"Service provider" and "network operator" are becoming independent terms in wireless. A look at how companies are evolving

The U.S. wireless industry has evolved in what could be called a monolithic fashion. It's been highly competitive and innovative, but it's also been tightly integrated vertically. Wireless operators have built and maintained networks, controlled customer relationships, offered service plans and even sold phones.

When wireless data networks emerged, the same models applied: Carriers sold not only data access, but content and applications, creating walled gardens in their little kingdoms on the mobile Internet. “The buck stops here” has always been the guiding principle in wireless — the ultimate responsibility for customer experience and safety resides with the operator, which consequently receives all the money.

But that is starting to change. Analysts are calling it the “disaggregation of the value chain.” Internet companies, application providers and hardware-makers are starting to draw customer attention away from network operators. Apple is perhaps the best-known example. The iPhone comes with an AT&T service plan and an AT&T bill, but Apple handles much of the customer relationship. iPhone activation and music purchase are done through the iTunes portal, and application downloads will be conducted through an App Store. There are less obvious examples, too: the relationship that Research in Motion has with the enterprise for its BlackBerry service and Sprint's background role as access provider for the Kindle, the e-book reader from Amazon.com.

The culmination of this trend is the separation of the service provider from the network operator. The operator becomes the conduit for services and applications sold by myriad providers. No one but the staunchest Net neutrality advocates believes the link between service and network will be fully severed, at least where basic voice services are concerned, but wireless data could be different.

“I don't think the value chain for wireless data will ever be fully disaggregated,” said Roger Entner, senior vice president of IAG Research's communications sector. But he believes monolithic service models are becoming a thing of the past: “The walled garden will either no longer exist or it will have really large doors.”

As data services take off, more companies are clamoring for network access, citing demand — whether real or perceived — for innovation and flexibility on the mobile Internet. Instead of rejecting these demands outright, carriers are actually coming around to the new order, though they're doing so tentatively and within limitations.

Some are doing it via partnerships, such as the Apple/AT&T hookup. Some are testing new business models while protecting old ones: Verizon Wireless opened its CDMA network to outside devices and apps, creating an island of openness within the immense sea of V CAST and Get It Now. Sprint is more radical, launching a network devoted to data while promising access to any app will be the rule rather than the exception.

These are some fairly bold steps for the wireless industry, but they may not be enough for the Internet industry. Google succeeded in getting open-access stipulations into the 700 MHz auction, ensuring future networks will be open to its apps. In today's world, Google and its peers must face the reality that operators own the networks needed to reach customers. But they do have an advantage: Those networks increasingly resemble broadband networks of the wireline world. Customers' expectations may start reflecting their experiences on the Internet not the mobile phone.

While Tier 1 operators might be afraid to mess with the current tariffs and product offerings using edge-device-driven mobile voice over IP (VoIP), Tier 2 and 3 carriers will see it as a chance to even the playing field — and make the revenue battle more about services and content.

Developments in open software and improvements in smart edge devices will enable new operator models as well. Consider Truphone (see story on page 26): The company offers free software and manages an IP-based back-end to enable mobile VoIP.

“If you look at people like us, we'll do a number of deals with access players who own spectrum,” said James Body, research director for Truphone. “Some will be Wi-Fi; others will have licensed spectrum. But there will be more operators piling in, and prices will keep going down. It will be our role to aggregate together wireless transmission means and make it work for the end user.”

Facilities-based wireless carriers are hardly doomed to fail in the face of these trends, but they must realize their potential to change the balance of power in the mobile game. Similarly, mobile operators shouldn't be underestimated.

“The balance of power won't tip, necessarily — at least not in the short term,” said David Chamberlain, analyst for In-Stat. “There are some smart people running the telcos, and they have always proven to be extraordinarily adept at protecting themselves from competition. Why would anyone believe that they'd fail to do so now?”

One thing going for operators is 10 years of conditioning and competition, which has created customer expectations for cheap devices and services. Without being network operators, Internet companies don't have access to the economies of scale that have driven the wireless business for so long. If Google launches its own service on a wholesale network, can it charge a customer $500 for a device and $40 a month for access to Gmail, Search and Maps?

AT&T spokesman Mark Siegel said that instead of discouraging innovation and choice, the U.S. wireless industry has done the opposite. Low rates and subsidized devices have actually led to the introduction of sophisticated devices and applications. “Something like the iPhone could not have been brought out in any other environment,” Siegel said.

The argument boils down to where the value lies: in the pipe or in the service itself. Operators have never distinguished between the two, while Internet companies have always viewed them as entirely distinct. Charging for access separately from service has never been in the operators' repertoire; following the Internet model would simply reduce them to dumb pipes.

But there's evidence that operators may be willing to make that distinction, possibly even adopting the models of their Internet competitors. Operators will never let go of their networks, said Shaun Cohen, a consultant with Pace Harmon, which advises operators on outsourcing plans. The network is their prime asset — their ultimate competitive advantage. But while owning the network will be crucial, Cohen said, operating it may not be. Some European operators have already turned their entire network operations over to third-party contractors such as Ericsson, and U.S. operators may be more open to the idea of outsourcing elements of it.

“We believe they are looking at separating their network operations from their service operations,” Cohen said. “You'll start to see something like what's happening in Europe in the U.S. in the next couple of years.”

If that happens, operators themselves may become the “new service providers” alongside their Internet peers, competing for service revenues on their own networks. It sounds farfetched, but Sprint has already hinted at the possibility. Other companies may bring their VoIP or video services to the Xohm network, but they won't have access to the quality of service capabilities Sprint will apply to its own offerings, said Ali Tabassi, vice president of technology development for Sprint.

Perhaps that's the ultimate argument for open access in wireless: No matter what services another company offers, no matter how innovative or unique, operators always have an edge; they can offer services better, and they can offer them faster.

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