Wireless data network dominance behind AT&T, Verizon smartphone wars

Dan Devine, Associate Editor

When it comes to 3G and 4G wireless data networks, Verizon and AT&T are facing off over which operator has the best smartphone to handle mobile Internet access. Verizon's Droid smartphone -- a Motorola device -- is about

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to hit the market to take on AT&T, with its exclusivity agreement for the Apple iPhone. Verizon recently announced plans to embrace the Android mobile OS, and now ads talking about the Droid are hitting the market. Industry speculation is that the Droid's hardware and software could be an iPhone killer. We'll have to wait and see.

While much of the speculation has focused on the Droid's features and design, there's a bigger question: Is Verizon competing with AT&T smartphone-to-smartphone or does it plan to challenge AT&T network-to-network? In other words, what's more important: the 3G or 4G network or the phone? To sort it out, associate editor Dan Devine talked to Tom Nolle, president of CIMI Corp.

Are AT&T and Verizon in a smartphone war or is something bigger at stake?

Tom Nolle: The Verizon-AT&T dynamic is what's really important here. The popular press has played this as the as-yet-unidentified Droid against the entrenched, powerful iPhone. The underlying issue is the approach these two providers might take.

AT&T has had all of the benefits of being the first in the market, and it's now about to suffer all the disadvantages. AT&T set the bar for smartphones and proved a handset could pull through data services for wireless. That was an important piece of knowledge. But the latest Apple numbers further validate that from the consumer's perspective, all of the services of the network are represented by the phone.

You would like to have your network thought of as something other than the pipe that connects the iPhone to a website in a manner similar to that in which plastic plumbing connects a leopard-skin toilet seat to the public sewer system. I think Verizon is trying to create incentives for broadband wireless data services without surrendering as much of the service visibility to the handset as AT&T has.

But the iPhone changed the game for AT&T. Isn't that what Verizon wants too?

Nolle: The issue for Verizon -- and for the industry -- that was created by the iPhone is that if we are looking for world-changing events as a precedent, the one that comes to mind is the Internet as a driver for consumer broadband. Network operators gained a lot less from Internet empowerment than newcomer players like Google. AT&T may have created the same kind of game-changing event with the iPhone in terms of creating demand.

The iPhone has created the consumerization of wireless data services. And in the case of the Internet, consumerization was accompanied by a catastrophic decline in revenue per bit for the service provider. That's what wireless operators have to try to fix. Otherwise, wireless investment slows down because carriers can't earn a reasonable return on their investment. If that happens, no one will be able to fund LTE.

How can Verizon change the game as it promotes the Droid smartphone?

Nolle: Verizon's advertising gives some indication of what it plans to do. Every problem in a marketing sense is like a problem in a military sense. It has a strategic and a tactical solution. The tactical thing for Verizon is to understand that the iPhone has stressed AT&T's 3G network. So Verizon hits back at AT&T on network coverage. That's a big issue AT&T has right now -- the more iPhones are sold, the more unhappy 3G users could be because of network congestion.

Everybody agrees that Verizon is going to have the edge on the network side. That's important, because if Verizon can make this into a "my network is better than your network" fight, it's putting the argument into the right perspective for network operators.

Verizon has always accepted the idea that the handset is an instrument of network service, not a fulfillment of it. So Verizon is looking to integrate the handset into its service offerings rather than simply use it as a mechanism for getting the consumer onto wireless Internet.

Are wireless operators hampered by network technology in terms of the revenue they can make on network services?

Nolle: We tend to think of the evolution of network services as being limited by technology, but it's really limited by return on investment (ROI). When we look at the way that the service marketplace is structured today, we have two kinds of players. We have the stodgy, conservative service providers, which have incredibly long planning cycles, slow decision processes and very low ROI targets. In contrast, you have higher-level players like Apple or Google, which have shorter planning cycles and very high, aggressive ROI targets. So there are lots of things the Googles can't afford to do.

Do long planning cycles and low ROI targets have any advantages?

Nolle: A lot of components of future services could be provided more easily by the service providers than the higher-level players. I think Verizon wants to identify some of those and begin to offer them through developer programs to the same people in handset developer programs.

So if I'm a handset developer, and I know how to program an iPhone or a Droid, and I also know how to program Verizon's services, I can write an application that when run on the Verizon network will provide a marriage of capabilities of what a handset can do, what a website can do, and what a wireless network can do.

How would that approach benefit Verizon?

Nolle: Verizon can sell those incremental features in the same way it sells text messaging or something like that. Instead of being a victim of iPhone traffic, it can actually be a participant in the smartphone revenue stream.

Are there any inherent advantages in the AT&T or Verizon networks?

Nolle: Even though they're both national carriers, both tend to have their largest number of customers in their original service geographies. Verizon realizes that a lot of people aren't going to switch to AT&T because they live on the East Coast, where AT&T doesn't have the network coverage. So they know that AT&T has not depleted all of Verizon's opportunity to sell smartphones.

Verizon is perfectly happy to see AT&T pushed with iPhone traffic and potentially pushed to build out additional cell sites in areas where Verizon is now strong. If AT&T does that, it will have less money to differentiate its services from mobile Internet services.

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