Exclusive network and distribution agreements: impact of the competition rules, by Angelique Bret, senior associate, Denton Wilde Sapte
On 11 January 2010, the French Competition Council accepted undertakings from Orange and Apple to put an end to the exclusive rights over the iPhone which Orange benefited from, both as a network operator for which the iPhone was configured ('simlocked'), but also as a wholesale distributor of the terminal.
In fact, these arrangements had already been brought to an end as a result of the Council's interim order on 17 December 2008 that the exclusivity provisions be dropped immediately (before everyone went Christmas shopping) so that other operators could sell the iPhone and run it on their networks. The case resulted from a complaint by SFR, the second-largest mobile operator in France after Orange, that the five-year exclusive deal infringed the competition law rules.
The Council was concerned about the effect of the exclusive deal on the French mobile market: there are only three 3G network licensees, Orange being the largest, with a market share of around 43% at the time of the Council's decision. Although the smart phone market represents only a small proportion of the overall mobile market (around 10% to 13% of worldwide sales according to the Council), the Council was concerned about the particular attractiveness of the iPhone and the leverage it enjoys as a result of the iPod and iTunes and, in particular, the fact that iPhone's Digital Right Management (DRM) provisions meant that consumers would not be able to switch network and take the music they had purchased with them. (Note that Apple now sells non-DRM music as well as DRM music on its digital platform). Clearly, the more consumers invest in new applications that run only on a particular platform, the less likely they will switch network if it means they can't take the applications with them. The freedom to switch is already frustrated by long term (12-24 month) consumer contracts, which are standard in the industry.
The UK market is more competitive than the French market, with at least five operators each having a market share over 5% (Orange being the market leader with a market share of 37%). Apple's two-year exclusive deal with O2 (with a market share of 28%) did not attract any attention from the UK competition authorities.
Under the settlement, which applies only to the French territory, Orange can agree an exclusive network or distribution agreement with Apple for future models of the iPhone for periods up to three months. This is significant if you consider that (according to the Council's decision) 35,000 iPhones were sold in France within the first four days of release on to the market and outlets were out of stock within two days. Apple has undertaken not to enter into any exclusive network or distribution agreements with any mobile operator for future models of the iPhone for periods of more than three months. Arguably, this goes further than necessary to address the competition law concerns: an exclusive agreement with a smaller operator could in fact be pro-competitive.
According to a report on www.appleinsider.com: "As exclusive contracts for the .iPhone begin to expire throughout Europe, sales of Apple's handset have increased dramatically thanks to expansion to multiple carriers." However, even Apple could not have anticipated at the time that they entered into these exclusive deals, just how successful the iPhone would be. The uptake of the new Apple tablet (the iSlate), for example, remains to be seen.
Exclusive arrangements do not generally raise competition concerns unless one of the parties has a degree of market power (with a market share over 30%). As such, they are likely to remain an important tool to enable the launch of new products, particularly by less well known brands. HTC Dream, for example, had an exclusive deal with T-Mobile in the UK to effect its launch as a viable alternative to the iPhone.