Illegal Tying and AT&T

I keep wondering if there isn’t an element of illegal tying in the two-year AT&T contract for iPhone. After all, you are, in effect, forced to buy two-years of voice service — something of declining value — to obtain a music player and a web browser — two things of real value.

Simply put, a tying arrangement is an agreement by a party to sell one product but only on the condition that the buyer also purchases a different product (often known as a positive tie), or at least agrees that he will not purchase that product from any other supplier (often known as a negative tie). The product that the buyer is required to purchase in order to get the product the buyer actually wants is called the tied product. The product that the buyer wants to purchase is called the tying product. In the most basic sense, the seller has tied two products together, as if in a knot.

Why can’t I have a better iPod and a nice wifi device without having to subsidize rapidly-obsoleting and declining-margin voice services from AT&T?

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Comments

  1. with folks like you and me who travel a fair bit, the AT&T (or other telco) cost component could be much much higher – see my post
    http://dealarchitect.typepad.com/deal_architect/2007/06/we-need-a-ztt.html

  2. Jennifer says:

    North American mobile operators have a habit of subsidizing a low(er) device cost in exchange for locked-in one or two year contract lengths. It makes me wonder what the “real” MSRP of the iPhone is, according to Apple?
    You should have a better iPod and a nice wifi device free of a network tie, eventually. :)

  3. Brent Buckner says:

    Is there anything to stop you from buying an iPhone and using the music player and wifi functionality without signing an AT&T contract?
    If not, it seems to lack a coercive element; perhaps moreso simple bundling than illegal tying.

  4. Jon H says:

    Seems a bit like complaining you have to buy four wheels with a Miata, when you want to use it as a motorcycle. It is a phone, after all.

  5. Brent, to your question, yes, you HAVE to buy the 2 year agreement to make the device work even as an ipod.
    In fact, until it’s activated by AT&T, the device only allows you to make an emergency call. That’s it. For $5-600.
    Big paperweight until you commit $1400 to $2400 in service fees over two years.

  6. Brent, to your question, yes, you HAVE to buy the 2 year agreement to make the device work even as an ipod.
    In fact, until it’s activated by AT&T, the device only allows you to make an emergency call. That’s it. For $5-600.
    Big paperweight until you commit $1400 to $2400 in service fees over two years.

  7. Vikas says:

    Huh,
    Someone woke up on the wrong side of the bed this morning. Of all the things to complain about.
    Why can’t you buy it without AT&T service? Well, because that’s the way they chose to sell it!. If you want a cool music player with Wifi – buy something else (maybe zune “2″ when it comes out). Apple isn’t obligated to sell you an Ipod with the exact specs you want. Despite it’s popularity arguing that itunes is an essential facility isn’t likely to get you very far.
    V

  8. Zacharias says:

    If I recall correctly, Jobs touched on iPhone-like iPods in the future in his employee-only prerelease (the one where he said “everybody gets one”).
    Sorry, I’d link it but i forgot where I read it.

  9. details says:

    The article says that, in order to be found guilty of per se tying, “…the seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product.”
    Apple may be a strong company, but it definitely isn’t big enough to restrain competition in the wireless telephony market, so it can’t be guilty of illegal tying.

  10. It is possible that the iPhone is a loss-leader. eg. the $499/599 retail value leaves a loss for Apple, or a small margin – which they then make up for with the AT&T deals (I understand that referrers to carrier can usually make 15-25% of the total revenue from a user) and other services (ringtones, and other tandard application bullying that you see from Verizon etc. (eg. charging for location services). I assume that Apple would also see some revenue from the Google bundled apps in the iPhone
    Judging by the components that make up an iPhone I wouldn’t be surprised if the manufacturing cost is $500 or more per unit. Rough estimates on the AT&T deal would see Apple make anywhere from $300 to $800 per device, per connection, over the 24 months (and perhaps more for users who have switched from another carrier). The YouTube bundle might be worth something, as well as maps
    So Apple see a net margin of around $75 per iPod, they probably wont see that much out of the retail price of the iPhone – but the AT&T deal could mean that Apple are seeing 3-4x better profit per unit in the iPhone over the iPod
    Because of this I am willing to bet that Apple are going to be very very aggressive against any attempts to unlock the iPhone and have it work on other carriers

  11. Leon Liebman says:

    Perhaps it’s useful to look back to the first case(I believe)that set precedent for this area. If I am not mistaken it was around 1937 (sorry, I’m not a lawyer) when the Supreme Court found that IBM’s requiring, to rent a sorter from IBM, the customer buy the cards from IBM. There was no other truly competitive sorter around. Perhaps Sperry or another company offered a sorter but the very dominant market share rested in the hands of IBM.
    This market case is different. There are multiple phones and multiple service providors. So, a customer has a great deal of choice. Also, this proposition can be characterized as an “introductory offer” since its life is two years. IBM’s offer was ongoing and served to lock in a strong, if not monopolistic, position. So, in my non-lawyer opinion, there would probably be a S.C. decision that an illegal tie-in did not exist unless the many intervening cases since the 1937 decision have greatly broadened the definition of a tie-in.

  12. @10 – may be I am naive but like Apple has done with DRM to music industry (and it took a couple of years of iTunes), Apple will help device manufacturers take over the top of the telecom food chain…and perhaps bring more rational pricing – and yes better pricing in a world where Skype charges 2c a minute for a call back to the US but AT&T from some countries 3.49 a minute …plus taxes – some of the highest on any utility…

  13. Dave says:

    You’re absolutely right, it is a CLASSIC case for tying. Tying is an ILLEGAL scheme to limit competition and monopolize the market. I graduated with a degree in Economics. Imagine buying a 35mm camera from Kodak and desiging it to only accept kodak film (an actual textbook case). You are limiting competition on the film, which is illegal. It’s no different than oil companies forming a cartel to control gas prices. you cannot limit competition plain and simple. Apple will be sued, probably by the government, and sucessfully. Apple is doing the same thing as Kodak with a forced AT&T contract, limiting competition on the tied cellular service, and tied MP3 player.