Even as the wireless industry chants a new gospel about opening mobile-phone networks to outside devices and applications, some of the biggest U.S. carriers are quietly blocking new services that would compete with their own.
Would-be mobile-service providers, ranging from startups to major banks to eBay's (EBAY) PayPal have encountered these roadblocks, erected by the likes of AT&T (T) and Verizon Wireless. In some cases, cellular carriers have backed down, but only after inflicting costly delays on the new services.
At issue is a type of mobile text message known as a short code, essentially a shortcut that lets cell-phone users access an array of services—say, getting sports scores or voting for a contestant on American Idol—by punching in five or six digits instead of the usual seven plus area code.
Even though it's illegal for phone companies to dictate which phone numbers customers can or can't dial, the carriers do not appear to be breaking any government regulations or industry rules by refusing certain short codes. Wireless-service providers say short-code applicants can still use regular text messaging to offer their services. Still, some experts suggest the actions can be construed as anticompetitive behavior that violates antitrust laws. And if nothing else, the moves undermine the credibility of recent proclamations by Verizon Wireless and AT&T about allowing competing devices and services to run on their rigidly controlled networks.
Global Calls for Less
One company rebuffed by the carriers is Rebtel Networks, a Swedish provider of cheap international calls over the Web. Rebtel wants to use short codes to bring its service to mobile phones. Users would send a text message containing the desired global phone number to Rebtel's short code. They would then receive a text message with a local phone number to dial, paying pennies per minute for the call rather than the much higher sums cellular carriers charge for overseas connections.
In May, Rebtel applied for a short code with the five biggest U.S. wireless providers. Sprint Nextel (S) and AT&T approved the request. But Verizon Wireless, T-Mobile USA, and Alltel denied the application, Rebtel says. Rebtel co-founder Greg Spector says the company that handled its application was told that Verizon Wireless considered the service "not an allowed international calling plan" and that Alltel refused because Rebtel's service "cannibalizes their international rates." T-Mobile and Alltel didn't immediately respond to requests for comment on the Rebtel matter.
Verizon says it has done nothing wrong. "They can still text-message our customers" to offer their service, says spokesman Jeffrey Nelson. "They just don't get to do it in a special way with a short code. We're not blocking anything." Just as a newspaper or TV network is free to reject advertising from a rival media outlet, Nelson says, "we don't need to provide special access to our customers and network to a company that's in direct competition with us."
It's not just small fry that are having trouble launching short-code services. AT&T recently refused to approve short-code applications by four banks that wanted to offer customers a mobile application to check account balances, transfer funds, and perform other transactions, say people familiar with the matter. One of the institutions was Bank of Stockton, a 140-year-old California bank, while two others were among the nation's 20 biggest banks, these sources say, declining to name the larger banks.
The applications, submitted in the third quarter, were rejected in October, these sources say. But under pressure from the banks and financial industry groups, AT&T relented in mid-November and agreed to allow the services, powered by technology from a company named ClairMail. Right around the time it reversed course, AT&T also announced the launch of its own mobile-banking service in partnership with Wachovia (WB) and SunTrust Banks (STI). AT&T declined to discuss specific applications, but stressed that it had approved other banking short codes in the past and has granted the ones in question.
AT&T also impeded a plan by PayPal to bring its online-payment service to mobile phones. PayPal announced the initiative at a wireless-industry trade show in early 2006. While all the other major cell carriers approved PayPal's short code soon after its application, AT&T didn't grant the request until May of this year. "We were in talks with them for a long time, and it just took a little bit longer with them," says Amanda Pires, a PayPal spokeswoman. AT&T didn't respond specifically to questions about PayPal's short code.
The disputes over access to short codes contrast with Verizon's surprise decision in late November to open its network to more phones and services in 2008 (BusinessWeek.com, 11/28/07). That announcement was greeted as the first big crack in a restrictive system that has made it hard for "unauthorized" device and software makers to reach cell-phone users.
Since short codes are relatively new and have rarely aroused controversy, there has been little need for lawmakers and regulators to weigh in on them the way federal and state agencies oversee basic phone service and industry competition. And since the system was created by the wireless industry to further its own business interests, it's unclear whether they have any obligation to provide equal access to all comers.
Legal Precedents May Apply
CTIA, the industry group that administers the U.S. program, discourages short codes that involve sexual content, illegal activity, and prejudice, but it doesn't set any other parameters for what constitutes an acceptable reason to reject an application. "Every pretzel maker in the country would like to have room on supermarket shelves. Every fast-food restaurant would like to be in O'Hare airport," says CTIA spokesman Joseph Farren. "The essence of every business agreement is that it makes sense for both parties. There's no difference here."
The Federal Communications Commission, which has never conducted proceedings or issued rulings concerning short codes, declined to comment for this article. Some industry experts say there's no clear-cut law being violated but suggest that legal precedents set in other areas of telecommunications may be applicable to short codes.
"There's no question that this sounds anticompetitive, but that doesn't mean it's illegal," says Michael Salsbury, a partner at law firm Chadbourne & Parke and former general counsel for MCI, the long-distance carrier purchased by Verizon Communications (VZ). "It's definitely improper, because I think from a consumer perspective [a phone company] should have its service compete on the merits of features and cost. It shouldn't be blocking someone else." But, Salsbury adds, if it's still possible to provide a service via text message rather than a short code, then the carriers may be acting within their rights.
The FCC may need to deal with the issue sooner rather than later. On Dec. 11, Public Knowledge and seven other consumer advocacy groups filed a petition with the FCC, calling carrier interference in text messaging a threat to free speech. The groups also asked the regulator to ban the practice. The petition cites the September refusal by Verizon Wireless to allow a short code for NARAL Pro-Choice America. Verizon Wireless quickly reversed the decision and apologized. Petitioners also refer to the Rebtel matter.
Such disputes may multiply, as short codes represent an expanding business for the carriers. For starters, all requests for short codes, and all responses, are delivered via text message, which typically cost 15¢ apiece or are purchased in monthly buckets. But carriers also share in revenue from premium short-code services where users agree to an extra per-message charge on their phone bills. Customers who have played the short-code version of Deal or No Deal, for example, have paid $1 for each message sent or received in the promotion, generating millions of dollars in revenue for the show and the carriers.