Race is on for Mobile Web's pot of gold

Warming up to "consumer choice" is a new riff, to say the least. For years, both have pushed cheap, subsidized handsets to grow their wireless businesses; they penalized these same customers by imposing a raft of restrictions on devices and applications.

Meanwhile, Google has been trying to tell cell phone carriers how to run their wireless businesses and treat customers.

Who? While it's a monster in desktop Web searches, Google is just another widget on the handset in the mobile world - like Yahoo or e-mail. Google has no wireless experience or even a customer care unit.

Has the wireless world gone crazy?

The short answer: You bet.

Big profit potential is the driver. As the mobile Web gains traction, a big chunk of online revenue could migrate to wireless. That's financial catnip to players of all sizes, from wireless incumbents such as AT&T to wireless newcomers such as Google.

Consider online shopping. When the tally on this holiday season is finished, JupiterResearch estimates it will show consumers spent $39 billion buying online. Total online retail in 2007: $116 billion.

Companies that figure out how to corral mobile customers early could reap big rewards later, says Morgan Gillis, executive director of the LiMo Foundation, an industry group dedicated to creating a Linux-based operating system for mobile devices. "The opportunity is very substantial."

And growing all the time. The global population expands by three people a second, according to International Data Base, an arm of the U.S. Census. In the same second, 38 wireless devices will be sold. At that rate, within 24 months another billion devices will be added to the 2.5 billion currently in circulation.

Meantime, the "mobile Web" - shorthand for browsing the Internet with a mobile device - is gaining steam. Pushing the trend is a flood of new smartphones and other wireless devices that make surfing on the run a snap. "In five years, the wireless Internet will be bigger than the desktop Internet," predicts Rajeev Chand, a senior wireless analyst at Rutberg & Co., an investment bank in San Francisco.

Kevin Martin, chairman of the Federal Communications Commission, says the wireless explosion is very good for consumers, and for the United States overall.

To date, he notes, broadband providers have tended to focus on densely populated areas where they can turn a profit quickly. Rural markets have had to make do, sometimes for years, with slower broadband speeds. In some small markets, dialup is still the primary Internet access.

Martin says wireless-based broadband, cheaper and more efficient to deploy than traditional desktop broadband, can help bridge the gap. "The technology does provide the U.S. with an opportunity to significantly leap ahead in terms of broadband deployment," he says.

Pushing for customer freedom

Under Martin, the FCC has pushed the wireless industry for more customer freedom. With that goal in mind, it is requiring buyers in the upcoming spectrum auctions to use it for networks that let consumers use any device and application.

The FCC's rules apply only to services using these new airwaves, which is ideal for wireless broadband because of its ability to penetrate walls and other obstacles. The spectrum is being vacated by TV broadcasters as they go to all-digital transmission

Still, Martin says, it's a step in the right direction. "Consumers are going to reap a lot of those benefits," particularly if carriers extend those freedoms to other parts of their wireless businesses. "We hope (the spectrum auctions) will accelerate those kinds of changes."

Consultant Craig Settles, president of Successful.com, says the wireless evolution, given its current trajectory, will leave customers "with greater options and greater reliability. Your world will not be dictated by your (wireless) carrier or your hardware maker, which is where it is now."

With so much opportunity, companies are jockeying hard for pole positions.

Cut to the Android announcement. In November, Google announced plans to work with 33 companies on a Linux-based operating system called Android for mobile devices. The group's goal: to create "consumer choice" by making it easier for customers to use any wireless application they want. Google has invited developers to write applications for Android and made developer tools available free.

T-Mobile, a coalition member, says it will sell an Android-based device late this year. One of the first prototypes, by A La Mobile, based in San Ramon, Calif., is expected to be unveiled next week.

While "consumer choice" might be the coalition's mantra, Android has another, arguably higher, purpose for Google, says Jane Zweig, CEO of The Shosteck Group, which tracks the wireless industry.

"This is about extending Google's presence in people's lives under the guise that the wireless industry isn't providing an open environment" for applications, she says.

Charles Golvin, a senior wireless analyst at Forrester, agrees. "This is about Google getting access to consumers."

The Android announcement riveted the wireless world. Verizon Wireless, which has historically kept customers on a short leash, soon announced that it, too, would champion the cause of "consumer choice" by opening up its network to all compatible devices and applications.

