Tearing Down The Wireless Fortress

Google's breakthrough at the FCC is just the latest threat to the telcos' mobile dominance

Back in the 1980s, when Americans were buying the first brick-size cell phones, Ma Bell and her powerful offspring quickly came to dominate the playing field. They did it by snagging government licenses to certain slices of the airwaves, with few strings attached, and then spending billions to build cell-phone networks using those airwaves. The result: Two decades later companies like AT&T (T )and Verizon Wireless Inc. (VZ ) control everything from phone design to which Web sites and what videos users can view on those handsets.

But now those wireless fortresses are under attack. The most obvious example is the partial breakthrough achieved on July 31 by Google Inc. (GOOG ) and other tech players in Washington, where persistent lobbying paid off in new Federal Communication Commission rules that will govern a key auction of new airwaves to be held between now and Jan. 28. This opens the door to nontelcos grabbing some serious wireless territory on which they could build a more open national network. And it may lead to a day when cell-phone users will be able to use any handset, and any software application like a mobile video game, that they want on that network.

In fact, though, a wide array of troops already were massing against the wireless telcos, long before the FCC stepped in. Everyone from computer maker Apple Inc. (AAPL ) to handset company Nokia (NOK ) to upstart service providers with names like Boingo are intent on wresting control from the big wireless carriers.

The major service providers offer no apologies for carefully protecting their profits as payback for the billions they've spent building their networks. And they dispute that the industry has lacked for choice or competition. "At times, it's been hyper-competitive," says Verizon Wireless spokesperson Jeffrey Nelson. Just because they appeared to lose a round last week doesn't mean the phone giants can be counted out. An AT&T statement released after the rules were announced praised FCC Chairman Kevin J. Martin for not "stacking the deck in Google's favor" by meeting all its conditions, and added: "Time will tell whether Google is serious about bidding in the auction."

THE IPHONE SHOCK

If the upcoming airwaves auction does bring in new competition for the telcos, it could drive the sort of innovation that's common on the Internet but exceedingly rare on the mobile Web. For a taste of the pent-up demand for a new wireless dynamic, look no further than the frenzy that sprang up around Apple's iPhone--and what happened after it hit the market. Apple's cachet in designing gotta-have electronics gear allowed it to demand an unprecedented amount of control from partner AT&T in designing the Web-surfing phone. Apple succeeded in picking which of its own software applications and services would run on the iPhone--and setting the price. Apple even wrangled a precious share of AT&T's monthly subscriber fees.

The trade-off Apple had to strike was to have the iPhone run only on AT&T's relatively sluggish wireless network. But the device was on store shelves for only a few hours before hackers delivered a work-around: They found ways to "unlock" the iPhone so that it can play music and access Wi-Fi without having to be activated through an AT&T CELLULAR CONTRACT. Today, those modified iPhones are so popular that eBay (EBAY ) Inc.'s auction site lists several selling for as much as $800--a 33% premium over the regular iPhone's list price.

Nokia is on a course that seems likely to intensify friction with U.S. carriers. At stores Nokia has opened in the U.S. over the past year there has been a significant increase in sales of devices that can be used on multiple carriers' networks, says Nokia Vice-President Bill Plummer. And Nokia is working to offer its own music, multimedia, and navigation services directly to a handset, or for users to download off the Web. It recently bought several companies to pursue these plans, including Twango, an online photo- and video-sharing Web site it picked up in a July 23 deal. "There's something very powerful taking place in the wireless market today," Nokia's Plummer says. "It's about the coming together of the Internet and mobility and consumer expectations. It's about openness and freedom."

FREE WIRELESS

Then there's Google, which makes no secret of its mobile aspirations. The Web-search powerhouse recently ramped up its Washington office, partly to counter heavy spending on lobbying by the phone giants. A spokesman says the company needs to see the printed FCC rules before deciding whether to pony up the nearly $9 billion that consulting firm Comsearch estimates Google or the companies in its lobbying consortium--including DirecTV Group (DTV ), EchoStar (DISH ), Yahoo!, (YHOO ) and Skype (owned by eBay (EBAY ))--might have to spend to win the most coveted piece of the airwaves that are being auctioned. If it does win, Google is expected to support an alternative network on which multiple companies could offer free or cheap wireless service to users who agree to view Google ads and content, says Richard P. Nespola, chief executive of consultancy TMNG Global (TMNG ), which has Google as a client. The success of ad-supported offerings on the Internet suggests there are plenty of consumers who would put up with ads if it means getting rid of a monthly cell bill of $50 or more.

Even without Google stepping in, the big carriers are facing competition from wireless networks based on Wi-Fi and a longer-range technology called WiMAX. On July 19, Microsoft Corp. (MSFT ) announced it will serve up content and ads via Wi-Fi networks onto PCs and Wi-Fi-enabled phones through JiWire Inc., a mobile marketing firm. If the ad-supported approach succeeds, Wi-Fi network operators may drop the subscription fees for public hotspots offered by retailers and a growing number of municipalities, revving up competition for wireless carriers that do charge for their service. "We see these [Wi-Fi] networks as being potentially very disruptive," says Stefan Weitz, director of planning for MSN at Microsoft.

The money carriers make from their cellular data services could decline as well, as software companies roll out more and more products that users can download straight to their smart phones. "I don't see the carriers' walled garden lasting long-term," says Kevin Rose, founder of Digg Inc., which recently launched a mobile version of its popular news aggregation site. "More and more people are going to demand the noncensored version of the Web."

By Olga Kharif, with Spencer E. Ante in New York

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