The New Wireless Tangle

The mobile-phone industry used to be straightforward. Operators, like Vodafone, ran networks based on cellular technologies that transmitted signals through the air from giant, ground-based antennas. And handset vendors, like Nokia and Motorola, churned out phones that worked on those networks, which they'd sell through the operators. An easy-enough, symbiotic relationship for all involved.

Now two new Net-based mobile technologies are challenging the dominance of traditional cellular networks — a shift that has left the carriers scrambling for a strategy as they increasingly face the prospect of competing head-on with their long-term collaborators, the handsetmakers. At stake? Potentially nothing less than the structure of the $600 billion worldwide mobile industry. Motorola ceo Ed Zander says: "There's going to be a lot of turmoil in the next couple of years."

That's an understatement. The technologies throwing everything into a tizz are called wi-fi and WiMax. Those names are familiar to anyone who's used their laptop to access the Internet wirelessly at a public place equipped with a "hot spot." Although a version of the more powerful, farther-reaching WiMax wireless network that works seamlessly with handheld devices probably won't be ready until next year, handsetmakers are already giddy at the prospect. With WiMax's roots in the Internet, the reasoning goes, mobile networks based on that technology will be able to deliver the multimedia goods to mobile-phone customers better than traditional cellular networks. Motorola chief technology officer Padmasree Warrior says WiMax offers "three times the data transfer and half the cost" of cellular networks, which were originally designed only to handle voice calls. Handset vendors also like the prospect of a WiMax future which may help to free them from intellectual property payments. (Many cell phones, for example, use a technology called cdma from San Diego–based Qualcomm, which collected $2.75 billion in licensing fees in its most recent fiscal year.)

Big cellular carriers are far less enthusiastic. They see WiMax as a threat to the 3G cellular networks they have invested in so heavily. For now, many operators are settling for relatively small software upgrades that boost the speed of 3G networks at far less cost than building a new WiMax network. But some operators acknowledge that these enhancements will probably not be powerful enough to compete with mobile WiMax, and few seem to have a strategy beyond that. Sanjiv Ahuja, chief executive of Orange, the France Telecom–owned mobile carrier, says only that Orange "will be making decisions over a period of time over what technologies will complement" conventional cellular. Vodafone, meanwhile, announced last month that it was dismantling its New Business and Innovation unit, which it had formed just six months ago to map its technology strategy.

While Vodafone, Orange and other major players will probably seek to preserve their investment in 3G for the next few years, the switch to WiMax may be inevitable. Sprint Nextel, a U.S. carrier that doesn't have a massive investment in 3G, effectively staked its future on WiMax in August, when it announced that it will spend up to $3 billion through 2008 building a national WiMax network.

Further pressuring cellular, new network operators who specialize in WiMax are popping up like hot spots at coffee shops. Seattle-based Clearwire is run by former cellular zealot turned WiMax guru Craig McCaw, while others include Irish Broadband in Ireland, Wimax Telecom in Eastern Europe and Unwired in Australia. "It's like a big landgrab," says Ryan Jarvis, founder and chief executive of London-based WiMax start-up Macropolitan. Fixed-line telephone and broadband providers including Softbank in Japan, and BT and Pipex in the U.K., are also getting in on the act. A wireless WiMax network could help fixed-line carriers extract delicious revenge on cellular carriers, which have undermined the fixed-line voice business in recent years.

Considering their widely divergent views on WiMax, it's no surprise that relations between phonemakers and mobile carriers are getting crackly. Motorola's Zander found that out after he struck a $300 million deal with Clearwire in July that gave Motorola access to WiMax technology and equipment. "I do the Clearwire deal, and I get 10 hate mails," Zander quipped to Time.

But even strained alliances with their old best customers is not stopping Motorola and its competitors from rolling out a range of new wi-fi and WiMax handsets. Nokia, the world's leading handset vendor, for example, offers at least 12 wi-fi devices, and says it's prepared to offer WiMax phones if the market wants them. Motorola started shipping its A910 wi-fi phone in Europe this month, and is providing WiMax handsets to Japanese provider Softbank for a planned trial. It's enough to make mobile-phone operators long for the days when they knew who their friends were.

• MARK HALPER
• Cellphone services are gearing up for a fight with handset makers — and it's all about Wi-Fi