Lowell McAdam, CEO of Verizon Wireless, says the move wasn't driven so much by Google as by the lure of profit. "We saw an opportunity for additional growth for the business that we weren't tapping into."

He says that Eric Schmidt, Google's CEO, recently invited Verizon to join the coalition. "We're still crawling through the data," he says. "We're impressed so far, but we're not ready to make that kind of leap."

One of Verizon's biggest concerns, he says, is "customer privacy." That's code for arguably the biggest bone of contention for U.S. cell phone carriers: the ad-based business model.

While PC users are accustomed to being blasted with banner ads and spam, he points out, cell phones have historically been off-limits to such tactics.

That's a problem for Google, whose survival hinges on growing ad-generated revenue, because its huge customer base is migrating to wireless. That's a universe in which the tech behemoth currently has no stake, or leverage, to speak of. By making it easy for wireless customers to access its services via Android, the tech giant is hoping to secure its future.

Google's insulated from customers

Google can well afford to test its ad theories in the wireless zone. It doesn't deal with customers directly, so it has no worry about complaints from cranky customers who object to their wireless devices being turned into mobile billboards.

Verizon and AT&T, on the other hand, have plenty to lose. Each has spent billions to build relationships with customers, with a hard focus on reducing "churn" - industry parlance for the number of people who dump their services each month.

After years of chipping away at it, Verizon has one of the lowest churn rates in the industry - just 1.3 percent. AT&T isn't far behind with 1.7 percent. For post-paid accounts, the rates are even better: 0.9 percent and 1.3 percent, respectively.

"When you build your reputation on a reliable experience, you don't want to surprise customers with something they don't want and don't expect," McAdam says. "Some people might argue that we are moving too slowly, but we have low churn and great customer loyalty, and we intend to keep it that way."

Ralph de la Vega, CEO of AT&T's wireless business, seconds that notion. "We are erring on the side of the customer, to make sure we don't make the handset just another advertising site for spam and other things."

AT&T's wireless customers already get access to Google - and any other application they want - on their cell phones, de la Vega notes. The freedom, he says, owes to the AT&T network's GSM technology, the standard in use by 85 percent of the world's wireless consumers.

As such, de la Vega says he's not so sure how Android will help AT&T's 67 million customers. "You can already use any application on our network, including Google," he says. "We don't prohibit it, or even police it."

Manageable searching

Dan Olschwang, CEO of JumpTap, a start-up that has developed a search engine and search-advertising platform for cellphones, says Google's biggest problem isn't the lack of an open operating system for mobile devices - it's Google's basic search algorithm, or how it searches. "They have to seriously overhaul it" to serve a mobile audience, he says.

For example, in the mobile Web world, "If somebody asks, "Where is the closest gas station?' they need that information now, and they don't need 20,000 results."

Olschwang's prediction: "I don't think they'll completely fail" in wireless, "but I don't think they will be nearly as successful as they are on the (desktop) Web."

Google declined to make executives available to be interviewed for this story. A founding member of its coalition, wireless provider T-Mobile, shed some light on its strategy, however.

Cole Brodman, T-Mobile's chief development officer, says Google's basic wireless goal is to use Android to better target ads to wireless customers so it can charge advertisers more.

By combining "unique information about consumers from the Web," he says, with "other information" from mobile devices, such as location, "Google believes search responses can be much more targeted for Google, and that the value they can bring back to advertisers can be quite a bit higher."

On the positive side for consumers, Brodman says, Android won't favor Google over Yahoo and other search-engine rivals. He says consumers also can "opt out" of Google's "cookies," used to track their movements on the Web.

Regardless of what happens with Android, Brodman says, T-Mobile won't blanket its customers with advertisements from Google or any other company.

"Mobile phones are personal and private, and we want to ensure that we are speaking for the consumer in terms of any advertising" that gets pitched their way, Brodman says. "Just getting blasted with search results and banner advertising is not something most consumers will accept."

It remains to be seen if Android will become a monster success or a monumental flop. Regardless, Brodman says T-Mobile thinks there's a lot of value to having a front-row seat on the strategy and thinking of the world's biggest search engine.

"For us, the choice was to be a part of (the Google coalition) or watch it happen," Brodman says. "We chose to be a part of it."