The New Wireless Playing Field

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The iPhone also provides proof of the burgeoning demand for mobile freedom in the way of so-called unlocked mobile devices. Such phones, common in Europe but rare in the U.S., can be purchased separately from a customer's wireless carrier, but used on that provider's network. At present, eBay's (EBAY) auction site lists several unlocked iPhones where the block on connecting the device to a Wi-Fi network without an AT&T cellular contract has been disabled. These unlocked iPhones are selling for as much as $800—a 33% premium to the list price.

"Openness and Freedom"

Nokia is pursuing the unlocked device market with increasing vigor, as well as other initiatives that appear likely to fuel friction with U.S. carriers over the coming years. The company recently began selling several of its high-end mobile devices through the Web sites of computer makers Dell (DELL) and Gateway (GTW), as well as other online retailers. And at the flagship stores Nokia has opened in the U.S. over the past year, there's been a significant increase in sales of unlocked devices, reports Nokia Vice-President Bill Plummer.

Similarly, online retailer PureMobile says it's been selling thousands of unlocked devices to North American consumers each month, tripling the company's revenues in the past year. This growing demand suggests carriers eventually may need to fork over extra cash for cell-phone makers to "lock" their wares if they hope to retain the current business model, says Michael Mahoney, senior managing director at investment manager Falcon Point Capital.

Nokia, which plans to create a new unit in January to support its increased emphasis on software and services, is also working to offer its own music, multimedia, and navigation services directly to end users. The company has made several acquisitions to pursue these plans, including a July 24 deal to buy Twango, an online photo and video-sharing Web site. "There's something very powerful taking place in the wireless market today," Nokia's Plummer says. "It's about the coming together of the Internet and mobility and consumer expectations. It's about openness and freedom."

Much Cheaper Service Possible

And then there's Google, which has made no secret of its mobile aspirations. The Internet powerhouse said on July 20 it might bid $4.6 billion for the wireless airwaves to be auctioned off in early 2008. If it wins, Google could build an alternative wholesale network on which multiple providers could offer free or cheap wireless service to users who agree to view Google ads and content, says Rich Nespola, CEO of consultancy TMNG Global (TMNG), where Google is a client (see BusinessWeek.com, 7/20/07, "Google May Bid Billions on Wireless"). The success of ad-supported offerings on the Internet suggests there are plenty of consumers who'd put up with ads if it means getting rid of that monthly cell bill of $50 or more.

Another wildcard threatening the cellular status quo is the proliferation of alternative wireless networks based on Wi-Fi and a longer-range related technology called WiMAX. "We see these [Wi-Fi] networks as being potentially very disruptive," says Stefan Weitz, director of planning for MSN at Microsoft (MSFT). On July 19, Microsoft announced it will serve up content and ads via Wi-Fi networks through a mobile marketing firm named JiWire. If the ad-supported approach succeeds, Wi-Fi network operators may drop the subscription fees for public hotspots offered by retailers and a growing number of cities. While Internet calling via Wi-Fi is hardly as convenient as using a cell phone, a free alternative might also stoke impatience with a monthly cell bill.

Fewer Fees

Carrier revenues from their cellular data networks, which have cost billions to upgrade, are threatened as well. Already, with the iPhone tied to the iTunes service, Apple has emerged as a mighty force in mobile content. And because the iPhone can connect to any provider's Wi-Fi network, Apple may eventually be able to push other applications and services onto subscribers' handsets without asking for AT&T's permission, suggests Richard Doherty, director of consultancy the Envisioneering Group. "The playing field has been changed," he says.

Other software and service providers are already charging users directly. Jajah, a provider of a Web-based phone calls, offers a cell-phone application that lets consumers avoid the astronomic fees that mobile carriers charge for dialing overseas numbers. The company says its customer base has doubled to 2 million users between November and March, with a third of them located in the U.S. Similarly, Sling Media allows consumers to bypass carrier charges for video content by enabling them to watch their home cable TV channels on high-end mobile phones.

"I don't see the carriers' walled garden lasting long-term," says Kevin Rose, founder of Digg.com, which recently launched a mobile version of its popular news aggregation site. "More and more people are going to demand the noncensored version of the Web."

Kharif is a writer for BusinessWeek.com in Portland, Ore.

With Jennifer L. Schenker in Paris