Telecom: Dumb-pipe dreams

Profits from high-value services are down, but wireless providers are adapting.

It was a scene that the Wesleyan Methodist congregation of Toronto’s Berkeley Church, last convened in the 1950s, likely never envisioned. Bathed in red light, Amy Hixson strutted over where clergymen must once have delivered fiery sermons on the importance of chastity before marriage. Sporting a leather bra, a waist clincher and shoulder pads adorned with chrome spikes, the lithe model resembled a dominatrix out to break a particularly vexed client.

Hixson also had a Blackberry strapped to her bare thigh: She was one of five models hired by Virgin Mobile Canada, the wireless telecom provider, to promote its latest products and services. Flanked by the models, new Virgin Mobile Canada CEO Robert Blumenthal, a 20-year veteran of the wireless industry, flipped a large mock switch, signifying the commissioning of a new wireless network that made it all possible.

Looking beyond Virgin’s provocative marketing, the balance of power in Canada’s wireless industry is shifting. A slew of new technologies are threatening to turn wireless network operators (notably Telus Mobility, Rogers Wireless — which, like Canadian Business, is owned by Rogers Communications — and Bell Mobility, which owns Virgin Mobile Canada) into “dumb pipes.” That’s an industry term for carriers relegated to transmitting large volumes of data, shut out of providing the value-added services that padded their income statements for years. If mobile carriers are not successful at managing this transition, they could find themselves bound and gagged by the harsh mistress of technological change.

For years, they have earned big margins largely by offering exclusive handsets at a substantial discount; in exchange, they have required customers to sign long-term contracts, which allows carriers to recoup their costs over time. The contract model also reduces churn — customers jumping from one provider to another.

Apple’s iPhone challenged this status quo. Thanks to its savvy at marketing directly to consumers, the company refused to enter exclusive partnerships with any one carrier. So while Rogers was first to offer the iPhone in Canada, today virtually every carrier sells it. Apple also controls services linked to the device to an unprecedented degree. The iPhone bypasses the wireless carrier’s offerings and links directly to Apple’s iTunes online store, where users can download wallpapers, purchase ring tones, and obtain the latest applications.

Now other devices threaten to further erode carriers’ control. Dirt-cheap handsets make the subsidized model unnecessary, while smartphones and tablet computers offer Internet access, which means users can now do virtually everything using third-party web applications. Most important perhaps is Skype, an application used for placing voice and video calls over the Internet, which effectively sidesteps the carrier’s voice service.

Blumenthal seems unperturbed by Skype or other Internet services. He points out that the network operators still get the data revenue. “Wireless is a measured service, whether you’re being charged for minutes or megabytes,” he says. “The implication is really moving what would normally be voice traffic over to data traffic.” The challenge is to make sure networks can accommodate that change in traffic patterns.

It’s not at all clear how much pricing power incumbents will enjoy, since new competitors are pushing down data prices. On the very day of Virgin Mobile’s fashion show, a new carrier, Mobilicity (formerly Dave Wireless), held its own press event across town. It has yet to launch, but promises unlimited voice and data plans. Wind, which launched early this year, already offers unlimited data for $35 a month — significantly less than the incumbent carriers.

Carriers could still thrive in a dumb-pipe world. But “it’s not a business for the faint of heart,” says Richard Smith, a professor at Simon Fraser University. “IP has to be perfect, but after that, we don’t care. We add our own devices, we add our own Skype, we do everything else. It’s scary for people who have made their business by distinguishing themselves with all kinds of add-ons.” Smith believes that to survive, Canada’s wireless carriers will have to become far more efficient and cope with razor-thin margins. “If you can make money as a dumb pipe,” he says, “then you’re really running a good business.’