FCC wireless ruling may kill smartphone deals, create app partnerships

If wireless operators can no longer sign exclusive deals with handset manufacturers, partnering with third-party developers and using internal resources will be key for application development and growing 3G and 4G revenue.

If the FCC's wireless inquiry kills operators' exclusive agreements with smartphone manufacturers, wireless operators

will have to partner with third-party application developers to build revenue and keep subscribers on their 3G and 4G networks.

If I were any of these carriers, I'd be getting really, really cozy with application developers.
Mike Jude
Frost & Sullivan
Telecom carriers like AT&T have used exclusivity with Apple's iPhone, for example, to lock new and existing customers into multi-year contracts and pay extra fees for unlimited data.

"If I were any of these carriers, I'd be getting really, really cozy with application developers and developing some application I could put some exclusivity on through copyright," said Mike Jude, a wireless analyst at Frost & Sullivan. (See related article: FCC regulation or not, wireless business model will change).

The Federal Communications Commission (FCC) recently issued a notice of inquiry (NOI) into mobile wireless competition, announcing it would conduct its own investigation, which gives interested parties a chance to offer comments.

The 14-page inquiry is wide ranging, covering everything from wireless roaming charges to investments in rural markets. But it is the relationship among wireless operators, device makers and third-party developers that is drawing particular attention.

In July, the agency sent letters to Apple, AT&T and Google asking why Google's Voice App messaging service has not been approved for use on the iPhone, which led telecom conspiracy theorists to speculate whether AT&T and other incumbent carriers were trying to prevent over-the-top (OTT) players from taking business away from them.

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No matter what the FCC decides, wireless operators must innovate

It is unclear what steps the FCC will take after the comment period ends, but analysts suggest operators prepare for change. Building a next-generation network will no longer be enough to lure customers and boost revenue, Jude said. "All of a sudden, a pipe is a pipe is a pipe. You need to give the consumer a reason for choosing your pipe," he said. "Get something really, really creative and charge a higher margin."

Although partnering with third-party developers will be key, Jude said that carriers have their own resources that can turn applications and application stores into money makers. Of course, he added, the biggest asset mobile carriers have is a relationship with customers, which is something a third-party may not have.

Operators must innovate, use customer-information advantage

European regulators have already mandated that exclusivity agreements between carriers and manufacturers must be temporary, according to Mike Sapien, a principal analyst at Ovum. Whether by regulation or market demand, clipped exclusivity deals are likely soon to become a given in the U.S., he said.

"I think the industry is reacting and saying these exclusivity agreements would only have a six-month life," Sapien said. The light scrutiny of looking at the issue and possible intervention has already resulted in the idea that the industry has to come around.

"I think it's going to be more about becoming an innovation factory than a singular technology or service," Sapien said. "They just need to hit it hard."

Hitting application development and innovation hard is its own challenge. The key will be marrying customer information with apps that focus on customer mobility, especially using GPS, Jude said. An app that helps customers finds airline tickets, hotel rooms and other accommodations based on an itinerary would be valuable to traveling executives, he added.

"Situation-sensitive applications – it could be based upon your lifestyle, your location or what it is you're planning to do," he said. "Some of those things could be combining location with e-commerce."

Larger telecoms can no longer operate under "the 'build it and they will come' mentality," Jude said.

Traditionally, wireless carriers have been less focused on services and more focused on simple access, but that really has to change, Jude said. "The FCC is going to do something – whether it's exclusivity or net neutrality on the wireless space. I think it will do something. My recommendation to carriers is just to expect it."

Wireless carriers play cards close to the vest on FCC inquiry

Carriers are being cautious when asked about the FCC's inquiry, although they will be involved in the official comment and reply phase. "Obviously for a very long time, Verizon Wireless has been saying the wireless sector of the technology industry is hugely competitive," said spokeswoman Debi Lewis. Representatives from Sprint did not respond to requests for comment.

A representative from AT&T declined to comment on the FCC inquiry, instead referring to a statement issued by CTIA, the global nonprofit association that represents wireless telecom carriers, manufacturers and wireless Internet providers, which took a non-combative tone.

"We are excited to tell the industry's story," CTIA president and CEO Steve Largent said in the statement. "The wireless ecosystem – from carriers, to handset manufacturers, to network providers, to operating system providers, to application developers – is evolving before our eyes and this is not the same market that it was even three years ago."

See related article: FCC regulation or not, wireless business model will change.

Let us know what you think about the story; email: Jessica Scarpati, news writer

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