preliminary examination is believed to be focused on deals like AT&T’s with Apple and Sprint’s (S.N) with Palm’s PALM.O Pre cellphone. Another is Verizon’s deal with LG for its Voyager phone.

AT&T spokesman Mark Siegel declined to comment on how it might respond to Verizon’s move, but defended exclusive deals.

“Without question exclusive handset deals have given America’s wireless customers big benefits, including more choices, lower prices, and a level of innovation that is the best in the world,” he said in an emailed statement.

Sprint declined immediate comment and a spokesperson for the FCC was not immediately available for comment.

Arbogast said AT&T, Sprint and T-Mobile USA, the No. 4 U.S. mobile service owned by Deutsche Telekom (DTEGn.DE), would come under pressure to follow suit.

The letter was sent to Senate Commerce Committee Chairman John Rockefeller, a West Virginia Democrat, and committee members John Kerry of Massachusetts and Republican Kay Bailey Hutchison of Texas. The letter also was sent to Representatives Rick Boucher, Henry Waxman, Joe Barton and Cliff Stearns.

Boucher, chairman of the House Energy and Commerce Subcommittee on Communications, who met with McAdam on Friday, praised Verizon’s actions.

“Verizon has taken an important and forward-looking step. I think it does ensure that smaller carriers get rapid access to the latest devices,” Boucher told Reuters.

Smaller telecommunications companies and consumer advocacy groups also have complained that bigger companies use their size to squeeze out smaller rivals by refusing roaming deals, or block applications like the Skype Web-based phone service. (Additional reporting John Poirier; Editing by Phil Berlowitz, Tiffany Wu, Richard Chang and Carol Bishopric)

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