Joe Weinman at GigaOM Structure 2011

The public Internet and the cloud shouldn’t mix, according to a paper out today from Joe Weinman of HP. Cisco seems to agree, if Tuesday’s announcement of its CloudVerse suite of products is any indication. A growing number of endpoints, the multiple services built within web applications, and the infinite variety of demands made on any web-based service mean the network can’t be trusted to run over the top.

The network is the cloud, so it needs to be agile, smart and billed based on usage.

Instead, the industry will need to move to pay-per-use, dynamic networks where possible to improve the economic benefits of cloud scenarios and deliver defined quality-of-service for applications that will require low latency, argues Weinman. Weinman, who moved over to HP from AT&T last year, is a deep thinker on the economics of cloud computing. He also argues that bandwidth will eventually be charged on a pay-per-use model for both consumers and enterprises.

He makes a good case for the importance of a smarter network in the context of delivering cloud services, something Cisco’s CloudVerse announcement Tuesday also supports. CloudVerse basically organizes Cisco’s existing networking products for the data center and links them back to the networking gear already in carrier and service provider networks, with the idea being that an intelligent network can take the fuzziness out of managing applications in the cloud.

Complex apps and infinite endpoints make quality of service more important.

It’s true that applications are growing more complex and relying on more protocols to deliver a variety of services over the web. Take, for example, an application like Google+. There are real-time streaming elements, a video conferencing set-up and document sharing. Each different element requires different levels of network quality, which is why Weinman argues for networks that run faster, not just on a megabit-per-second basis, but also with less latency. From the paper:

Human performance studies show that 200 to 250 milliseconds is acceptable for multimedia conferencing and collaboration applications. However, interactive tasks such as keystrokes and mousedowns must be responded to within about 150 milliseconds [10], and emerging online games require even lower latencies.
There are also empirical results showing the importance of low latency not just in terms of user experience, but in terms of revenue. Lower latency directly correlates with increased revenue [11].

Add in the complexity at the end point in terms of the number of devices that connect to the network and it gets worse. Sensor networks, plus more devices per person and more concurrent streams coming in per device (as in personal video recorders) require more bandwidth. It also requires more intelligent bandwidth that can allocate resources and deal with emergent effects like in-office or in-home congestion and odd spikes in traffic in case of unexpected events. For example, a pipe breaking in a sensor-equipped home in the middle of the afternoon when the house is empty may create a sudden spike in traffic as humidity sensors activate, power gets shut in certain areas and you check in via a home camera system to see why your home network is going crazy. But because that’s an unexpected spike in a normally dull time, will your service provider have the bandwidth capacity to meet that event?

Of course, there’s something on cloudbursting and software-defined networks.

Weinman also offers the Holy Grail of true cloudbursting as an example where adding network intelligence makes it easier to scale a workload from one data center to another in times of peak demand. He lists five ways of doing this, beginning with the simplest idea of dividing up tasks between various clouds, which requires little to no network intelligence. He concludes with a network that can push a huge amount of data as needed and very quickly, but which would require infinite bandwidth. Since this last approach is impractical, he suggests providing pay-per-use bandwidth as the easiest way to instantly replicate data while keeping costs in line.

To help deliver the type of fine-grained control that intelligent networks will need, Weinman believes software-defined networks, such as those created using protocols like OpenFlow, are a way to add intelligence and flexibility. Using open protocols to create the networks are a good way to make sure that the added intelligence doesn’t act as a way to lock in users. Weinman also covers additional topics that will require research in bringing forth these new networks for cloud computing, and I highly recommend folks check out his paper.

This sounds great; so how do we co-opt it to sell products?

So what does this have to do with Cisco’s marketing effort around CloudVerse? Essentially, with the suite of products that wrap data center networking in with the networks of service providers for wireline and mobile broadband, Cisco is recognizing that a holistic, intelligent network could be a huge selling point for those concerned about piecing together their own fragmented network elements to deliver web services and cloud services. A quote from the Cisco release sums up the news nicely:

“Until now cloud technology resided in silos, making it harder to build and manage clouds, and to interconnect multiple clouds, posing critical challenges for many organizations,” said Padmasree Warrior, Cisco senior vice president of engineering and chief technology officer. “Cisco uniquely enables the world of many clouds – connecting people, communities and organizations with a business-class cloud user experience for the next-generation Internet.”

