Google, Apple lead Silicon Valley in taking initiative, loosening controls in wireless world

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Silicon Valley takes helm in wireless world

BARCELONA, Spain — Silicon Valley is looking like a winner in the tug-of-war with wireless carriers over who will control the new world of Internet-connected phones.

The tension between the largely U.S.-based PC and Internet industry and the world’s wireless carriers was palpable this week at the world’s largest cell phone trade show, Mobile World Congress. Google Inc. was one of the headliners, and Apple Inc. was the ghost hovering over it all. While many wireless carriers are cooperating or working with Google and Apple, many are also signaling that they don’t want to cede power and be reduced to simple utilities.

For consumers, the reduced power of wireless carriers could mean more choices. Traditionally the network operators tried to limit the content people could access on their devices, before the rise of “app stores” and Web-based services dramatically expanded ways for us to customize our phones.

On the other hand, Internet companies such as Google might crowd out other services, the way it already dominates Web searches.

Phones are becoming more sophisticated and wireless Internet access is spreading across the globe. These trends play directly to Silicon Valley’s strengths in software and the Internet. Meanwhile, voice service, the mainstay of the wireless carriers, is becoming less lucrative and less important.

Carriers are losing control over other phone functions as well. Ringtones are one example: Wireless network operators used to pull in hundreds of millions of dollars a year selling those in the U.S. alone. But sales are declining as smarter phones allow their owners to use their own audio snippets as ringtones, bypassing the carriers.

Advertising keyed to Web searches is a small but growing business, and one Google dominates, along with Yahoo Inc. and Microsoft Corp. This worries the CEO of British-based Vodafone Group PLC, part owner of Verizon Wireless and one of the largest carriers in the world. Vittorio Colao said in a speech at the show that regulators such as the U.S. Federal Communications Commission should examine Google’s power over this market and see whether more competition is needed.

Sales of downloadable programs known as applications for smart phones are also growing — and forcing carriers to struggle to stay relevant. When Apple took skills honed in the computer industry to create the iconic iPhone, it also created an application store where it gets a 30 percent cut of the sales, and the carrier gets nothing. Google has followed the same path with its application store for phones that run the Android software it’s created.

Two dozen of the world’s largest wireless carriers struck back at the show, announcing that they would create a “Wholesale Applications Community.” The idea is that software developers will write their applications once, following a standard set by the community, which can then distribute them to carrier-run applications stores across the world.

U.S. carriers Verizon Wireless, AT&T Inc., Sprint Nextel Corp. and T-Mobile USA are part of the group, which has 3 billion customers globally. Phone makers LG Electronics Inc., Samsung Electronics Co. and Sony Ericsson, none of which have significant applications stores, also said they would support the group. It remains to be seen whether it will have a significant impact.

Google CEO Eric Schmidt gave a keynote speech that emphasized how important the mobile market is to Google. Afterward, an audience member told him it appears Google wants to turn carriers into “dumb data pipes” — simple conduits to the Internet that don’t get to sell any added services. How will carriers afford to upgrade their networks to increase data capacity if they can’t be “intelligent pipes?” he wondered.

Schmidt acknowledged that wireless carriers have to invest in network upgrades in order for them to profit from increased data usage.

“But I can assure you that you will get that money back in many, many ways,” Schmidt said.

While some carriers are indicating that they won’t go gently into that dumb pipe, they also want to keep their customers happy. They may not like Apple’s terms, but they can’t afford to pass up the chance to sell the iPhone. At AT&T Inc., iPhone customers pay about twice as much in monthly service fees as other phone users.

Skype, the Internet-based calling and videoconferencing service, has complained for years that carriers have locked it out of cellular broadband networks, restricting Skype applications to working when the customer is in a Wi-Fi hot spot. But at the show, Verizon Wireless announced that it’s working with Skype to enable Skype calls over its cellular network for BlackBerry and Android phones by March. That means free calls between Skype users, as long as the phones have data plans — exactly the sort of thing the industry has struggled to avoid.

Of course, Verizon Wireless is counting on making the money back, if not in the “many, many ways” promised by Schmidt, then at least in data fees.

In another sign of Silicon Valley’s influence, the GSM Association’s prize for “Mobile Industry Personality of the Year” went to a man who wasn’t there, and doesn’t appear at trade shows at all: Apple CEO Steve Jobs. Notably, the jury for that prize doesn’t consist of wireless industry professionals, but journalists.