AIR WAR
A Fight Over What You
Can Do on a Cellphone
Handset Makers Push
Free Features for Which
Carriers Want to Charge
By JESSICA E. VASCELLARO
June 14, 2007; Page A1
Wireless phone carriers and the makers of hand-held gadgets like the BlackBerry have long had a symbiotic relationship. Carriers sell the BlackBerry to subscribers, putting it in the hands of millions. In turn, the carriers get to charge their subscribers not just for voice but for pricier data service as well.
Now, a turf war is looming between the two camps, as lucrative new services such as video, games, and maps move onto mobile devices. Each camp wants to control the new offerings, and the gusher of revenue they could produce.
The war is already playing out over the popular BlackBerry. Its maker Research In Motion Ltd. wants to move beyond its core business market, so it designed a device with features like video and music players. RIM wanted to include an electronic map, too, to let users find directions. But it needed AT&T Inc., which sells BlackBerrys to consumers and provides wireless service, to agree that the new model launched earlier this year could include this mapping software.
AT&T said no. It wanted to offer its subscribers its own version of a map service, and charge them $9.99 a month.
"There's a battle for customer ownership," says Jim Balsillie, co-chief executive of RIM. "There is going to be a considerable reordering of the...food chain."
At stake for consumers are what services will be available on their mobile phones and whether they're free or cost a monthly fee. The wireless Web is taking off more slowly in America than overseas, and one reason is that U.S. carriers tightly control what applications are available on mobile devices. That's a contrast with Europe and parts of Asia, where carriers' control is less tight and where wireless services have been more broadly available for years.
Pressure is building for U.S. carriers to loosen their grip. The push comes in part from handset makers that want to make their devices more attractive by including a host of services and software applications. If the handset makers succeed, consumers could see a rise in the number of sophisticated applications available free.
For investors, at issue is who gets what share of the $15 billion-plus of revenue generated annually by mobile data services in the U.S. -- a market that is forecast to explode. Phone carriers want the revenue to offset declining revenue from their voice businesses.
Until recently, carriers and cellphone manufacturers didn't have much to fight over. The phones had few fancy features besides text messaging and cameras. But they're morphing into little computers, able to do such things as download music, stream video and surf the Web. Handset makers now include computer companies such as Hewlett-Packard Co. and Apple Inc.
The reason the carriers are in such a powerful position is that in the U.S., handset makers typically don't have direct relationships with consumers. Instead, carriers buy handsets in bulk from the likes of RIM, Nokia Corp. and Motorola Inc., reselling them to people who buy service plans. If carriers don't like a feature a handset maker has built in, they can simply refuse to buy it.
Manufacturers can sometimes overcome such resistance by having a product so sought-after that carriers don't want to say no. An example is the
iPhone, due out from Apple later this month. Apple leveraged the huge popularity of its iPod music player to get AT&T to sell consumers the
iPhone without also offering -- as AT&T had wanted to do -- the carrier's own line of games and ring tones.
The BlackBerry's great popularity has also sometimes let its maker flex its muscles. With nearly half the U.S. market for smart phones -- those that include features such as email and a Web browser -- RIM has been largely responsible for getting consumers to upgrade their cellphone service plans to data plans. These are more lucrative for carriers. Using this leverage, RIM has persuaded carriers to include some free features, such as instant-messaging, in BlackBerry models.
Handset makers also sometimes try to bypass the carriers' control by selling directly to consumers. But carriers' resistance to efforts to go around them can be fierce, for historical reasons. As the Web goes wireless, they want to prevent a repeat of what happened when the Internet first arose. They provided access to it, but the businesses that thrived were others, such as Amazon.com, that provided services over the Net. Carriers were reduced to what the industry calls "dumb pipes." To avoid that plight, wireless companies tightly control what services cellphone consumers can access, their cost and who displays what on cellphone screens.
The BlackBerry has long been a big money maker for the carriers. They first began buying the email devices in bulk and selling them to consumers in 2000, along with the data service plans for their use. There are about eight million BlackBerry subscribers world-wide now.
Competition soon arose.
Palm Inc. and Nokia also began making handsets with email as well as voice capability. On the software side, Microsoft Corp. offered an operating system to compete with the one RIM had built for the BlackBerry.
Mike Lazaridis, who had founded RIM in 1984 while a student in Ontario, decided BlackBerry needed a makeover to keep up its fast growth. Aiming to attract ordinary cellphone users, not just business customers, he set out a few years ago to turn it into a hip consumer device.
First, he asked engineers to make it smaller. They trimmed its battery size by 20% and developed a smaller keyboard. They gave it software that recognizes the words users are trying to type.
For navigating, the team added a trackball -- in effect a tiny, upside-down computer mouse. Mr. Lazaridis baptized this model the Pearl because that's what the translucent trackball vaguely resembled.
He asked RIM employees, who included hundreds of college students, to develop new applications. Within months, they designed music players, photo software, and instant-messaging software to send short text messages quickly.
Mr. Lazaridis encouraged outside software designers, too. A software company called Magmic Inc. developed Bplay, a Web site with ring tones and games that owners of the BlackBerry Pearl could download for a few dollars each.