Cisco and Weinman are not alone. Alcatel-Lucent recently outlined its vision of as service provider cloud that adds intelligence to the network in a way that many enterprise and business customers will find appealing.

Could someone build a fully functioning network without resorting to all-Cisco gear, or perhaps even Weinman’s view of the intelligent network? Yes, but it takes skill and dedication that places such as Google, Yahoo, Facebook and other webscale operators have, and other companies just don’t seem to want to bother with.

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Media-measurement company Nielsen is tapping into that information pipeline as well, which raises the questions of how many other companies may be buying information from Carrier IQ. Providing a carrier with anonymous performance metrics is one thing, but selling compiled customer data to a third-party with no relationship to the customer or the network Carrier IQ is monitoring is another altogether. Carrier IQ claims to be offering a service to the operators to help them optimize their networks, but it may well be a big data mercenary selling information on all kinds of mobile consumer behavior to the highest bidder. It might even be playing both sides.

The story so far

AT&T and T-Mobile USA are just the latest to admit they received data from Carrier IQ on the behavior of their customers’ smartphones. However, like Sprint, they claimed it used that information solely for network optimization purposes. Verizon is the only major U.S. operator untarnished. Apple copped to installing Carrier IQ’s software on all its iPhones before the release of iOS 5. HTC and Samsung acknowledged implementing Carrier IQ, but only at the behest of their carrier customers, which didn’t prevent them from getting slapped with class action lawsuits.

Lawyers have compared Carrier IQ’s covert digital snooping to illegal wiretapping. Carrier IQ has even attracted the attention of Congress. U.S. Senator Al Franken (D-Minn.), who chairs the Senate subcommittee on Privacy, Technology and the Law, sent a letter Thursday to Carrier IQ President and CEO Larry Lenhart asking some poignant questions about how and for whom Carrier IQ collects its data.

Taking a cue from Franken, let’s ask some of those same questions. Moving beyond what data Carrier IQ is collecting, which has been covered extensively by Eckhart and subsequent stories, lets’ explore why Carrier IQ is collecting information from millions of smartphones and more importantly who its selling that data to.

A bizarre big-data triangle

Based on the patterns of admissions and denials we’re seeing around the industry, as well as some background conversations with some industry sources, it looks like Carrier IQ is two-headed beast: one head being its covert handset software and the other being its measurement and analytics service. Certain handset makers, like HTC and Samsung, are installing the app on many, if not all, of their smartphones at the root layer, but those handsets aren’t necessarily the customers for the analytics service. In fact, both HTC and Samsung deny they receive any of the data collected.

Then who does? AT&T, T-Mobile and Sprint are three, as was Apple, but another is Nielsen. In October, Nielsen signed on as a Carrier IQ partner saying it would use the company’s technology to help “measure the performance of mobile services, networks, and devices” and “gather actionable intelligence on the performance of mobile devices and networks.”

That sounds very much like what both AT&T and Sprint are saying. We reached out to Nielsen to ask what exactly they’re doing with Carrier IQ data. Here’s the email response from VP of Global Communications Marivi Lerdo de Tejada:

“Nielsen and Carrier IQ announced an alliance in October 2011 to explore potential ways to measure mobile services, networks and devices, exclusively using opt-in panels and in accordance with Nielsen’s stringent privacy standards. To date, we continue to explore these opportunities, with neither any work for clients initiated, nor any panels created.”

If Nielsen sticks with its opt-in policies, it won’t get into the trouble the carriers and handset vendors appear to be in, but are there other market research companies that might not be so scrupulous? Carrier IQ has no qualms with selling carriers their own customers’ data without those customers’ permission. Could it sell the data it collects from AT&T, Sprint and T-Mobile’s customers to another market analytics firms. Could it sell AT&T’s data to Sprint and vice versa?

Late Thursday, Carrier IQ broke its silence, putting out a statement explaining what data it collects and what it does with it. Here are some excerpts:

“While a few individuals have identified that there is a great deal of information available to the Carrier IQ software inside the handset, our software does not record, store or transmit the contents of SMS messages, email, photographs, audio or video. For example, we understand whether an SMS was sent accurately, but do not record or transmit the content of the SMS. We know which applications are draining your battery, but do not capture the screen.

