Mobile data: Can carriers ride the wave?

Data-centric smartphones are gaining popularity with consumers but can carriers keep up with the demands these data-centric devices place on the network?

The year that is coming to a close will likely go down as the year of the smartphone. Apple's iPhone 3G was just named as the top-selling consumer handset in the third quarter, according to the NPD Group, passing the Motorola RAZR, which had been atop the heap for twelve straight quarters. According to Ross Rubin, NPD's director of industry analysis, it was the first time a smartphone had topped the list. 

The changing of the guard offers a window into where the industry is going. Carriers are bringing more smartphones to market, and, in turn, those data-heavy devices that make searching the web, sending email, playing games and browsing social networking sites easy are causing a big increase in data usage. This trend brings both promise and peril for the carriers, according to industry analysts.  

Perhaps lost in the flurry of stories about the drop in AT&T Mobility's margins because of the costs incurred from subsidizing the iPhone was the fact that the carrier's data revenue spiked 50.5 percent compared to the third quarter of 2007 to $2.7 billion. Likewise, Verizon Wireless' data revenue ballooned 42.5 percent over the prior year, to $2.8 billion. Both Sprint Nextel and T-Mobile USA said data revenues contributed strongly to post-paid ARPU in the third quarter.

But much of that data, and much of the revenue, leads back to the handset. And while the iPhone has become as ubiquitous an example for how smartphones are changing the wireless landscape, it is not the only factor at play, just the most-hyped.

According to ComScore M:Metrics' analysis of data use during the three-month average ending in August 2008, more than 18 million mobile subscribers accessed a web search on their phones, and of those 8 million were smartphone users. While ComScore measured spikes in email usage from mobile phones and growth in browser downloads since the debut of the iPhone 3G this past July, the trend toward smartphones and data-heavy applications was accelerating even before the iPhone became a phenomenon.

"The iPhone jumped to the front a parade that was already well in progress," said Mark Donovan, a senior analyst with ComScore.

Frank Dickson, the co-founder and chief research officer for the consultancy Multimedia Intelligence, said the company that really started the trend is Research In Motion, going back to 2007. However, Apple changed the dynamic. "I think one of the things that Apple probably did a lot more than RIM is really take that whole smartphone-type concept and instead of focusing on an enterprise user, really focused on making that handset friendly for a consumer market," Dickson said. "And what we're seeing now is what was once the realm of enterprise is the realm of consumers."     

Both Donovan and Dickson agreed that there are a collection of different players influencing the way the mobile data market goes forward. There are the incumbent handset makers such as Nokia; insurgent device makers such as Apple and RIM; software companies such as Microsoft; and Internet-based firms like Google that provision services. 

"I don't think anyone is acting in concert," Donovan said. "Each of these companies are trying to stay on their own strategy and box out what they see as competition from other platforms."

What is the upshot for the carriers? The answer is complicated. "It's certainly a mixed bag for a carrier perspective. They use a lot [applications from third parties found in places like Apple's App Store or Google's Android Market]," Donovan said. "The flipside of that coin is that it's not a one-company town any more in terms of where you're going to buy your games or your applications."

Dickson agreed, adding that the carriers have yet to fully understand the ramifications increased data usage will have on their networks. "If people use the phone as a peer-to-peer service that becomes scary...It could crush the networks."

But some are confident that as mobile data volume grows, carriers will recognize the potential network traffic issues. Randy Fuller, vice president of business development at Camiant, says that the big question is what can operators do about this problem? 

Fuller said operators have a few options. They can use pricing plans to discourage heavy data users with smartphones from buying plans that will not fit their needs; institute soft usage caps that penalize users; or institute solutions that deal with congestion, and slow down some users' connection who are hogging data so that the rest of those on the network do not suffer.

"I would say that like any industry there are people out in front and there are the laggards. By and large because mobile operators have never had to deal with the open Internet, I would say congestion and network use is going to be a problem before the really good controls are put in place," he said.

The net result is that operators will receive more complaints from people who say the network is not operating as fast as it could. "I can't imagine mobile operators can put the genie back in the bottle," Fuller said.

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