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Open Wireless Networks Could Come With a Price

While the movement toward open mobile networks in the U.S. has received strong support from both consumers and the Federal Communications Commission, a new report suggests that consumers may still wind up paying a steep price.

The problem involves the heavy subsidies that wireless carriers offer users on mobile devices that are "locked" to their networks, in return for signing long-term contracts. Open network advocates, such as Skype, are pushing the FCC to make all carriers open their networks on the basis of a little-known, 50-year FCC decision.

But a study from the Phoenix Center released yesterday claims that regulating the traditional device subsidy strategy could "harm consumers substantially" -- bringing about far higher prices on phones by removing incentives for carriers to subsidize them.

"This is one of the top hottest telecom policy issues that's going to be before the FCC going forward," George Ford, chief economist of the Phoenix Center, a non-profit, non-partisan think tank, told InternetNews.com.

The 1968 Carterfone decision forced Ma Bell to open its network to devices sold by other vendors -- creating a market for phones made by other companies besides AT&T (NYSE: T). In early 2007, Skype filed a petition with the FCC to apply the same ruling to wireless networks, claiming it would benefit consumers and advance Net neutrality.

FCC Chairman Kevin Martin earlier this year suggested that U.S. carriers' increasing openness made Skype's petition unnecessary, but the petition remains in play.

Ford, who co-authored the study, said open access supporters aiming to bring Carterfone rules back in vogue believe it would help consumers once again. But that in the case of wireless communications, Carterphone could actually hurt them, he said.

"It's not the best regulation on the open network issue, because in this case, such openness would mean that buyers would pay hundreds of dollars for the phone they paid $20 for this year," he said.

Only consumers wanting unlocked phones would benefit from resurrecting Carterfone, Ford said, describing the segment as a minority customer base.

Others have also spoken out this week against open networks, warning that changes to carriers' pricing strategy could also send the highly competitive industry -- where margins are razor-thin -- into a tailspin.

Carriers' bottom lines depend heavily on their subsidies of locked phones, and their ability to ink exclusive handset deals also contribute to growing their customer base -- for example, AT&T has enjoyed a sizable boost from its deal with Apple for the iPhone.

"Consumers want cheap handsets, and [they're] an important piece of the competitive industry," Ford said.

He adding that carriers also need network control to meet customer's needs -- echoing comments made earlier this week by top U.S. carriers during the CTIA conference. Control of their networks offers carriers an incentive to develop better and more advanced applications in the competitive environment.

Yet critics of closed wireless networks have argued that greater innovation in applications would come about once networks were opened -- a position that U.S. carriers have also acknowledged as a possibility, although they cautioned that they would still have to enact some form of "protection" for their networks' infrastructure.

Ford added that reinstating Carterfone would also impact current wireless carrier programs around contract termination fees -- another issue that's currently pending before the FCC. The contract fees are directly tied to revenue streams that have historically kept device pricing low, he said.

While Ford asserted that unlocked phones would serve only a slim interest among consumers in the U.S., many carriers in Europe have long contended with a large and brisk market for unlocked phones, which have been the norm.

And some industry stakeholders may be willing to chance higher prices. Nokia, the world's largest mobile phone maker, is betting that unlocked mobile devices can find a willing audience in the U.S., despite the comparatively higher price tag carried by its new Nseries N85 phone.