Cell Service Providers Get A Wake-Up Call From Business Users

Cell network operators, used to exercising strict control over phone features, are under pressure to change.



Cellular service providers rule their networks with iron fists, an ongoing source of frustration to millions of their customers. Disabled cell phone features, locked phones that work only on one network, a "walled garden" where Web access is controlled by the carrier--some call it cell phone tyranny. But change is in the airwaves, driven in part by business adoption of smartphones, where this play-by-our-rules approach won't be accepted.

By some estimates, nine in 10 cell phones in the United States are sold by carriers, nearly reverse the ratio in other countries. Cellular carriers subsidize the price of phones, then use their dominant positions to impose multiyear contracts with hefty termination fees, offer roaming plans that are useless outside the United States, restrict Web-enabled phones to limited Internet access, and exclude handset features they deem threatening to their business models.

"We're locked in a system that enriches and empowers the service providers at the expense of consumers and equipment providers," argues Reed Hundt, former FCC chairman and now with startup Frontline Wireless, formed to build a wireless broadband network to challenge the incumbents.

Next month's launch of the Apple iPhone will be as notable for what's wrong with the cellular industry as for breakthrough smartphone design at a premium price. The iPhone will be sold exclusively by AT&T Mobility, formerly Cingular Wireless, and will work only on AT&T's network. Anyone wanting an iPhone and not already an AT&T customer will need to switch providers. And the iPhone will operate over AT&T's outdated GSM network, known as Edge, not over the carrier's faster 3G network.

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Yet the iPhone is poised to break through one technical barrier imposed by carriers on most phones--it will be capable of switching from cell mode to Wi-Fi when it detects a network hotspot. Wi-Fi--despite its wide availability and appeal--is impossible to access from most cell phones because carriers have been slow to support any wireless technology that competes with their own. For example, when Nokia released the E61 smartphone in Europe last year, Wi-Fi support came built in. But when Cingular introduced the same phone in the United States last fall, Wi-Fi support was missing.

Voice over IP is another network service cell carriers have been slow to support but IT departments want. Ben Holder, CIO of Unifi, a yarn manufacturer, says his company's BlackBerry users would benefit "a lot" from both Wi-Fi and VoIP if only they could get it. "Business users are now behaving more like consumers," Holder says. "They want more of the same features and functions as consumers."

Carriers influence the capabilities of cell phones and smartphones by getting involved in the design process. Among the features they have sway over besides Wi-Fi: Bluetooth, GPS, file sharing, and e-mail clients. "The carriers want to be the gatekeepers for everything in the wireless industry, from application design to the handset," says Tim Wu, a professor at Columbia University School of Law and author of a recent report that scrutinizes cell carrier practices. Wu charges carriers with crippling, blocking, and modifying certain features, and he argues they make it tough on developers who want to write applications for the devices that connect to their networks.

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Truphone, a provider of voice-over-IP software for cell phones, earlier this month said it would consider legal action against Vodafone, which doesn't provide service in the United States but is part owner of Verizon Wireless, because Vodafone won't support VoIP on devices connecting to its network. Likewise, France-based carrier Orange excludes VoIP and instant messaging from its service plans. Neither Vodafone nor Orange returned calls seeking comment.

Cell carriers could face a backlash as more customers demand dual-mode devices and mobile VoIP. "It's going to get harder and harder to hold back a technology that people want," says Truphone CEO James Tagg. "The mobile VoIP genie is very much out of the bottle."

Cell carriers deny that they intentionally block features customer want and say that, in the interests of reliability and security, their networks can't be opened to every feature that comes along. AT&T doesn't disable cell phone features, though it may exclude features that customers don't require, says a spokesman. Sprint requires a clear business case and customer demand to include specific features, says a spokeswoman.



INDISPENSABLE TOOLS

Enterprise service contacts--on track to reach $52 billion by 2010, according to IDC--are helping businesses wield more influence with carriers. A typical enterprise service contract covers devices, service, and end user support. Companies are beginning to treat smartphones and cell phones more like laptops--indispensible business-productivity tools--which elevates the product and service evaluation process.

"The buyer is changing," says Bruce Friedman, CEO of Movero Technology, a provider of managed mobility services to businesses. "The point of sale has moved from a procurement officer in the company to the IT manager or CIO. And they're treating it not as a choice of carriers but as a platform choice, with all the usual IT concerns about manufacturing cycles, security, adoption of new technology, management, and so on."

Carriers accustomed to a take-it-or-leave-it sales approach face informed business customers with higher expectations. Carriers remain heavy handed, Friedman says, "but they're seeing IT managers looking at other trusted partners, to IT companies they've dealt with over longer periods of time, for these procurements." Case in point: Sun Microsystems last week showed prototype cell phones based on its Java Mobile FX software, putting Sun on track to compete with cell phone manufacturers.

