The recent high-profile launch of Google’s open Android mobile platform, coupled with evolving requirements in the U.S. 700-MHz spectrum auctions for open access, will dramatically alter the mobile industry as we know it. Traditionally, mobile devices have been tightly tied to a particular mobile network. All devices had to be approved by the provider through a long, arduous “black box process” before they were allowed on the carrier’s network.

Stewart Taylor

Tightly coupling the device and platform to the network served mobile operators well:

• Brand Identification – Consumers associated the device with the mobile provider.
• Switching Costs – Contracts made it harder for consumers to leave.
• Product Differentiation – Exclusive offers for trendy devices (e.g., RAZR, iPhone).
• New Revenue Sources – High-margin services, such as ringtones, available only from operators.

It was also a beneficial model for consumers, who enjoyed heavily subsidized devices that were guaranteed to work and be supported. The move to more open platforms and increasing customer demand for new and popular devices, however, are making many mobile operators nervous about their future.

Falling Walls, Rising Opportunities
The erosion of the traditional “walled-garden” world will fundamentally change the operators’ business and their relationships with customers. Operators want to know what they can do to mitigate these risks. Progressive operators recognize that this new world presents a range of exciting opportunities:

• Break the “Subsidization Drug” – Save the $200 or more per device used to subsidize handsets in order to attract customers.
• Cut Customer Support Costs – Offload the majority of customer service calls to device and solution providers.
• Grow Devices on the Network – With high subscriber penetration in most markets, encouraging growth of non-voice traffic will be essential.
• Increase Network Efficiencies – More devices will result in higher network use and improved ROIs on huge capital investments.

While the move to an open mobile world offers extraordinary new opportunities, the falling walls pose real risks and challenges to operators’ revenue growth and continued healthy margins. Decoupling devices from the network threatens to relegate the operator to a “dumb pipe” as one of their key means of differentiation is removed. Equally, reduced customer stickiness could result in much higher customer churn, coupled with lost revenue from high-margin walled-garden services.

Succeeding in an Open World
Mobile operators can embrace the opportunities presented by an open world while mitigating the risks that it poses to their business. Mobile operators can employ a number of strategies to manage the challenges to their current business:

1. Fight commoditization by seeking new levels of customer interaction, investing in network and service quality and aggregating content and services that enhance customer experience.
2. Avoid declining ARPU by taking advantage of new economics that allow you to invest the savings in strategies and services and increasing collaboration with third parties.
3. Battle churn through loyalty programs, continuing the use of contracts and developing creative offers.

The walls are beginning to topple. At first glance, this may seem to threaten the closed world that operators currently enjoy. On closer examination, a number of new and exciting opportunities are opening up to mobile operators. Of course, these do present some risks and challenges, but by employing a number of key strategies, operators can successfully manage these risks and partake in the lucrative opportunities that await them in this next phase of the mobile world.

Taylor leads the North American Mobile segment within the Cisco Systems Internet Business Solutions Group (IBSG).