Another company, Handmark Inc., developed software to let users get weather, sports and news alerts. And one called 30 Second Software produced software so users could send flowers, chocolates or books to a person on a user's contact list with a few clicks.
RIM wanted to have these types of services available on the Pearl when consumers bought it. The alternative was for users to find and download the software from Web sites, via the device's Internet browser. That system would greatly reduce the services' appeal. Many people wouldn't realize the services existed or would find downloading them too hard.
Carriers refused to include these features in the menu of icons users can click on. For example, RIM executives enjoyed using their own BlackBerrys to play games like Texas Hold 'em, which can be downloaded from the Bplay Web site that Magmic built. They talked to AT&T about including the Bplay games in the BlackBerry Pearl. Instead of agreeing to this, AT&T made some Bplay games available from its own virtual store, Media Mall.
Now users of the BlackBerry Pearl must pay a few dollars to download a game. The money is split between Magmic and AT&T. "The carriers want their own content store," says a Magmic vice president, Nicholas Reichenbach.
RIM also wanted to offer BlackBerry users a free search service for finding things like movie theaters, show times and restaurants. It spent months developing such a feature with InfoSpace Inc., according to an executive of that software company. The two companies talked about possibly splitting revenue from ads sold against the locater service among RIM, InfoSpace and a wireless phone carrier.
Again, carriers balked. Sprint Nextel Corp. felt such an ad-supported service would compete with its own local navigation service -- for which Sprint charges -- according to someone familiar with the matter. The result is that InfoSpace now is trying to get BlackBerry owners to use their Web browser to download the locater service from InfoSpace's Web site. Sprint Nextel declined to comment.
RIM's Mr. Balsillie says his company's role is to create phones that carriers want to sell, but the arguments over which features make it onto the devices can be frustrating.
RIM has scored some victories. AT&T, seeing the popularity of the BlackBerry Messenger instant-messaging service, agreed to let RIM make this a standard feature on the Pearl model. Before, AT&T customers with BlackBerrys could get the instant-messaging service only by downloading it from RIM's Web site.
Even without some of the features RIM wanted built in, the Pearl was a big success when it came out last September. Wireless carriers have sold nearly a million, analysts estimate, including overseas.
Other handset makers face similar issues. The carrier Verizon Wireless declined to offer its subscribers Apple's forthcoming
iPhone, according to people familiar with the matter. Verizon wanted it to include Verizon's own music and video service along with Apple's, an arrangement unacceptable to Apple. The joint owners of Verizon Wireless, Verizon Communications Inc. and Vodafone Group PLC, have been heavily marketing their music and video service for monthly fees. AT&T, by contrast, agreed to offer the
iPhone without putting in its own mobile Web and entertainment service.
Earlier this year Nokia and Motorola announced their own navigation and mapping services, using Global Positioning System technology to send directions, maps and local search information to cellphones. They're trying to go straight to consumers. Motorola plans to sell a tiny GPS receiver that lets consumers access maps and directions when it's placed near its newest phones. It will be available through wireless operators and on Motorola's Web site.
Nokia has begun selling a separate smart phone with navigation software through its U.S. Nokia stores, at other retailers and online. The Finnish company is one of the few handset makers that deal with U.S. consumers directly through their own stores. Consumers who buy a mobile device at retail must activate it by swapping in a service card from another phone they've bought. While the vast majority of phones in the U.S. are sold through wireless carriers, overseas many consumers buy phones and wireless service separately.
Seeking to get ahead of the pack, Motorola, Hewlett-Packard and Nokia want to build more handsets with WiFi technology. With this, a cellphone user could tap the Internet at any café, airport or home that has a WiFi "hot spot." Besides using it for smart phones' built-in Internet browsers, consumers could use the connection to make Internet phone calls.
That would be a threat to wireless carriers. Subscribers would be bypassing the carriers' networks for calls. Carriers have so far largely refused to sell WiFi phones for mainstream cellphone and smart-phone users. To date, carriers have agreed to sell only a few handset models with WiFi, to enterprises whose employees often work at locations like hospitals.
When Nokia wanted to bring a new wireless email device to the U.S. last year, AT&T insisted it remove the WiFi chip before AT&T would offer it to consumers. A Nokia sales executive, Todd Thayer, said the company will be less likely to strike that compromise in the future and will sell WiFi handsets directly in its stores. A spokeswoman for AT&T said the carrier will permit only those built-in features it thinks subscribers want.
WiFi technology could let owners of cellphones download songs and videos more rapidly, and use the devices in areas with weak cellular reception. For those reasons, RIM also wants to build WiFi technology into BlackBerry models, says RIM's co-CEO, Mr. Balsillie. RIM plans to launch a device with WiFi by the end of the year.
The Waterloo, Ontario, company isn't slowing its push into advanced services despite carriers' resistance. In March, it gave software companies access to the code underlying more applications for advanced BlackBerrys, to make it easier for them to build services tailored to the devices.
A company called QuickPlay Media Inc. plans to launch a service this summer that would allow users to download video content like music videos and sports highlights to BlackBerrys. QuickPlay saved months of development time by using the device's existing video player rather than creating its own. Having access to the software code also enabled QuickPlay, of Toronto, to create features such as being able to easily store and locate videos on the device.
Write to Jessica E. Vascellaro at
jessica.vascellaro@wsj.com
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