More on the French decision to ban iPhone exclusivity

Orange will lose its exclusive deal with Apple to sell the iPhone through Orange beginning this Christmas season pursuant to a decision by the French Competition Council. Orange may wholesale the iPhone, on a non-exclusive way to multi-brand resellers (for example, Darty) but it must ensure that the iPhone works the same way on any existing mobile network in France. Therefore Orange may continue to sell a SIM-locked iPhone tying it to the Orange network in its own distribution channel. The Competition Council says Apple must limit exclusive contracts to 3 months or less.

Background of the Competition Council’s decision

Last September 2008, Bouygues Telecom filed a suit at the French Competition Council against Orange France complaining that they asked Apple for permission to sell the iPhone in France. However, Apple refused because Apple had signed a 5-year exclusive agreement with Orange.

ARCEP, the French regulator was asked to give its advice on the matter. ARCEP published a report on 4 November 2008. The regulator mentioned that when the iPhone first launched, Apple had signed exclusive agreements with one operator per country to sell the iPhone, but that that time, the phones were not subsidized by the operators. Apple received payments from the operators based on traffic on their networks. After the poor sales of the 2G iPhone, Apple changed its model for the 3G iPhone: the operators went back to their old model of subsidizing the iPhone to sell it at a lower price based on a 2-year contract with their end users.
ARCEP in its report says that the market for mobile data is a fast-growing strategic market in which smartphones are the preferred device. It emphasizes that the iPhone is bundling an attractive phone terminal and an iPod at a very attractive price compared to the iPod alone. For the iPhone, the report explains that Orange has created a specific set of exclusive and attractive services.

“This bundle of services with a specific terminal gives Orange the ability to conquer a base of young and high value added customers. It is easy for Orange to “lock” them because his exclusivity on ability to wholesale the device and to deliver services is multi-annual and concerns future unannounced iPhones. The future devices would also generate  exclusive services resulting of a technology transfer with Apple.”

For ARCEP, the bundle ”terminal+service” is based on two exclusive practices  which allow Orange to sell the iPhone only bundled with his own services. The first exclusivity “as a wholeseller”  gives Orange the exclusive right to resell the iPhone in France, the second exclusivity “of service” gives Orange the right to sell the iPhone only bundled with his own services (SIM-locking), even when it is sold to multibrand channels.

Today, the impact of the iPhone in France is significant since Orange has sold more than 600,000 iPhones in one year, large number of them (216,000) during the third quarter 2008 alone.

The Competition Council has decided that “all these facts are contributing to reinforce the dominant position of Orange on the market of mobile services and to weaken the competition between operators on this market.” The Council’s final report rejected Orange’s claim that there is no real exclusivity because iPhone users can pay a one time fee of 100 EUR to unlock the phone. The report notes that “the problem is serious because the Competition Council, ARCEP and the European Commission already have reported a lack of competition on the mobile telephony market, and at the time of the emergence of the Internet Mobile market with unlimited data offers giving it an active thrust, the Orange exclusivity would introduce a factor of rigidity to this segment.” The lengthy explanation of the Council contains a lot of interesting information and statistics on the Orange contract with Apple.

Orange says it will appeal the decision

Orange issued a press release to acknowledge the problem and says they will appeal this decision:

“Orange notes that this decision places France in a radically different situation compared to countries such as the United States, Germany, the United Kingdom and Spain. The Competition Council’s decision also undermines Orange’s efforts to develop high-speed mobile services in France. It is ironic that the operator which is most behind in terms of rolling out its 3G network initiated this complaint . . . This decision is a serious blow. It calls into question the economic structure of the market and in particular, the different partnerships made between mobile operators and handset manufacturers working in the best interests of consumers and promoting innovation. Unfortunately, this decision may have serious consequences on manufacturers, as well as their subcontractors and software suppliers, sectors that are already facing economic difficulties.”

Orange fails to mention that since the launch of the 3G iPhone, several countries (Austria, Switzerland, Italy and Portugal) already have two operators selling the iPhone.

Now Apple will be able to sell iPhone to be used on the 3 mobile networks available in France, which we think is a plus for Apple and for the consumers.