Apple, Google Taking Control of Wireless

I like to imagine that it happened this way: One day the computer guys in Silicon Valley looked over at the mobile-phone industry and realized those carriers have figured out the ultimate racket. They sell you a phone, lock you into a two-year contract, and anything you want to buy for the phone—accessories, ringtones, games—you have to buy from them. They control the whole thing, from top to bottom, and instead of getting a one-time sale, they get a recurring revenue stream. "Wow!" the computer guys said. "Why aren't we doing that?"

Well, now they are. Slowly but surely, companies like Apple and Google are wresting control away from the mobile carriers. Instead of a world where the companies that make the phones are just dumb hardware makers—silent partners who never get to touch the customer—Google and Apple are using the transition to smart phones as a way to flip the mobile-phone business model on its head.

Going forward, the phone makers will be the ones who deal with the customers and sell all the software and accessories. The carriers will be the silent partners, relegated to connecting calls and collecting a monthly fee.

Eventually, this means that we'll all be able to buy a phone and run it on any network we want, which is what we should have been able to do all along. There's a risk, however, that we're fleeing one cage only to run straight into another, and the only thing that will change is the name of our jailer.

This trend started with Apple's iPhone in 2007. AT&T wanted that sexy new smart phone so much that it agreed to cede some control to Apple. Instead of being the sole supplier of the phone, as had been the custom with U.S. carriers, AT&T agreed to let Apple sell the iPhone in its Apple stores, too. More significant, Apple—not AT&T—would sell the software apps for the iPhone, via Apple's online App Store. Plus, Apple would sell iPhone accessories. Bottom line: Apple, not AT&T, would control the ecosystem.

Now, with the iPad, Apple is taking things one step further. With the iPad, you don't need to get a wireless subscription to browse the Web, read online newspapers, or watch Hulu. The device, which lacks a phone, will run on Wi-Fi, and for many people that will be sufficient. If you do want to use the iPad on a 3G network, you can get data service from AT&T. But there's no contract. You pay by the month, and can cancel whenever you want. And it's cheap: $14.99 for a limited plan, $29.99 for unlimited.

Better yet, the device is "unlocked," meaning that you'll be able to run the iPad on networks operated by carriers other than AT&T, like T-Mobile. Critics carp that the radio used in iPad will run only on T-Mobile's slow network, not its speedy 3G network. Still, Apple's move is a step in the right direction.

Google has done the same thing with the Nexus One phone that it introduced in January. The phone runs on Google's Android operating system, and you can buy it unlocked for $529 and run it on different networks. (You can also buy a $179 subsidized version from T-Mobile, but to get the subsidy you have to sign up for a two-year contract.) A version that runs on Verizon will be out by the middle of this year.

As with Apple and the iPhone, Google aims to maintain control of the customer relationship. The whole idea of Android-based phones is to draw people into relying on Google's online programs (Gmail, Google Maps) to manage your online life. If you want to run third-party applications, you get them from Android Market, an online store operated by Google.

In other words, if you buy a Google phone, you pretty much buy into the World According to Google. Buy an Apple device, and you're buying into Apple's world view. In Apple's universe, its control extends beyond software apps to content itself, because if you want to buy music, movies, books, or newspapers, you'll most likely buy them from Apple. That content will be encrypted in such a way that it could be difficult—maybe impossible—to move it to a non-Apple device. Nice, right?

So while you won't be locked into any one carrier network, you'll now be locked into Apple or Google. Once you've invested all that time and money buying apps and content, you're not going to want to switch to a new phone and start all over.

The guys in Silicon Valley will sell this as "freedom," but it's really no different from the lock-in we've had with carriers. Nevertheless, I suspect a lot of people will dive on the opportunity.

Daniel Lyons is also the author of Options: The Secret Life of Steve Jobs and Dog Days: A Novel.