There is no more frustrating a market to watch than mobile devices. The phenomena success of the iPhone demonstrated that customers would plunk down several hundred dollars for a compelling (or at least “eye-appealing”) mobile device; however, the iPhone is just one device. There is a tremendous potential market for mobile devices that is waiting to develop. The cork in the bottle is the cellular carriers’ inability to recognize that they have become the biggest obstacle to the development of their own market.

While cellular technology has been one of the greatest developments in communications over the past twenty-five years, the carriers are stuck in a business plan that mirrors the pre-Carterfone Bell System. In 1968, the Supreme Court’s Caterfone Decision allowed competitive devices to connect to the public telephone network, it gave rise to a remarkable wave of creativity that spawned the interconnect business, digital PBX systems, high speed modems, T-1 multiplexers, frame relay, IP PBXs, and unified communications. That explosion of creativity came about because equipment design was taken out of the hands of the hidebound folks whose concerns focused solely on the network.

The Internet was based on the fundamental idea of “clear pipes”, and open standards. That philosophy has brought about consumer email, online shopping, eBay, downloadable music, YouTube, Facebook, and thousands of other applications that were not coming about in a monopoly telephone environment. This is the business model that leads to growth. Just as IBM, Burroughs, Univac, and the other 1970s bastions of data processing learned the hard way, adopting standards may mean you get a smaller slice of the pie, but it’s a smaller slice of an exponentially larger pie.

For the cellular carriers, business change will require an enormous leap of faith. Change is gut-wrenching, and even more so when you’ve had a plan that’s worked so well. Their industry has been built on the Faustian bargain that the customer gets a subsidized handset in return for committing to a long-term contract. While the deal reduces the out-front cost of subscribing to the service, it leaves the decision of which mobile devices make it to the market largely in the hands of the cellular carriers. The result is an environment where we are offered a lame set of mobile gadgets that are so tangled up with the carriers’ plans to suck more revenue out of their subscribers, it leaves us with a product that is substantially less than the sum of its parts.

The command-and-control mentality has an effect on the service as well as the equipment selection. You’ve probably noticed that the major cellular carriers do not offer fixed-mobile convergence (FMC), or to integrate other potentially competitive wireless technologies with cellular. The general feeling within the cellular industry is that FMC could potentially impact cellular revenues, but more importantly, it could loosen their grip on the customer. T-Mobile’ HotSpot@Home service has been the sole exception, though it is highly unlikely the other carriers will follow suit. My bet is that consumer FMC solutions will veer toward femtocells that use all-cellular technology allowing the cellular carriers to keep the entire solution “in-house”.

The Rise of Open Mobile Operating Systems

Despite the inherent recalcitrance of the cellular carriers, pressure is building to open up the equipment market. Some of that has been driven by developments in mobile operating systems. Nokia’s recent decision to acquire the remaining stake in the Symbian mobile operating system and create the open source Symbian Foundation will put it in the open camp along with Android and Linux. Symbian is the most widely deployed mobile O/S (See Table 1), though it is not a major element in the US market. Symbian is used on over half of the world’s smart phones with over 200 million units, 235 models, and tens of thousands of third-party applications.

The cache of the Google name has driven interest in the delayed Android operating system and the Open Handset Alliance; current projections put Android availability in the fourth quarter of this year. While Google’s Android has garnered the bulk of the press coverage, Linux Mobile (LiMo) is currently available on over a dozen devices from Motorola, NEC, LG, and Panasonic. The Linux camp got a further boost yesterday with the merger of the two major groups backing it, the Linux Phone Standards (LiPS) Forum and the LiMo (Linux Mobile) Foundation. 

There are other business plans that work, as long as the owners don’t try to smother the baby in the crib. Both RIM (the Blackberry people) and Apple use a packaged hardware/software model, but both are actively pursuing developers to add capabilities to their platforms. Apple has opted for the packaged approach across all of their product lines, and RIM makes a strong case for the security of their solution based on the links between their software and their internally developed hardware. All of this “openness” may put pressure on Microsoft to rethink their plans regarding royalties for Windows Mobile.

The Pressure Builds

The delivery of the first iPhone was clearly a turning point. It looked like AT&T had come out on the short end of the deal with Apple, but in the end, they picked up millions of new subscribers as a result. However as I pointed out in a recent post, the iPhone is optimized for Web surfing, while the primary business application is email. The developer network Apple has assembled has already produced a consumer oriented VoIP Wi-Fi client (something AT&T wasn’t encouraging we can be sure), so laptop tethering, FMC, and a torrent of other new applications shouldn’t be far behind.  

Evidence of change is also showing up in the cellular industry itself. T-Mobile’s HotSpot@Home service is one element, but they are too small a player to have a widespread impact. However, it does at least demonstrate that there are stress fractures in the cellular industry’s Maginot line of resistance. The more significant development was Verizon’s commitment last November to open access to its network with its “Any Apps Any Device” initiative. As one of the two leading national carriers, Verizon’s commitment carries a lot more weight. Verizon also won the 700 MHz C Block frequencies that require support for open devices. However, we’ve yet to see any new products or services result from those initiatives, so when it comes to meaningful change in the cellular business, we’re still in waiting mode.

Conclusion

The prospects for more functional mobile devices are exciting. We should all be carrying cell phones that double as iPods, maintain calendars wirelessly synched to our desktops, have built-in Wi-Fi (and eventually WiMAX if it ever catches on) for Web access and VoIP calling, all of those applications should be location-linked, vendor-sponsored local content should be deliverable by Wi-Fi, they should have cameras (only if we want them) and the ability to upload, download, and share pictures, songs, appointments or whatever we want to do with our legitimate content in an open fashion that is unencumbered by the profit motives of the cellular carriers.

It remains to be seen if and when the cellular carriers embrace that open model wholeheartedly. It will be a wrenching change for carriers who have prospered with a business plan that packaged a long-term contract with a subsidized handset. Of course when I entered the business almost 30-years ago, no one could envision a day when AT&T and IBM would not be the dominant players in telecommunications and data processing. However, technological advancement is relentless, and no entrenched monopoly is unassailable. The good news is that in virtually every technology business we have seen, openness is the rising tide that raises all boats. The key to continued growth and success for the cellular carriers will be to “Set my handset free”.