Traditionally, the mobile services market is considered two-sided — on one side, the subscriber pays to the mobile operator for access and content and on the other side the operator pays a percentage of content revenue to the content provider, and charges the content provider for access to the network.

There are strong network effects between content and network access service in this market due to the complementarities between the two. Since mobile access network is an essential facility, the mobile operator, who stands tall in the middle of the two-sided market, often holds a supreme position and protects turf — in what is also referred to as the “walled garden” approach.

This is often felt in markets where high-end smartphones are bundled with two-three years of service agreement and sold by the mobile operator. In a classic case of restrictive practices, AT&T, the US mobile service provider, which bundles iPhone 3G handsets along with its access service, put restrictions on running iPhone applications such as Sling Player and Skype on its 3G network.

Competition in access services, including policies such as Mobile Number Portability, dissuades such practices by operators to some extent. Meanwhile, technology innovations, especially by the Internet companies, are posing a great threat to mobile operators worldwide.

In 2009, Google, after acquiring Grand Central, a phone management service company, launched Google Voice Number that can act as a master phone number. This bypassed the operator and enabled Google to provide its subscribers with advanced voice services with its own provisioned number. However, the service failed to catch the attention of users as it might have been ahead of its time or due to still evolving Cloud technologies or that it addressed voice-only service.

However, the latest development in embedded Subscriber Identification Module (SIM) and integration of SMSs on Facebook has opened up new possibilities that could rock the walled gardens of the operators. Apple has been working on a project on a special SIM that would be integrated into the iPhone motherboard and will enable users to buy a handset online and activate it for a range of networks through its App Store.

Apple has filed a patent called ‘dynamic carrier selection' that would allow Apple to establish an optimal communication link with a network operator for each voice or data call dynamically. The criterion for selection may be price, quality of services or it can even be based on dynamic bids of bandwidth prices received from the network operators.

In this vertical integration, Apple would buy the minutes and megabytes from carriers wholesale, and pass them on to users. This would take the service provider out of the phone retail game by giving the user a choice of operator on purchase.

This patent may hold the key to the evolving changes in consumer usage pattern, such as data-intensive downloads, diversity of applications including mobile entertainment and enterprise mobility, and usage of smarter phones and tablet devices. This will also obviate operators from blocking or slowing down certain applications, violating Net Neutrality principles. It also removes dependency of the user on the coverage areas of the operators for applications access and associated roaming and related charges.

Net neutrality

In another interesting development, Face Book is to provide SMS as Instant Messages (IMs). Bulk mobile advertising and telemarketing messages can now be pushed as IMs over the Internet to FaceBook users, totally bypassing mobile networks of the telecom companies that often earn substantial portion of the revenue from such bulk SMSs.

However, it poses an important regulatory question and a dilemma for Net Neutrality proponents who have been criticising vertical integration of operators and content providers. What if Apple, having integrated the device, application and access service taking the role of a Mobile Virtual Network Operator (MVNO) plays an unfair game to the detriment of the customer? However, if there are many such MVNOs, then the content developer markets will be appropriately segmented to suit the needs of each.

Last December, in a partial nod to Net Neutrality and to the satisfaction of mobile operators, the Federal Communications Commission (FCC) in the US ruled that wireless service is different and still evolving compared with wire-line services and hence laid down lenient rules regarding blocking, prioritising and pricing of content. The above developments indicate that innovations continue to happen in the Internet and content world, and mobile operators cannot be content with the FCC ruling. They either embrace the developments and become part of the eco system or continue to innovate to provide better value to customers. Can customers finally become kings, having absolute discretion to choose the service they need at good prices and of adequate quality?

The Telecom Regulatory Authority of India issued the Telecom Commercial Communications Customer Preference Regulation, 2010 in December last year to provide an effective mechanism for curbing unsolicited commercial communications. However, due to the slow preparedness of the operators, the above regulation is still to see the light of the day. Can the Internet world come up with an effective solution so that we can at least avoid hearing pesky telemarketer calls and receiving bulk SMSs?

The authors are with Sasken Communication Technologies. Views are personal.

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