FCC: The mobile crackdown cometh

Internet companies that want a piece of the telecom market are getting a sympathetic ear from federal regulators.

At an Aug. 27 hearing in Washington, the Federal Communications Commission signaled that it's preparing to scrutinize the data services and software available on the most sophisticated mobile phones and whether wireless carriers are inhibiting competition. The FCC will "look more broadly at all of the elements that affect the mobile marketplace," Chairman Julius Genachowski said during the meeting.

The FCC's statement is positive news for companies including Google, Vonage Holdings, and Skype, which want less fettered consumer access to their software and services that allow cheap or free phone calls over the Web. The regulations would also affect providers of other applications, such as mobile video. The FCC "is asking the right questions to maximize innovation across the wireless ecosystem," said Christopher Libertelli, a senior director at Skype, in a statement sent to BusinessWeek.com.

The FCC invited cell-phone software developers and companies that sell mobile-phone applications to submit comments about whether the carriers the agency regulates inhibit competition in the markets for smartphone software and related services. The commission may use the commentary to craft a new set of regulations for the wireless market, expected in 2010.

A more hands-on FCC?

The broadened scope of the FCC's inquiry—it hadn't previously invited mobile software developers and marketplace owners to submit comments—could mean additional regulation of data services by wireless service providers such as AT&T and Verizon Wireless. "The early indications are that there will be a little bit more hands-on activity at the FCC," says Ronald Gruia, a principal analyst at consultant Frost & Sullivan.

Software makers say the FCC is finally taking their complaints to heart. On July 31 the FCC began asking why Apple hasn't yet approved Google Voice software, used for making Internet phone calls, for inclusion in its iPhone App Store.

In August, Web-calling company Vonage said its iPhone app's approval has been delayed as well. "Apple identified one issue, stating that it is 'simple to fix,' " Vonage said in an Aug. 27 statement. "We've made the requested change and resubmitted the application for approval." Web-calling service provider Skype has complained to the FCC that U.S. service providers have been restricting its usage for months.

Ripe for regulation

The FCC is now expected to examine a range of what Web companies say is anticompetitive behavior by AT&T, Verizon Wireless, and Sprint Nextel. But mobile applications and data services will likely be the center of the commission's attention. "A lot of the focus will be on the applications," says David Farber, a professor at Carnegie Mellon University and former chief technologist at the FCC.

Here's why: Regulators may be hard-pressed to prove that other areas of concern by smaller wireless carriers, such as the exclusive iPhone deal between Apple and AT&T, impede competition. "I don't see how they can do it," says Harold Furchtgott-Roth, an economic consultant and former FCC commissioner. There are three to four carriers servicing any given market in the U.S., and small service providers such as MetroPCS (PCS) and Leap (LEAP) have grown quickly.

Apps and data services, meanwhile, represent a ripe area for new rules from Washington. The burgeoning mobile data market is largely unregulated, and small carriers such as Cellular South and consumer advocacy groups, including Public Knowledge, say the large carriers aren't allowing users to send e-mail and access the Web from phones using their services when traveling outside their home states. "Consumers are not getting the services they deserve," says Eric Graham, a vice-president at Cellular South. The FCC also provides little guidance on how wireless carriers need to break out data charges on consumer bills. Whether carriers have the right to block certain text messages is another issue of contention.

The gatekeeper debate

Use of data services is skyrocketing, which could serve as an impetus for reform as well. Back in 2005, wireless data services contributed only 7.5% of the carriers' total revenues, and much of that came from basic text-messaging. By the end of 2008, data services accounted for 22% of total revenues and reached $32.3 billion, according to the industry association CTIA.

As data services have gained momentum, they shifted some power away from carriers. Nowadays, Apple's App Store drives many people to use AT&T's network. The store offers more than 65,000 apps from thousands of independent developers.

Google has suggested that Apple now acts as a gatekeeper, deciding who gets access to wireless subscribers. While the FCC may not have the authority to regulate Apple, it may be able to tell carriers whether they can restrict or reject an application.

AT&T and other carriers argue that their networks' capacity is finite and that certain applications, such as Web-calling and video, may clog up those networks. Certain apps could also eat into their revenues, such as those that let users skirt international calling charges. The arguments are similar to those posed earlier in the so-called net neutrality debate, which centered on whether cable service providers had the right to hinder use of applications such as peer-to-peer video sharing on their networks.

Similar changes may be coming to the wireless market as well.

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