The new wireless playing field

Olga Kharif
30 Jul 2007

Back in the 1980s, when Americans were buying the first brick-size cell phones, service providers quickly came to dominate the playing field with barely a struggle. Sure, there was a role for other companies, including the makers of those hefty handsets. But thanks to a government that doled out airwave licenses with few strings attached, the real power in the U.S. mobile-phone industry lay with Ma Bell and her powerful offspring. It was they that built out the networks, collected monthly bills and set the terms of use for the country's millions of cell-phone users.

Motorola (MOT), which invented much of the initial cellular technology, was fairly happy just to have a new market for its wireless equipment. And far away in Finland, a small manufacturer named Nokia (NOK) was known for making everything from paper to bicycle tires"”everything except phones, that is.

That early tilt in the balance of power has enabled the wireless carriers to hold sway ever since in just about every aspect of the business, from the very design of cell phones to dictating which Web sites and what videos users can view on those handsets.

But two decades later, a wide array of troops are massing against this system"”from Apple (AAPL) and Nokia to industry newcomers like Google (GOOG)"”all intent on wresting control from the carriers to deal directly with mobile users and grab a bigger share of the revenue.
Breaking Down Barriers

The dominant service providers like AT&T (T) and Verizon Wireless (VZ, VOD) remain in firm control for now, and offer no apologies for carefully protecting their profits as payback for the billions they've spent on building their networks. But an upcoming government auction to use new swaths of the airwaves could favor industry newcomers and require winners to open their networks to any device, service or technology from rival providers.

Google in particular, frustrated by the endless hurdles for getting its search engine and other services on cell phones, has been urging the Federal Communications Commission to impose such conditions, pledging to bid big in the auction. And while the final rules have yet to be decided, FCC Chairman Kevin Martin has publicly embraced at least some of the proposals to ensure the new airwaves are less rigidly controlled by the winning bidders. This potential new freedom for users to buy ringtones, video games or even their actual calling plans from any provider could drive the sort of innovation that's common on the Internet, but exceedingly rare on the mobile manifestation of the Web.

Apple's Model

For a taste of what this new dynamic might look like"”and the market's obvious pent-up demand for it"”one need look no further than the iPhone. Apple succeeded in wresting an unprecedented amount of control from carrier partner AT&T in designing the device, picking the applications and determining how to price the device and service. In fact, thanks to the fanatical customer base it was sure to bring AT&T's way, Apple also negotiated to win a rare share of the carrier's monthly subscriber fees.

Though some complain Apple itself copied the carrier playbook by making it hard for anyone else to create applications for the iPhone, it's hard to argue with the results: RBC Capital Markets estimates that by July 25, when Apple reports its quarterly earnings, up to 1.5 million iPhones will have been sold at $499 or $599 a piece.

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