The iPhone and the Technology Thieves

The story begins with a familiar plot: With extraordinary expense and effort, Company A develops a wonderful new product filled with innovative intellectual property. After reviewing a wide range of options, Company A contracts exclusively with Company B to distribute the product. Then, a nemesis appears to thwart the contract and steal the intellectual property. Does the tale have a happy or a sad ending?

From books to pharmaceuticals, the story line is the same, with different innovators. J.K. Rowling of "Harry Potter" fame turns to Scholastic exclusively to distribute her books. The contracts between Ms. Rowling and Scholastic are mutually beneficial. No one held a gun to her head and said, "Sign this exclusive contract or else." When pirates steal "Harry Potter," public reaction ranges from condemnation to pained tolerance. No one lionizes the pirates.

But now, consider the wireless world, where Company A is Apple Inc., which developed the iPhone, and Company B is AT&T, with whom Apple contracted for exclusive distribution.

Last week, a series of newspaper articles described several individuals around the world who engaged in dubious activities such as the hacking of the iPhone's specialized software, the breach of Apple's and AT&T's intellectual property, and the interference with these companies' exclusivity contract. A common judgmental theme of the articles was that Apple had erred in its exclusive contract with AT&T.

Apple had many choices to distribute the iPhone. It could have entered into nonexclusive contracts with practically every wireless carrier in the world, or at least in America. A carrier purchases the handsets, and is responsible for inventories, marketing, customer service, maintenance, and repair. There are many commoditized handsets from Nokia, Motorola, Samsung, LG, and others that can and do operate on most wireless networks around the world.

Alternatively, Apple could have shunned contracts with wireless carriers and insisted on selling iPhones directly to the public. Apple would have been responsible for all aspects of distributing the iPhone, including inventories, marketing, customer service, maintenance, and repair. Individual consumers would then negotiate the purchase of SIM cards with a carrier of their choice.

Nothing prevented Apple from selecting either of these business models for the iPhone. Instead, it chose an exclusive contract with AT&T, self-evidently because it was in Apple's financial interest to do so. A different distribution plan would have been less profitable for Apple, or else Apple would have chosen it.

The elegance of the American economy, and every economy in the world where contracts are respected, is that the parties to a contract write the provisions of that contract. AT&T and Apple developed specialized software for the iPhone to protect the exclusivity of the distribution contract.

It seems many reporters believe that they, not Apple, knew what type of contract Apple should have had. The reports assume that consumers have a "right" to purchase the iPhone outside of AT&T, as if consumers have a "right" to purchase the New York Times Magazine with a different label such as the Wall Street Journal on it.

Valuable property often attracts efforts to steal it. Usually, the American public condemns those efforts. But descriptions of hackers attacking Apple, AT&T, and their contract often lionized the thieves. Many of the hackers chose to remain anonymous, maybe because they were not convinced that their behavior was legal.

Increasingly, in news coverage of stories about advanced telecommunications such as the Internet and wireless services, traditional moral standards about the sanctity of property and contracts are eroding. People who are appalled at shoplifting may admire those who hack into new technologies.

All consumers pay a price tomorrow for thievery today. Clever engineers at Apple or other technology companies may approach management with the opportunity to develop for $1 billion the next greatest technological gadget or software. Without protection of contracts and property, management will simply say no.

How will the tale of the iPhone end? Will Apple's contract with AT&T survive? Or will property and contracts be looted by thieves encouraged by a myopic public? Only time will tell.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.