“… Carrier IQ acts as an agent for the Operators. Each implementation is different and the diagnostic information actually gathered is determined by our customers – the mobile Operators. Carrier IQ does not gather any other data from devices.”

Carrier IQ claims to count the frequency of actions, not the content of the actions themselves, and say whatever data it sends back to is servers is encrypted and personal information is protected. But Carrier IQ isn’t being quite so honest about who its customers or potential customers are. Right there on its home page, Carrier IQ says it gives handset manufacturers as well as wireless operators “unprecedented insight into their customers’ mobile experience.” Nielsen certainly isn’t a wireless operator.

This isn’t just about a few carriers keeping tabs on their customers. This is big data for the mobile world – massive databases of consumer behavior delving into when, how and in what manner we use our devices. By Carrier IQ’s own admission, its software is embedded in more than 150 million handsets. There are plenty of companies that would find that information enormously useful. The problem is Carrier IQ never got permission from all these smartphone users to collect that data, never told them it was gathering it, and never provided a way of opting out.

Who gave Carrier IQ permission?

Carrier IQ couldn’t just do this on its own, covertly installing rootkit software into millions of phones without anyone’s knowledge. It had to have the cooperation of operators like Sprint and AT&T and of the handset manufacturers that built their devices. HTC and Samsung are pointing fingers directly at the operators. Take the statement circulating from HTC, which we first saw on Bright Side of the News:

“Carrier IQ is required on devices by a number of U.S carriers so if consumers or media have any questions about the practices relating to, or data collected by, Carrier IQ we’d advise them to contact their carrier. It is important to note that HTC is not a customer or partner of Carrier IQ and does not receive data from the application, the company, or carriers that partner with Carrier IQ. HTC is investigating the option to allow consumers to opt-out of data collection by the Carrier IQ application.”

But if the operators are entirely to blame, how is that Nokia, Google and RIM can claim they don’t use Carrier IQ’s software? It may have been harder to drill down into Nokia and RIMs’ operating system, sure, but Carrier IQ was able to work with Apple to embed its software deep into the iPhone. Plus, if RIM and Nokia can turn down Sprint and AT&T, why can’t HTC and Samsung? It’s not as if Nokia market share is so strong in the U.S. it can casually deny a software customization request from AT&T, one of the world’s largest GSM operators. And though RIM claims to be Carrier IQ-free, that hasn’t stopped AT&T, T-Mobile and Sprint from selling plenty of BlackBerry devices.

I’m not fully convinced Carrier IQ’s intent is as evil as the deluge of recent coverage makes it out to be, though its methods are both suspect and scary. But if it’s a conspiracy you’re looking for, then there are plenty of possible conspirators. Carrier IQ didn’t do this alone. To drill this far down into the habits of mobile consumers, companies up and down the wireless value needed to be complicit.

Image courtesy of  flickr user alancleaver

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AT&T, however, didn’t get everything it wanted. The FCC is releasing its 109-page staff report that found that the merger would do more public harm than good. The report will be redacted to protect confidential information submitted by AT&T and T-Mobile, but it will contain the full explanations of why the commission staff thought the merger was a lemon. FCC lawyers countered almost all of AT&T’s claims about the deal’s supposed benefits, stating the merger would kill jobs, rather than create them; would result in a 4G network no bigger than AT&T would build on its own and would stifle wireless competition in 99 of the 100 largest U.S. markets. (The full report is available on the FCC site)

Update: “Competition is the engine of our free market economy and a cornerstone of the FCC’s mandate,” FCC chairman Julius Genachowski said in a statement. “Our review of this merger has had a clear focus: fostering a competitive market that drives innovation, promotes investment, encourages job creation, and protects consumers. These goals will remain the focus if any future merger application is filed.”

The FCC couldn’t deny the merger outright last week, but it appeared set to use the most powerful weapon at its disposal: sending it to an administrative law judge for review. Rather than deal with two judges simultaneously, AT&T opted to withdraw its petition last week before Genachowski tabulated an official vote of commissioners.

That raised the hackles of consumer advocacy groups Public Knowledge and the Media Access Project, which accused AT&T of trying to game the system. They petitioned the FCC to deny AT&T’s request, claiming an evidentiary hearing before an administrative judge would air all of AT&T’s dirty laundry – some 1 million documents that the FCC has reviewed – which could have a direct bearing on the DOJ’s antitrust case. Dish Networks has even called for the FCC to publish its findings, according to Bloomberg.

