A few days before Christmas, the French Competition Council, at the request of Bouygues Telecom, ordered Apple and Orange, in summary proceedings, to terminate their agreements that guaranteed Orange exclusive distribution of iPhone handsets. The Bouygues Telecom victory was confirmed on February 4, 2009 by the Paris Court of Appeals. The injunction delivered by the Council and upheld by the Court terminated the exclusive rights that Orange benefitted from, both as a network operator for which the iPhone was configured ("simlocked") but also as a wholesale distributor of this terminal. In other words, the Competition Council made the iPhone accessible to all customers, no matter which operator they have chosen.
At first blush this is good news for consumers. Looking into it further, however, the decision raises some complex questions. Indeed, not every case of exclusive rights is anticompetitive by nature. On the contrary, the implementation of contractual exclusive rights between suppliers and distributors often helps differentiate the offers and make them clearly identifiable by consumers, which in turn allows consumers to let competition play between these offers. Competition rests on the plurality and differentiation of offers, whether in terms of content, related services, or, of course, price. In sum, as it is often the case in competition analysis matters, it is all a matter of evaluating the facts and the real or potential consequences of exclusive rights in the market.
In the iPhone decision, several factors lead the Council to its decision to terminate the exclusive rights in question, considered excessive both in their scope and duration. Above all, the Council insisted that the exclusivity involves a very attractive product. As it has done in many cases before, the Council first points to the fact that the mobile telephone sector in France is not very competitive, and that MVNO operators do not currently represent a significant alternative to the three French major mobile operators. The Council also highlights the particularly long duration of the exclusive rights between Apple and Orange (5 years), and above all, the particular popularity and exceptional attractiveness of Apple brand products. This is the heart of the analysis: in a market that is insufficiently competitive, an exclusive rights agreement between the principal mobile operator and the most appealing terminal can potentially be anticompetitive because it leads to a compartmentalization of the market. This anticompetitive effect is exacerbated because of Apple's prominent position in the market for mp3 players thanks to the iPod (close to 50% of the French market).
Is the attractiveness of the iPhone, being more asserted than demonstrated by facts, really enough to pose a threat of market partitioning and foreclosure of operators deprived of this product?
While still only speaking in terms of theoretical generalities, this reasoning appears persuasive. Some commentators have criticized the Council and Court for having provided little concrete demonstration of how the attractiveness of the iPhone is supposedly strengthening Orange's position to the point that it affects competition. In spite of its popularity, iPhone remains relatively marginal in terms of sales volume. Taking into account the number of mobile phone subscribers in France and the average rate at which they change terminals ("churn"), there are between 13 million (according to the Court) and 35 million (according to Orange) phone terminals sold each year, compared to nearly 450,000 iPhone 3G sold during the first 5 months following its launch. At most, iPhone terminals represent approximately 6-7 % of yearly sales. Of course, the sales volume data is not as relevant as the data concerning value, and the revenue generated by the iPhone for an operator is on average significantly higher than that generated by standard devices, but it is comparable to other high-quality products such as Nokia or Blackberry smartphones. The leverage between the mp3 player and the smartphone market might also have been better demonstrated.
In the end, one understands fairly easily the logic that guided the Council in this matter and which the Court then adopted. By generalizing, even "trivializing" the iPhone, the Council hopes to force operators to differentiate their offers by prices and increase the fluidity of the market between operators.
The Council's and Court's task was made easier because the agreements contained a particularly long exclusivity period (5 years) and provisions prohibiting passive sales, clauses that caused the agreements to fall outside the relevant block exemption regulation.
The Council's reasoning may well have some merits particularly in light of the structure of the French mobile market. But some commentators have criticized the Council's approach as a disguised method of regulating the mobile market rather than a rigorous application of ex post competition law principles. i
Other Similar Cases are Pending or Decided
This high-profile iPhone case is not the only case involving exclusivity or tying agreements in the Media & Communications sector in France: the French competition authority is currently examining several matters involving Orange's exclusive right to distribute certain content to Orange subscribers, and it remains to be seen whether the competition authority will follow the same reasoning as that applied in the iPhone case. Moreover on February 23, 2009 the Paris commercial court analyzed the contracts that require customers who want to purchase Orange's exclusive TV programming (which includes some premium football programs) to simultaneously subscribe to Orange's triple play broadband offer. The court held that the bundled offers violated French law on tied sales. According to some commentators, this decision is a blow to Orange's strategy of building broadband offers based on exclusive content and, beyond, may raise concerns on many kinds of exclusivity arrangements in the digital media field.