Faced with business and technology issues, carriers in many cases are being forced into deals and initiatives they would not have considered a few years ago.

Richard Martin, Contributor

October 5, 2007

4 Min Read

The BT Fon Wi-Fi service, announced last week, sounds like a great deal for customers but it could have a drawback for BT -- in what seems to be the latest shift in the telecom market toward non-traditional partnerships.

In return for offering other Web surfers in their vicinity access to the Wi-Fi network over their router, users will have access to more than 190,000 Fon hotspots worldwide and BT's existing network of 7,000 Wi-Fi hotspots, plus new BT Fon connection points to be rolled out in the coming months.

"This is the start of something very exciting for BT," said Gavin Patterson, the managing director of BT Group's Consumer arm, in announcing the deal. "Today we are launching a people's network of Wi-Fi, which could one day cover every street in Britain."

The BT-Fon hookup was hardly surprising, as it has been reported since earlier that year that the British telecom giant had become a strategic investor in the Spanish Wi-Fi startup. But the deal could have significant drawbacks for BT: existing customers with "dual-mode" Wi-Fi-plus-cellular devices can not only get much faster download speeds, but can also make voice-over-IP calls that eat into BT's core calling revenue.

What's more, BT has thrown its lot in with a company that was specifically founded in February 2006 to provide an alternative to pricey existing services from telecoms and wireless carriers. Headed by CEO, Martin Varsavsky, the company calls its Wi-Fi sharing customers "Foneros" and Fon identifies itself as a "movement" rather than a conventional business, spreading Internet access and VoIP in nontraditional and viral ways.

In fact the arrangement is just the latest signal that the incumbent carriers, facing tectonic shifts in their core businesses, are grasping at ways to move beyond being dumb pipes and provide added value in the form of Web services, content, and non-traditional forms of connectivity -- businesses in which they have little experience and must often combine with younger and more nimble rivals.

On retreat on a broad front of business and technological issues, the carriers in many cases are being forced into deals and initiatives they would not have considered a few years ago. In this rapidly changing environment, the established companies are trying to adopt the strategies of up and coming firms -- with mixed results. For example, BT's Fusion venture for converged Wi-Fi and cellular handsets has gained little traction, while both Nokia and Apple have this year released new dual-mode devices to great fanfare.

Verizon Wireless last week debuted its new Voyager phone, from LG, the first consumer phone from Verizon Wireless to include a full Web browser. That means that customers can now move beyond Verizon's "walled garden" of branded content and services from established partners, often carrying ads and peddling for-fee add-ons from which Verizon gets a cut -- a concern that Apple, with the Web-browsing iPhone, does not share.

T-Mobile USA, the No. 4 U.S. wireless carrier, has already begun offering Wi-Fi services with its HotSpot@Home service, which is in the process of rolling out beyond its original test region in the Pacific Northwest. Acknowledging that the service could eat into existing revenues from cellular customers making calls over the Wi-Fi network, T-Mobile executives have said that change is inevitable and they must take risks to adapt.

Sprint Nextel CEO Gary Forsee, who has bet much of the carrier's strategy on a costly effort to build a nationwide WiMax network, has already discovered the downside of such bold moves. Faced with huge build-out costs and sizable risks, Sprint has partnered with startup Clearwire, which has fewer than 300,000 customers -- a fraction of Sprint's 54 million cellular customers.

The Wall Street Journal last week reported that the Sprint board has begun the search for Forsee's successor.

The biggest potential influence among carriers though is that of Google, which has said it will "probably" bid in the upcoming FCC auction of valuable wireless spectrum in 700MHz band and has struck a series of deals, mostly with overseas carriers, to get its services and applications on users' mobile screens.

"Google alone has the heft and the business and social influence to bring the incumbent players to their knees," said Carmi Levy, senior vice president for strategic consulting at AR Communications.

Ultimately, the carriers are faced with a dilemma: if they don't develop new products and services, and strike deals with their erstwhile competitors, they risk becoming irrelevant; but when they do they hasten the demise of their existing business models.

"If the carriers don't partner, they lose control of the users, and the users will find a carrier that does allow open access -- this is already starting to happen," said Jack Gold, principal at research and consulting firm J. Gold Associates. "The bottom line is: the carriers are trying desperately to find a way to stay relevant and not become just a commodity data pipe for end user access."

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