This is the first article in the Future Agenda, a new series from Future Tense in which experts suggest specific, forward-looking actions the new Biden administration should implement.
Months into the COVID-19 pandemic, industries across the economy are still experiencing critical supply shortages. Hospitals don’t have enough lifesaving equipment. Students are unable to purchase computers that they need to learn in their new virtual environments. Car manufacturers are also facing inventory shortages of vehicles and parts.
One of the primary reasons for these scarcities is the exclusive contracts that force manufacturers, suppliers, and consumers to obtain their goods only from firms dominant in their markets. For instance, Apple requires “authorized” independent repair shops to buy iPhone parts only from Apple’s preapproved exclusive vendors. But it doesn’t have to be this way. The new Biden administration can and should instruct the Federal Trade Commission to use its rule-making authority to ban exclusive agreements by dominant manufacturers.
Manufacturers of all stripes restrict consumers’ ability to repair their products—all in efforts to squeeze more profits and forced purchases from consumers. Some of the most common methods include using software to lock down the system so that only the firm can access it and remedy the issue, and implementing predatory designs such as using copious amounts of glue rather than standardized screws to hold pieces together. (That’s an Apple specialty.) But dominant manufacturers are now increasingly using exclusive dealing agreements to restrict, repair, and perpetuate their monopoly power.
The ability to fix and tinker with one’s rightfully purchased product is fundamental to ownership. Repair has been a recognized right of consumers for more than a century and maintains broad public backing, with almost two-thirds of Americans supporting the right to repair. In the early 20th century, manufacturers purposefully built their products to be repairable. In 1910, car wheels became detachable and enabled owners to change their tires themselves. In the 1940s, the Western Electric Model 500 telephone was purposefully designed to be as durable as possible—many continued to work for decades.
Today, in the spirit of facilitating repair, multiple states have proposed laws that seek to expand a consumer’s right to repair their products. On Election Day, voters in Massachusetts approved a ballot initiative to expand access to wirelessly transmitted (telemetric) car data to independent repair shops—something that might seem small, but is a huge victory. (It’s a blow to Tesla in particular.) However, exclusive agreements require a particular manufacturer, supplier, and consumer to purchase tools, parts, or services exclusively from the dominant firm.
Exclusive agreements operate as a form of vertical integration and expand the control of a dominant firm over weaker suppliers and customers. These restrictive agreements cause consumers to pay inflated prices for parts and services and endure increased wait times for the repair of their products. They also allow manufacturers to restrict the supply of available parts and services for repair.
Exclusive deals, along with other restrictive repair tactics, are exceptionally lucrative. Car manufacturers, for example, obtain only 37 percent of their revenue from the initial sale of the car; the other 63 percent comes from the aftermarket business, which includes services for repairs and the selling of parts. Similar numbers exist for car dealerships. Farm equipment manufacturer John Deere alone brought in almost $6 billion in 2018 just from repair services. Its profit margins on repair are five times more than its new equipment sales.* These disproportionately lucrative aftermarkets give dominant firms a perverse incentive to pour millions of dollars in lobbying to expand these restrictive practices and inhibit repair.
Manufacturers can use exclusive contracts to restrict the availability of parts. For example, Apple’s chip manufacturers, such as Intersil, can only sell chips to Apple. This means that if a third-party repair shop wants to purchase a chip to repair a MacBook laptop, it must obtain the chip from Apple—at its marked-up prices—rather than from the chip manufacturer or alternative supplier. Many studies and anecdotal evidence show that independent repair shops cost significantly less than repairs performed by the manufacturer—in some cases, 15 percent to 50 percent cheaper. Apple has only continued to extend its exclusive relationships with various suppliers, including renewing an agreement in September with TSMC to be the sole manufacturer of Apple’s 14X chip in iPhones and other iOS devices.
Manufacturers such as Tesla and Apple also use exclusive deals to tightly control exactly who can repair their products, maximizing their own profits. This system means that when unexpected demand arises, consumers can face significant delays to have their products repaired or obtain spare parts. Some have waited months for repairs to their Tesla vehicles or for software updates because of the limited availability of third-party repair services. Farmers have also experienced wait times extending a week or more for simple software fixes that must be exclusively done by John Deere, as the corporation uses proprietary software to block unauthorized repair to the equipment. Farmers would likely be able to fix these problems themselves if they had access to the same parts and software that John Deere has. Lengthy wait times can be devastating to already indebted farming operations, as many crops only have a narrow window to ensure a maximum yield.
Apple similarly uses contracts to restrict the availability of parts. In February, Vice News obtained a copy of Apple’s independent repair service agreement. The contract requires repair shops to obtain their parts only from Apple authorized providers and grants Apple unilateral access to a repair shop’s inventory to ensure compliance and impose severe fines for violations, even years after the contract ends.
In the case of ventilators, any unnecessary time waiting for parts or repair technicians can mean a matter of life and death. Despite the global emergency to save lives with ventilators, other manufacturers have also enforced restrictive repair agreements. Certain manufacturers require that only exclusively authorized technicians fix mechanical and software issues with ventilators. As Sen. Ron Wyden and Ilir Kullolli, a biomedical engineer, recently wrote for Future Tense, “lifesaving equipment is being left to gather dust in a closet” as some hospitals are forced to wait weeks for a manufacturer-approved technician to repair devices.
Restricting repair with exclusive deals can also lessen the availability of refurbished goods from third parties. For example, the United States is facing a shortage of at least 5 million laptops for students, 1 million in California alone. If consumers and independent repair shops were able to obtain parts along with other necessary tools restricted by the manufacturer and distributors, it would alleviate a significant portion of the deficit. Instead, manufacturers seek to restrict the availability of third-party goods to force consumers to purchase new products directly from them. In one instance, Apple decided to solicit Amazon to become one of the select few companies allowed to distribute its products. As a result of this near-exclusive agreement, Amazon removed all but the largest retailers of Apple products from the Amazon Marketplace. Independent product refurbishers, such as John Bumstead, whose entire business is repairing older equipment for resale to maximize its longevity, had their entire Marketplace businesses wiped out. These agreements thus perpetuate manufacturers’ exclusive control over the distribution of products, even over older products that they no longer sell.
As long as exclusive agreements exist, dominant manufacturers will be able to preserve their market power to restrict the availability of the parts and tools necessary to complete repairs. Fortunately, the FTC can ban this practice.
In July, the Open Markets Institute, where I work, and 30 other organizations called on the FTC to use its rule-making authority to prohibit exclusive deals from dominant companies (determined by either the market share the company occupies or the amount of market it prevents other firms from accessing). Though the FTC prosecutes exclusive deals case by case, the litigation can take years to complete. A bright-line rule prohibiting exclusive dealing would make it easier for the FTC to promote fair competition and help consumers access the parts and services they need to repair their products.
President-elect Joe Biden has already started to explore potential federal agency appointments. He should appoint commissioners to the FTC who are committed to banning exclusionary agreements and instruct the commission to enact a rule prohibiting dominant manufacturers from using them.
Correction, Nov. 18, 2020: This article originally misstated the relationship between John Deere’s repair services and its profit margins as it relates to the company’s equipment sales.