Facebook, YouTube hitch a ride on telcos paying through their noses

London: Consumers’ increasing love of using services like Facebook and YouTube on their smartphones is leaving many telecoms carriers sidelined while bearing the costs of ever-growing demands on their networks.

As users lap up mobile Internet services, the Web giants are strengthening their relationships with consumers, while the telcos are finding their connections with customers reduced to a monthly bill and an occasional handset upgrade.

More than half of Facebook’s users already access the social network from a mobile device, Facebook said in its recent filing for a long-awaited initial public offering - and that proportion is expected to keep growing.

The operators complain that the Web giants are hitching a free ride on the networks in which they are investing billions, while free services like Facebook Messenger are eating into the SMS text revenues on which they have long depended.

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They’ve talked about charging bandwidth-heavy Internet players like movie streaming Netflix or Google to carry their traffic, but have been rebuffed by the Web giants and cooled by regulators worried that such deals would warp the level playing field of the Internet.

“The Facebook IPO is going to fuel that discussion around Facebook and Google and how these players are affecting the industry,” said David Gosen, European director of telecoms at market researcher Nielsen, ahead of next week’s Mobile World Congress in Barcelona, the world’s biggest wireless fair.

“They’re driving their cars along the roads the carriers have built, and collecting the tolls, and carriers are wondering what their role is going to be in these new ecosystems,” he said. “I get the sense it’s going to be a lively one this year.”

DUMB PIPE

Telecoms carriers are racing to deploy next-generation mobile networks, which will be able to carry the exponentially increasing amounts of data generated by the likes of YouTube many times faster than current networks can.

The GSMA, the operators’ association, estimates that telcos will have to spend $800 billion in the next five years to upgrade mobile networks and buy licences for fourth-generation wireless spectrum. Mobile connections are expected to surpass the human population in 2014, according to consultant Ernst & Young.

The burden is getting harder to shoulder, especially for operators in mature market like Europe where there is little growth amid recession and tough price competition, leading many to cut their prized dividends.

For many incumbents in mature markets, such as Spain’s Telefonica , even their operations in fast-growing regions like Latin America can no longer compensate, and they may need to venture into riskier markets if they cannot make data usage pay.

A long-term trend of dwindling revenues from core voice and SMS services is being accelerated by competition from so-called over-the-top services from Internet providers that offer free alternatives or more attractive features.

Having weathered an assault on their voice revenues from a range of companies led by Skype, telcos are now battling free mobile messenger services from BlackBerry maker RIM , Facebook, and popular messaging app WhatsApp.

Operators lost $13.9 billion in SMS revenue last year through subscribers using social messaging apps on their mobile phones instead, according to an estimate this week from technology research firm Ovum.

“We’re moving towards social media and social networking at a rapid pace. Because telecom operators have not been able to keep up with that, they’re probably going to become a dumb pipe,” the report’s author, analyst Neha Dharia, told Reuters.

The operators say that on top of the capacity strains being put on their networks by Web services, Google and Apple are adding insult to injury by allowing popular apps like Angry Birds to constantly ping their networks for no good reason.

Since mobile networks were not designed to handle phones constantly sending such signals, some operators have seen major outages like one at Japan’s NTT Docomolast month that prompted the operator to call on Google to tweak its market leading Android mobile operating software to fix the problem.

Google’s Eric Schmidt, former CEO and now executive chairman, will make his third appearance at Mobile World Congress this year, as he continues a charm offensive against an industry that blames the search giant for many of its problems.

Many operators resent the attention and top billing that Google continues to achieve at the show, along with Facebook, which this year is creating more excitement than all the carriers combined. Apple has never appeared at MWC.

Facebook, in particular, is expected to announce plans for advertising on mobile devices in the near future, possibly next week, a move that could stimulate a leap in growth in the still fledgling mobile advertising market.

Facebook’s Chief Technology Officer Bret Taylor will give a keynote address, the first time an executive from the social network has got top billing at the show.

“Once again, the Mobile World Congress is very focused on the end users, which will probably result in the MWC attracting a great deal of international media attention,” John Strand, an influential consultant to European carriers, wrote this week.

“Personally, I would have liked to see a little more focus on the technical challenges the mobile networks are currently facing and how the signalling traffic from technically inferior smartphones like some of the iPhone models is influencing the mobile customers’ overall network experience.”

The GSMA is said to be preparing guidelines for the industry about the signalling problem, according to a person familiar with the project.

CHINESE MUSCLE

Some operators are hoping that the year-old alliance of top handset maker Nokia and software giant Microsoft will provide a more friendly alternative to the powerful groups that Google and Apple have built.

Nokia, struggling to compete against Android and the iPhone, dumped its own smartphone software a year ago and threw in its lot with Microsoft, whose Windows phone software is itself a distant number three in the market.

Together, they have billed themselves as offering a “third ecosystem” more receptive to the concerns of operators.

The ecosystem has yet to prove itself in terms of the vital measure of attracting the software developers who design the apps that make smartphone platforms come alive.

Much will depend on the reception of Windows 8, which will be previewed at Mobile World Congress, and is the first time Microsoft will have released a single software platform for both desktop and mobile, in a drive for wider adoption.

Meantime, Nokia is expected to launch a range of Windows phones including a cheaper version of its Lumia smartphone to compete with offerings from new ambitious Chinese rivals including Huawei , ZTEand Lenovo.

“Telecom operators are keen to lower subsidy costs, and Chinese companies manufacturing smartphones on either Windows Phone and Android could be seen as credible alternatives to current smartphone manufacturers such as Nokia,” Morgan Stanley telecoms analysts wrote in a note this week.

A crop of unknown Indian and Chinese companies are now gunning to make truly mass-market smartphones that go for $100-150 wholesale to the operator, as opposed to $600 for an iPhone or $300-400 for an Android phone, said Benedict Evans of Enders Analysis.

“Commodity smartphones are starting to bubble up,” he said. “Today if you can make a calculator, you can make a phone.”

Reuters