Telecoms and online companies set to do battle

Telecoms and online companies have entered the arena to compete over billions of dollars in revenue set to flood the mobile telephony market.

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Observing the world's biggest mobile telecommunications operators and major online companies circling each other at last week's Mobile World Congress in Barcelona was like watching the opening moves of a Spanish bullfight.

The two parties were sizing each other up in preparation for a grand battle over the billions of dollars of revenue to be poured into mobile telephony in the coming years. And it was hardly surprising - they have a great deal to fight about. The operators are growing increasingly angry after having spent billions of dollars building network infrastructure only to give free rein to application makers and online advertising giants such as Google and Yahoo.

"We have become a pipeline for the Googles and Apples of the world to use us, consume us and make money," said Naguib Sawiris, the chairman of Orascom Telecom, during a keynote speech at the congress. "We come to these conferences to listen to them and they say 'we're not going to pay you millions of dollars for your infrastructure'. They're practically telling us we're suckers." The chairman and chief executive of Google, Eric Schmidt, fired back, asserting that the search engine giant was "not trying to run roughshod" over telecoms operators or turn them into "dumb pipes". The term "dumb pipe" refers to an operator's network being used simply to transfer data between the customer's device and the internet. The use of the term "dumb" refers to the inability of the operator to add value for its customers beyond simple bandwidth and network speed.

"I feel very, very strongly that we depend on successful businesses for the operators globally, and I disagree that we are trying to turn the operators into dumb pipes," Mr Schmidt said. "We need advanced, sophisticated networks. We are not going to be investing in broad-scale infrastructure, we are going to have the operators do it." So what is the endgame here? Can the Googles and Apples kiss and make up with the global telecoms? Or will operators take matters into their own hands and enforce new pricing or revenue streams?

It has become clear that operators have become a "bottleneck" in providing innovation and value to customers, said Said Irfan, the regional research manager for telecoms for the consultancy IDC. "The reason that Google and Apple have been so successful compared to other platforms, or operators, is that they make it easy for people to make applications for them," Mr Irfan said. "Operators are really going to need to fix that internally if they want to add any sort of value to their customers."

The operators' main reaction so far has been to start thinking of limiting the amount of bandwidth mobile users have and to introduce tiered pricing and speed models to control the amount of traffic on their networks. While this business model will probably evolve, it is likely that it will eventually be blocked by Google. "Google plays the regulatory card very hard and eventually people will say 'you can't throttle [the mobile web]'," said Ameet Shah, the director of PRTM's regional telecoms practice.

"If you got offered a mobile package but, say, 20 websites are withheld and operators reserve the right to add or subtract sites as you go, I personally don't know if that's a compelling case for consumers." What Mr Shah believes will happen is "smart-pipe pricing", where nothing will be blocked or throttled on the mobile Web. But if Google wants to pay operators for a better quality of service, that would be an option, even if the charge gets passed down to consumers.

"If someone wants to go to YouTube and gets a better, high-definition video, I should be able to sell you more bandwidth," Mr Shah said. "I think this is a way that operators will find a way to charge Google but I don't think it will be as simple as you'd think." Mr Shah thinks that if Google keeps getting pushed around by carriers, it could take an unprecedented step and procure its own. Despite claims from Mr Schmidt that it does not want to get into the network building business, the company has US$24.4 billion (Dh89.62bn) of cash reserves and short-term investments, and no debt. It is possible that it could afford a significant stake in an operator such as AT&T or Vodafone in a few years.

"This would be relatively unconventional given current dynamics but [do] not rule it out," Mr Shah said. "The difficulty is that it polarises market dynamics because in theory, Google wants to be on every operator. But if these guys are able to break 'net neutrality', I could quite happily see Google re-evaluating that as they certainly have the capital to play." Net, or network, neutrality is the principle that if a given user pays for a certain level of internet access, and another user pays for the same level of access, then the two users should be able to connect to each other at the subscribed level of access.

One industry analyst has gone even further by suggesting that a neutral party, such as government, could step in and own telecoms networks and products. The services could be purchased by customers, much like buying stamps at the post office. A similar model is beginning to emerge in countries with a national broadband network, such as Australia and Singapore, and it could easily work for the mobile world, says the analyst, who declined to be named. "Duplication of the networks don't make sense any more. Who's providing the innovation and the services? It's not the network providers, it's the companies like Google and Skype."

Some, however, are less optimistic. Mr Sawiris provided a more humble perspective for his fellow telecoms operators last week, by suggesting that massive consolidation was inevitable. He added that the only way for the industry to survive was to pursue new revenue streams in the banking and healthcare markets. And maybe that is the more realistic outlook. Telecoms operators still make billions in profit just by letting people use their networks, and that windfall will continue.

"The operators still have a lot to say on this," said Marc Biosca, the regional head of the telecoms practice for the management consultancy AT Kearney. "Of course, they will need to be proactive and need to take action. If they don't move fast, then they will face some market pressures. "But I think operators have good assets to leverage - such as secure billing platforms, and customer usage and location information - which puts them in a good position to successfully defend themselves, and to even get their fair share into this new space."

The operators Telecommunications companies have spent billions of dollars building fast networks to accommodate growing internet and mobile demand. Although those companies have seen record profits and have shrugged off the economic downturn, they are feeling left out of the mobile applications market, where the big money is. The online camp Companies such as Google, Skype, Yahoo and Facebook not only dominate the internet, they are now beginning to take over the mobile world as well. Since customers are increasingly buying powerful smartphone devices, they also need innovative applications to get the best "bang for their bucks". While operators gain from people using applications over their network, they are left out of any potential online advertising revenue. The device makers If there is one company that telecoms operators quietly blame for their current predicament, it is Apple. The computer maker created nothing short of a mobile revolution when it introduced the iPhone in 2007, along with its App Store. Since then, other handset makers such as Research In Motion, Nokia and Samsung have followed in Apple's footsteps to create user-friendly and powerful mobile devices, while providing their customers with their own application store. Smartphone sales have increased 24 per cent during the past year, figures from the IT research company Gartner showed, and there are few signs that the sector is slowing down. A New Hope? Two dozen of the world's biggest telecoms companies announced last week that they would collaborate to produce an open applications platform. This model will allow consumers to take their applications with them whenever they change handsets. The idea is that media companies would have to build only one application for different handsets, while networks would get an undisclosed slice of the revenues.