With thousands of mobile phone users, the Veterans Affairs Department does business with all the major cellular carriers. Agency departments don't enter into contracts for specific phones but have ongoing agreements with one or more carriers that cover a designated number of units. Volume gives the VA and other large enterprises pricing leverage consumers can't match, says Charles De Sanno, the VA's executive director of enterprise infrastructure engineering.

Scenarios in which carriers don't offer certain features "happen all the time," he says. For instance, De Sanno wanted two phone lines on his BlackBerry, but Nextel wouldn't support it. "I had to switch to a different carrier," he says.

THEY'RE 'DOOMED'

Consumers, too, are starting to focus on "platform" rather than service provider, as the handset makers invest millions of dollars in marketing sleek new devices under their own powerful brands. Customers are intrigued by the iPhone, BlackBerry Pearl, Helio Ocean, and Samsung BlackJack more than the carriers that support them.

"The carriers are ultimately doomed because when anyone asks, 'What's your phone?' you don't say, 'Cingular.' You say 'Motorola' or 'Nokia,'" says Duncan Pilgrim, director of product marketing at Sequoia Communications, a startup maker of semiconductors for 3G phones. Carriers, he says, should concentrate on providing great service.

Earlier this year, Skype filed a petition with the FCC, asking that networks be opened so that consumers can use any mobile device and application on any wireless network. But any push for cellular "net neutrality" may lack political footing. Influenced by the U.S. Telecom Association, CTIA, and "consumer groups" backed by the Big Four carriers (AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless), lawmakers and the FCC have shown little inclination to further regulate the wireless oligopoly.

But customers are pushing back. Last year, nearly 29,000 complaints were filed with the Better Business Bureau related to cell phone service, and disgruntled customers filed a class-action suit against the merged Cingular-AT&T.

Locked cell phones--the inability to take phones from one service provider to another--are partly a result of incompatible standards. But they're also a function of carrier practices. CDMA phones are carrier-specific down to the silicon: If the device serial number doesn't reside in the carrier's database, the phone won't work. CDMA is used predominantly by Verizon Wireless and Sprint Nextel. GSM, employed by T-Mobile and AT&T, is a more universal protocol: Slap the proper SIM card in a phone, and it'll run anywhere on any GSM network.



But T-Mobile and AT&T have chosen to follow the industry practice of locking their U.S.-distributed phones, says an executive with a handset manufacturer who declined to be identified. So while in theory anyone can buy a GSM phone and a SIM card and get service from any GSM provider, in practice the number of U.S. users willing to go to such lengths is probably less than 1%.


It's a balancing act, says RIM CEO Balsillie -- Photo by Mark Lennihan/AP

It's a balancing act, says RIM CEO Balsillie

Photo by Mark Lennihan/AP
Smartphone manufacturers walk a fine line between feature-craving end users and the cell carriers that distribute their products. "We only have a certain amount of capacity to execute [customer desires] like providing 3G support with every protocol across the world in every band," says Jim Balsillie, CEO of BlackBerry maker Research In Motion. "We're always balancing those things: the capacity to deliver, the strong voice that you're dealing with, how much distinctive strategy the carrier has, and what's going to fit in the market."

Motorola CEO Ed Zander apparently reached his breaking point over the way cell carriers control the distribution and price of cell phones. "I hate my customers," Zander recently huffed in reference to the carriers, according to The Wall Street Journal.

Still, most handset makers are reluctant to publicly criticize the carriers, and, in fact, they fare well in the current system, particularly since most tech-support calls go to the carriers, not to them.

When it comes to excluding features, handset vendors describe it as more of a cooperative relationship: "If I'm trying to sell to the carriers, they are my customers. I have to offer a product they're willing to buy," says Muzibul Khan, VP of production management and engineering with Samsung.

Carriers are known to wield their clout. Verizon Wireless disabled the Wi-Fi voice function on the Samsung i730 phone when it launched in the United States, according to one source. A Verizon spokesman explains the carrier doesn't consider Wi-Fi reliable for voice communications.

Getting dropped from a carrier's product line can be death for new handset models, says Miro Kazakoff, an analyst with market research firm Compete. For handset makers, the risk of challenging the status quo "is so much greater than the reward," Kazakoff says.

Nokia, for one, is looking for a way out of this vise. The cell phone maker has begun opening "flagship stores," where it sells unlocked mobile devices ranging from full-featured business smartphones to consumer cell phones. The first two, in Chicago and New York, opened last year, and Nokia plans to open additional stores around the world.

The company wouldn't comment on what goes on behind closed doors in its discussions with carriers, but it provided the following statement: "By bringing global Nokia devices to our flagship stores, online channels, and to independent retail, Nokia strives to complement the volume strategy of the carriers, while at the same time satisfy a real and existing demand from the early adopters."

So customers willing to buck the system--and forgo carrier subsidies and support--can get an unlocked phone today. The carriers are still betting that most U.S. consumers, who couldn't tell GPRS from WCDMA if their lives depended on it, won't bother.

But business buyers are far more sophisticated, and cellular carriers won't be able to stand in the way of their progress. Carriers may be able to control the phones--but not their customers.

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