Focus: C Block auction should unlock Apple's iPhone--is that a good thing?

NEW YORK, Feb 16, 2008 (Thomson Financial via COMTEX) -- T | news | PowerRating | PR Charts -- The wireless industry is hurtling toward a world where, very soon, at least one wireless carrier will allow its customers to use any cell phone they want, and download any Web applications onto their handsets.

When that day comes, industry experts say, consumers may not be the only ones affected by the openness in a big section of U.S. airwaves. The open spectrum, or C Block, might also offer Apple Inc. an escape hatch from its five-year revenue-sharing agreement with AT&T Inc.'s AT&T Wireless. Whether or not freeing itself from the AT&T deal will help the iPhone keep its competitiveness or mystique in a market awash with other "cool" devices is less certain.

Although Apple enjoys the subscription revenue it receives from AT&T as part of their deal, "the demand they've seen and the barriers the carrier exclusivity represents is something they've got to be ambivalent about," industry analyst Greg Sterling of Sterling Market Intelligence told Thomson Financial News.

That ambivalence may not last much longer. In Feb. 2009, analog TV will pass the reins for the 700 MHz band spectrum to the wireless phone industry. Top wireless players are bidding billions of dollars to control licenses to the valuable upper band known as the C Block in a federal auction that's expected to end soon.

"AT&T is interested in the spectrum," said Nadine Manjaro, senior analyst for wireless infrastructure at ABI Research. Other analysts have also singled out AT&T as a C Block spectrum bidder, and recent reports say the company has lobbied the federal government on the spectrum auctions.

Among the rules governing the C Block swath is that whoever buys the band must allow customers, device manufacturers and application developers to use any device or application they choose on its networks. The Federal Communications Commission also requires the C Block licensee to publish its technical standards for anyone interested in using or developing products for use on its networks.

Although AT&T may benefit from customer additions in rural areas if it wins part of the C Block, that might be offset by Apple iPhone customer losses, ABI's Manjaro said. "If there's no reason to switch carriers in order to get the iPhone, AT&T loses the advantage of exclusivity."

If AT&T buys all or part of the C block and its iPhone agreement were voided by the openness rules, then Apple would be able to tap pent-up demand for iPhones from non-AT&T customers, said Sterling.

"Apple wants this product to become the iPod of handsets. The more distribution they get is ultimately better for them because if this is the platform everyone writes for, it could move into the dominant position that the iPod has had," Sterling added. "Clearly Apple would want to make their device to work on the C block, but it may be a contractual issue that hinders it."

"The irony would be," Sterling said, "it would be Apple's way of getting out from exclusivity," he said.

"If it's open access," Manjaro said, "then as Apple is selling its iPhone on the open market, technically AT&T won't have that exclusivity with Apple."

AT&T and Apple declined to comment, citing the FCC's anti-collusion rules regarding the auction.

Open availability might seem good for Apple, but unleashing the iPhone onto an open marketplace elicits a variety of predictions about how it would fare.

"The iPhone is a more interesting case, because there has been huge demand for it, and 25% of the phones were sold (to customers) that didn't have relationship with AT&T," Sterling said.

While Sterling sees AT&T's exclusivity agreement with Apple preventing the iPhone from becoming the next iPod, Manjaro thinks lifting the floodgates will make the iPhone too ubiquitous.

"Phones will have to be made that work on the spectrum, a new generation of phones -- Nokia, Kindle, iPod Touch -- can be made technically compatible," Sterling said.

So far, Apple has done a good job of marketing the phone so that it wouldn't become too commonplace, Manjaro said. But as companies come along and copy it, competition will be Apple's biggest challenge.

"Everybody knows this Apple thing isn't going to last," Manjaro said. "I think it will water down their popularity."

One observer doesn't see the C Block openness as a significant threat to the iPhone. "Eventually the answer is yes, Apple may want to get on more bands," said Andy Castonguay, director of consumer research for the Yankee Group, a Boston-based industry analysis and advisory firm said. "You need the brand identity that Apple has, not a lot of companies have that clout."

Smaller companies will have to come up with exceptional devices that adhere to technical standards and generate the commercial buzz with consumers, he told Thomson Financial News.

"This is a volume business," Castonguay said. "If you can't drive volume into the millions, most of these devices aren't going to be profitable."

To be sure, open access will will change business models for more than just AT&T and Apple, Manjaro predicts.

For instance, the agreement model will go away. Many carriers subsidize the cost of phones to customers, and in turn, lock them into a 2-year service agreement.

Carriers may lose their ability to tie customers into a contract once they are able to buy a phone anywhere, from anyone. "If I can get my device off eBay for $99 without changing plans or locking into a 2-year contract, I can jump on any network," Manjaro said.

Manjaro predicts that openness will affect the customer churn rates for carriers. "It will increase because customers won't be willing to sign contracts. Numbers will be more difficult to predict."

Ad hoc usage will increase too. Customers looking to use Wimax or 4G networks can pay one-time access fees using their credit cards without having to lock into a long-term contract.

Verizon Communications' Verizon Wireless previously only allowed customers to use phones they approved, but eventually dropped its "walled garden" strategy and joined Google Inc.'s open handset alliance, which allows third-party businesses to create new technologies that would enhance its data offerings.

"Google is going to be more active, more innovative, and carriers are reaching a capacity for how much data they can offer," Manjaro said. "Whoever gets this network for $5 billion or $6 billion, will have to invest in technology. They need to find ways to recoup that money, so companies are looking at their architecture to see what they can do, services that customers will pay extra for, video, music and so on."

That means increased competition for established handset makers, and new ones like Apple, because it invites developers to make cooler, more advanced phones, and gives consumers greater choice.

Thanks to Google's lobbying efforts and the Internet giants' auction bid, which triggered the openness provision, its Android platform and the open-handset alliance stand a chance at gaining critical mass in the mobile Internet market.

If Google is still interested, as the auction nears a close. Michelle Rama tk1

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