US mobile industry in turmoil

THE demise of the $US95 billion ($108 billion) US mobile phone industry as we know it is not quite imminent, but if the events of the past week are taken at face value, it seems a lot closer today than it was last Tuesday.

First Verizon Wireless, the second-largest US mobile phone operator, announced it would open its network to devices or applications bought by users from third parties, as long as they met its required technical standards.

While this is only the first step towards a wireless marketplace that encourages far more innovation and choice, it is significant because Verizon Wireless (55 per cent owned by its namesake parent and 45 per cent by Vodafone) has until now been the major player most resistant to growing pressure for openness from wireless consumers, regulators and firms such as Google and Microsoft.

Verizon's move was followed three days later by public confirmation that, as anticipated, Google will bid in the Federal Communications Commissions auction next month of the nationwide 700 megahertz spectrum being vacated by the US television networks. This potentially positions Google to exercise immense influence over the future direction of the US wireless and broadband markets either by working with partners to roll out services with dramatically different pricing models (probably supported by advertising and more use of low-cost voice-over-IP), or perhaps even by operating a wireless network itself.

As a result, the four major (and hugely profitable) US wireless carriers - ATT, Verizon, Sprint Nextel, and T-Mobile - face an upheaval that will erode their margins, curb their control over the devices and services using their network, and eventually force them to scrap their current revenue model.

Verizon's announcement should be viewed cautiously until its minimum requirements are spelled out and it becomes clearer how open it really intends to be.

While in part triggered by Google's looming threat, at least the move is an attempt to get out in front of painful market changes, rather than being dragged along.

Combined, the two events are definitive evidence the command and control approach the telephone industry has pursued for most of its history, and which US wireless carriers insist is still the only way to guarantee reliable service to customers at all times, is quickly crumbling.

The FCC, mostly due to pressure from Google and other non-incumbents, has already irritated carriers by mandating that 700MHz winners must permit open access to the networks they roll out from any device and for any application a broadly similar standard of openness to that being pushed by Verizon.

But regulators did not support more aggressive proposals from Google and consumer groups that winning bidders also be required to open their networks to any service a clause which would have required them to enable access to spectrum and facilities at wholesale rates to competitors, much as incumbent phone companies used to have to unbundle their local loop.

Even so, Google will bid for the C Block spectrum, which is suited for offering nationwide wireless broadband service in competition with existing DSL and cable broadband providers.

Other bidders for the C portion of the spectrum include AT&T and Verizon Wireless, and the FCCs elaborate electronic auction is expected to yield a price that could be several times the $US4.6 billion reserve.

It has been speculated that Google's bid partners could include Sprint and T-Mobile (which have both signed up to its Android mobile phone software project) and/or Apple, while if it wins it may choose to work with groups such as Clearwire in areas that are most attractive for advertising-driven revenue models, such as IPTV.

Although Google has made it clear that it believes the wireless market is converging with the public internet and will inevitably become similarly open to a huge and unregulated range of services, applications and products offered by an ecosystem of vendors, exactly what it would do with the spectrum if it won is not clear.

Although the firm has huge resources, it is difficult to envisage it getting into the messy hands-on business of operating a consumer wireless network itself - or at least that is the hope on Wall Street, as it is way outside the firm's current business.

Google won't have to go quite that far to achieve what presumably are its underlying goals - to cut wireless and broadband prices, open mobile communications to the same rapid innovation from numerous vendors that is taking place on the internet, and to dominate distribution of context-appropriate ads to mobile consumers as it has on the internet.