Analyst Angle: Open Access Does Not Mean Open Season for Device Vendors

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Jupiter Research’s Julie Ask, iGR’s Iain Gillott and more.
The big news coming out of the FCC this past week was the open-access requirement for the C block of 22 MHz of prime, beachfront 700 MHz spectrum in the upcoming spectrum auction. The 700 MHz band is being reallocated from broadcast analog TV and is prized for its ability to penetrate walls (you can usually watch TV in your basement if you have a decent set of rabbit ears), among other things. Assuming an incumbent wireless carrier bids on and wins this block, the open-access condition will not force them to change their current business model much. But it should change things at the margins for device vendors, and that could lead to some extremely big changes down the road.
Right now, carriers act as gatekeepers either by design (they want to approve and control what devices get on the network and which services are used), or by accident (there are a limited number of people they have on staff to deal with device vendors). This situation inhibits sales of high-end convergence cellphones that carriers don’t want to stock in inventory, such as Nokia’s Nseries, or expensive, limited edition fashion phones. Open access should allow handset vendors to go directly to consumers with whatever they think will sell. Open access should also provide the Web 2.0 crowd some of what they’re seeking-the ability to offer cellphones that are tied to services carriers would not approve of. This can be due to exclusive arrangements with another service provider (the Google argument, which sparked the open-access consideration in the first place), or because the content itself is objectionable to the carrier in some other way.
Typically, this has been to prevent revenue substitution: VoIP services cut into paid wireless minutes, and alternative mobile content (ringtones, graphics, games, etc.) cut into the carrier’s efforts to sell content. But carriers block content for other reasons, too-for example, adult content. There’s an argument you didn’t see stated before the auction rules were set: We need open access so we can have wireless porn!
Google had also pushed for open access to the network itself-that whoever bought the spectrum would have to offer wholesale prices on spectrum access to competitors for resale-but the FCC did not go that far. Open access for devices and services is not new; Sprint Nextel is already promising an open access 4G network-WiMAX, using 2.5G spectrum it already owns. Sprint Nextel already has an under-utilized 3G network, so it is adopting an open-access stance to jumpstart an ecosystem around WiMAX in the hopes that a killer app or service will arise to justify the financial investment required for the buildout. Companies like Nokia and Google, who have felt constrained by carrier demands in the cellular world, have already signed on.
Beyond mobile phones, all sorts of things could benefit from connectivity that today are stand-alone, or, at best, use Bluetooth, Wi-Fi or ZigBee, which constrain connectivity to hotspots or rely on a secondary source for a WWAN connection. Potential devices include digital cameras that automatically upload your pictures to the Web-or to other cameras-Web tablets that work outside a hotspot, GPS navigation devices that get real-time traffic without being tethered to a cellphone, and set-top boxes or portable multimedia gadgets designed for streaming media. Open access also unlocks the potential for the broader spread of machine to machine (M2M) applications that are arguably growing too slowly today: everything from vending machines that track real-time sales, to medical devices like glucose monitors that send data to a secure online storage site and e-mail your doctor if your readings are too far out of whack.
Some of the most blue-sky applications could still be constrained by service pricing, since there’s nothing preventing the owner of the new spectrum from creating tiered pricing schemes that are appropriate for, say, intermittent usage, or, on the other hand, constant high-bandwidth use. There doesn’t have to be a sinister motive at work here, either-whoever buys rights to the spectrum will have to manage network capacity somehow so that you don’t end up with the wireless equivalent of a busy signal. Pricing is a blunt tool, but it’s effective.
However, even if the spectrum owner provides various affordable access plans for third party devices-the most likely scenario, since any owner of the spectrum will want to monetize it-open access does not fundamentally change the U.S. wireless market. Much of the whining you often hear about the U.S. wireless environment comes from people who think that the European model is a panacea, and from Congressmen who want to use their iPhones on Verizon Wireless’ network. There’s no easy way to put this-that isn’t going to happen. The new open-access rules only apply to a single chunk of spectrum that will likely end up being controlled by a single entity (because that’s the only way to build a national network out of it, which is the only way to justify spending billions of dollars on it).
Realistically, there is no way-politically or legally-to retroactively demand open access to already allocated spectrum. That spectrum is used in various bands with competing technology standards by carriers who compete fiercely with each other. I don’t care what Consumers Union says, you can’t make a consumer benefits argument here: The only way to make every device work on every network would be to force carriers to offer multi-radio solutions in every device. This would be technically difficult, ludicrously expensive, and rather wasteful. It would actually set the U.S. back in the global mobile market as many handset vendors would be forced to abandon the market entirely. That’s a doomsday scenario, but it’s irrelevant because it’s just not going to happen.
So where does that leave us? We get at least one new network debuting as early as 2009 or 2010 that allows vendors the opportunity to jack in without the spectrum winner’s official approval. We’ll have Sprint Nextel’s WiMAX network, which the company promises will also be open access, along with four closed 3G networks (assuming T-Mobile builds out a W-CDMA network at 1700/2100 MHz), each built around a different technical standard/swath of spectrum.
The technology and spectrum frequencies used by carriers in the U.S. still will not match those being used anywhere else in the world. Therefore, for all intents and purposes, any 3G or 4G device destined for the U.S. will either be custom-made for the network it is intended to run on, or it will by necessity need to support multiple technologies (raising the price of the device). That injects a fairly high level of risk for vendors building devices for the new 700 MHz network.
For carrier-sourced devices, vendors have to accede to carrier demands, which include exclusive offerings, standardized interfaces and walled gardens. In return, they are promised large minimum orders backed by device subsidies, which lower the retail price for consumers and the carrier’s enormous marketing resources. (There is no way to overstate how important carrier marketing budgets are to handset vendors-the wireless carriers are among the largest advertisers in the world.) Deep-pocketed companies like Nokia and Google should be expected to shoulder the risks to launch open access devices, but I expect most vendors-including Nokia-will continue to play it safe and keep their carrier customers happy.
The bottom line is that the mobile device world is actually getting more fragmented and more complicated. (This thrills my wife, by the way, who happily notes I should have a job for a while.) Despite the FCC’s new open-access provisions, the tight carrier control over most wireless devices will remain, and devices taking advantage of the
open access provisions will either be expensive or risky propositions for the vendor.
Avi Greengart is the Principal Analyst, Mobile Devices at Current Analysis, Inc. This Analyst Angle column was first published as an Advisory Report for Current Analysis clients on Aug. 2, the day after the FCC rules were clarified. Avi can be reached at agreengart@currentanalysis.com. You can contact RCR Wireless News at rcrwebhelp@crain.com.