In 2006, the Digital Millennium Copyright Act (DMCA) created a legal provision that allowed for the “unlocking” of mobile phones, making it legal to move mobile phones from one network to another.

Matt Bancroft

In 2007, federal and state lawsuits accused AT&T and Apple of unfair business practices and violation of antitrust laws; the lawsuits allege that they are constraining consumer choice by not allowing users to unlock their iPhones and move to another network provider. This may have catalyzed Apple’s October announcement that it will enable third-party applications to run natively on the iPhone.

More recently, part of the FCC’s order mandating the upcoming U.S. 700 MHz spectrum auction specified an “open platform and application” requirement as part of the service rules for a portion of the spectrum being auctioned. This was seen as good news by potential newcomers to the mobile services space such as Google, which is bidding in the auction.

These are examples of some of the ongoing battles in the open-access war, as consumers and regulators advocate for flexibility in mobile device and service options, and as mobile operators update their commercial models to meet the needs of a rapidly changing and increasingly competitive market climate.

OPEN-ACCESS PROS & CONS

Mandating that mobile operators offer open-access services is a path that can provide benefits, both to the consumer and the operator, but there are significant issues as well.

In return for subsidizing the cost of free or discounted phones with predetermined service plans and specific feature and application packages, many mobile operators lock the phones to their network and receive an exclusive long-term contract commitment from the consumers. They also may limit subscriber choice in other ways, for example, by limiting the services and applications that can be used on the device to those available through their portal.

In this model, which includes penalties for breaking these 1- or 2-year contracts, customers are unlikely to switch operators in the middle of a contract, regardless of their support or service experience. The perception among many consumers is that the locked model encourages mobile operators to concentrate on new sales rather than on support, new services or quality of service for existing customers.

Mobile operators that offer unlocked handsets give consumers greater flexibility in choosing devices and capabilities, but lose the security associated with “locking in” the customer. In addition, the subscriber is likely to pay a significantly higher price for the handset in return for the freedom that being “unlocked” brings. This open-access model tends to force competition based on service offerings, network quality and customer support and service experience rather than on phone capabilities and price. This model also may provide more opportunities for operators to drive up service usage and individual average revenue per user (ARPU) by offering a broader and more compelling set of services and capabilities on a broad range of devices.

PUSHING TOWARD OPENNESS

The U.S. mobile market is becoming saturated, forcing mobile operators to look at new strategies for stimulating revenue growth. Many of these strategies — from attracting customers from competitors (who now want to bring their phones with them) and “lower value” customers (who won’t purchase 2-year contracts), to broadening service and application offerings to include a wide array of third-party products designed to generate new incremental revenue streams — are likely to lead to more open business models.

In addition, consumers are demanding more openness. As their mobile devices become less like phones and more like portable computers, it is difficult for many consumers to understand why they shouldn’t be able to use their mobile devices on whatever network they choose, or access the best and most relevant applications and services out there, wherever they are.

It may be that we’re at a turning point. Verizon Wireless just announced that it will be opening up access to its network in 2008, introducing an option for its customers that will enable them to use devices, software and applications not offered by the company on its network. And AT&T just announced that customers can run any device or application from any maker on its network.

OPPORTUNITY OR CHALLENGE?

In Europe and other parts of the world, markets are significantly more “open” than in the United States. Mobile operators and service providers are forced to attract (and retain) customers by providing compelling service offerings and a superior service experience. Yes, the transition to these models met with resistance — it is always difficult to move away from a known and time-tested recipe. Many of these operators have been able to capitalize on the opportunity, increasing ARPU and margins, especially from data revenues.

Recent events seem to indicate that open access is inevitable in the United States as well. Forward-looking operators will manage this change and find ways to capitalize on more open commercial models that can deliver higher revenues and margins. Handsets and services tailored to subscriber needs will naturally lead to improvements in ARPU, customer satisfaction and, ultimately, customer retention.

Bancroft is chief marketing officer of Mformation.