The Mobile Snatchers

By Mark Halper

Wi-fi changed the way the world surfs the web. Now it's coming to a phone near you -- and telecoms will never be the same.

When operations manager Spiros Stefanou learns that a flight coming into Athens International Airport is due in early, he picks up his mobile phone and alerts baggage handlers to scramble a crew quickly. Nothing unusual about that -- except that the Cisco-supplied handset that Stefanou and some 100 other airport employees use never touches a mobile network. Instead, it wirelessly taps into the airport's internal network, which transmits the call for free anywhere in the 16-sq-km airport. "It bypasses any mobile or telecom network," says Fotis Karonis, the airport's director of information technology and telecommunications. "It's an advantage, because you don't have to call with your mobile and pay." Using this system helps save airport workers as much as $163,000 per year.

It might seem like little more than the reinvention of the walkie-talkie, but Stefanou and Karonis are on the cusp of a movement that could be called The Invasion of the Mobile Snatchers. Ever since the beginning of commercial cell-phone services some two decades ago, mobile phones and mobile operators have gone together like railroad cars and railroad tracks. Handset vendors such as Nokia and Motorola provided about 2 billion phones to mobile operators like Vodafone, Orange and Verizon, which in turn put them in the hands of consumers who pay to transmit calls over the operators' mobile networks. Indeed, many operators subsidized the handset business, picking up the cost of the phones as a loss leader that would be more than made up by charging consumers for use.

But after all that cooperation, something radical is happening. Handset vendors are starting to build Internet technologies into their phones that permit users like Stefanou to bypass mobile networks. The same wi-fi chips that have worked their way into laptops and turned tens of thousands of coffee shops and hotel lounges into Internet surfing zones are starting to appear in handsets. Customers using this phone simply place a call as normal, provided they have access to a wi-fi zone.

This lets them do an end run around the mobile network. The lines between Internet service and phone service are blurring, and just as voice over Internet Protocol (VoIP) has shaken up the fixed-line phone business, it is now poised to disrupt the mobile business. At stake is a slice of the $550 billion in voice revenue that London research firm Informa Telecoms & Media says mobile operators will generate in

2010. The revelation in August that Google will begin providing free voice transmissions over computers, and Microsoft's announced acquisition last week of the VoIP start-up Teleo, show that the biggest tech players are not going to sit this game out.

For some companies, that will be liberating. "Making calls from a mobile handset is no longer the preserve of just the mobile operator," says Ryan Jarvis, head of convergence products for British mobile and fixed-line provider BT. Because BT only recently entered into the mobile-service business, it has been among the first of the old-line telecoms to cautiously embrace mobile VoIP. Since June, BT has started

400 of its home broadband customers on Fusion, a Motorola-supplied phone that makes cheap Internet Protocol (IP) calls from home and switches to pricier mobile transmission outside the house. It's still a fledgling technology, because the phones use Bluetooth to make an IP connection, which limits the range in which supercheap calls can be made.

But things should get more interesting in 2006, when BT and other providers add hybrid wi-fi/cellular phones. At least four of the largest mobile-handset vendors -- Nokia, Motorola, Samsung and LG -- are known to be preparing such devices, which will bring wi-fi phoning more into the mainstream. "2006 will be a big year for [mobile] wi-fi," pred icts Nokia senior vice president Ilkka Raiskinen, noting that wi-fi will become a standard feature in Nokia's multimedia and business phones next year, and that by 2006 Nokia will put it into many midrange models (it currently offers wi-fi only in an $800 phone called the 9500 Communicator).

At handset maker Motorola, chief strategy officer Richard Nottenberg echoes Nokia's views, and pledges that Motorola will next year introduce a "significant" number of wi-fi phones. Indeed, Motorola has made a deal with the company that many phone firms associate with the Devil; its mix of products next year is expected to include a phone loaded with software from Luxembourg-based VoIP firm Skype, whose users can make free VoIP calls to each other. Skype has signed up 51 million "registered" users of its software, though probably less than half of those actually use it. Many Skype users call from their PCs, laptops and handheld devices via fixed or wi-fi-accessed broadband lines. "Five years from now, most calls, everywhere in the world, will be routed over the Internet, [via] affordable, cell-phone-like products that are Skype- and Internet-enabled," predicts Skype ceo Niklas Zennström.

In these early days of mobile VoIP, analysts find it difficult to quantify its potential impact. But many expect a shakeup. "Can carriers, either wireless or wireline, prevent its spread? The answer is no,'' says Allen Nogee of research firm In-Stat. The company forecasts that global shipments of mobile phones with wi-fi will hit

13.5 million in 2007, leap to 52.8 million in 2008, and surge to 136 million by 2010 -- probably a conservative estimate. And it's not just voice calls that are under threat. As phones morph into data and entertainment devices, wi-fi chips will also permit phone users to browse the Web and download music without coming near a mobile network.

Nokia, for instance, is building wi-fi into its N91, a slick, music-playing phone capable of storing 3,000 songs, due by the end of the year. Wi-fi and other Net connections also threaten operators' profitable text-messaging business, because users can send IP-based "instant messages" instead. Of course, mobile operators will not sit idly by. Some will point out that wi-fi phones have short battery life and poor wandering capabilities. Mobile operators are also requesting that handset makers like Nokia and Motorola build into their hybrid phones a technology that will route wi-fi-initiated calls over mobile networks. And then there's the ultimate weapon: price cuts, which could make the underlying technology irrelevant. "At the end of the day, it's a pricing game," notes Gartner analyst Martin Gutberlet in Munich. Many mobile operators, for example, now provide virtually free intra-office calls. This fall, several will offer free calls that stay on the operator's own network within a country, says Gutberlet.

But eventually, most operators will be forced to join the VoIP revolution. Some already run wi-fi hot spots; in France, Orange subscribers can tap the Net with laptops and other devices, so adding VoIP phones to its portfolio could help the company hold onto at least some voice revenue. Germany's third largest operator, E-Plus, last week said that it will include Skype software as part of its flat-rate

40-per-month data-card subscription for use on laptops, starting in October. "In the long term, as part of an evolution, we'll go to VoIP-enabled over the phone," concedes Dave Williams, chief technology officer at O2. Like the planes in Athens, mobile VoIP looks set to take off, and woe to any carrier that stays on the runway.

Copyright 2005 TIME Magazine.

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