AT&T claimed that the FCC had no right to deny withdrawal of its petition, saying that it submitted its request before the commission voted. AT&T senior EVP and general counsel made the argument very forcefully in a statement:

“The FCC’s own rules give us this right and provide that the FCC ‘will’ grant any such withdrawal.  Further, this has been the FCC’s own consistent interpretation of its rules.   We have every right to withdraw our merger from the FCC, and the FCC has no right to stop us. Any suggestion the agency might do otherwise would be an abuse of procedure which we would immediately challenge in court.”

Credit: Hasbro

FCC officials, however, said the decision to approve or deny was under the commission’s discretion. While the deal’s opponents won’t get their evidentiary hearing, they’ll get their paperwork. The FCC also plans to keep the docket, keeping any comments and filings in the record if AT&T does choose to resubmit its merger application. An FCC official said the commission has never faced a situation like this before – in which an operator takes a petition to the brink, pulls back but publicly admits it plan to return to the edge in the future. If AT&T resubmits its report the process starts again and Ma Bell gets a new 180-day clock. Given the circumstances, the official said the FCC felt it was in the public interest to release the information it had collected and keep the record open while AT&T deliberates.

Meanwhile, rumors are popping up that AT&T is trying to nail down an eleventh-hour deal that would make the merger more palatable to the DOJ. Last week, Bloomberg reported that AT&T was willing to part with as much as 40 percent of T-Mobile’s assets to close the deal. On Monday, the New York Times’ Dealbook reported that AT&T is in talks with Leap Wireless to sell it a big piece of T-Mobile’s customer base, networks and spectrum. Leap, a regional operator that sells mobile service under the Cricket brand, would certainly welcome the opportunity to expand beyond its footprint of small and mid-sized markets, but it probably doesn’t have to resources to buy the assets. That is unless AT&T were desperate enough to give them away for a song.

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So what happens in the aftermath? Every operator would have a different take depending on what side of the AT&T-Mo battle lines they stood and their relative position in the mobile market. Here’s our take on who would win and who would lose:

AT&T: Back to the status quo, though with a few bruises

It may seem obvious that AT&T loses if its blockbuster acquisition fails, but AT&T isn’t as bad off as it claims. It would still be the country’s second largest operator in terms of total retail subscribers and mobile connections, and a big gap would still remain between itself and the next largest competitor Sprint. It still has every flavor of the iPhone still sold and still maintains a big advantage when it comes to new devices since it plays nicely with the dominant global GSM standard.

AT&T wouldn’t be able to piece together the massive 20 MHz-by-20 MHz LTE juggernaut it hoped to gain with T-Mobile’s Advanced Wireless Service (AWS) spectrum, but it’s still fairly well off spectrum-wise. Unlike Verizon Wireless, AT&T doesn’t have a uniform hunk of 700 MHz nationwide. It will have to put its LTE network together from the various AWS and 700 MHz licenses it holds around the country. But while Ma Bell may have lost out on T-Mobile’s spectrum goldmine, the FCC looks set to approve its purchase of Qualcomm’s 700 MHz licenses. Once LTE-Advanced comes along, AT&T can use new carrier-aggregation technology to shoehorn all of those disparate bands into one big network. That will put it in much the same position as Verizon, either forced to go get new licenses at auction, through smaller acquisitions or by re-farming its PCS and cellular frequencies for LTE.

The most lasting damage from the merger fallout to AT&T may be in public perception. In the last year, AT&T has become synonymous with the greedy expansionist corporation, whether it’s a fair criticism or not. Even if it decided to cut its losses and withdraw its merger petition completely, Ma Bell may not escape without incurring a few more bruises. Public Knowledge and the Media Access Project want the government to go in for the kill, petitioning the FCC to deny AT&T’s request to withdraw its merger petition. The two consumer interest groups argue that AT&T is gaming the system, withdrawing from a review process that could hurt its chances in the DOJ’s antitrust lawsuit. But Public Knowledge and MAP also want an evidentiary hearing, which would effectively air all of the deal’s dirty laundry.

T-Mobile: A carrier still in need of a new network

T-Mobile could come out of this smelling slightly sweeter than when it started. A failed acquisition means a big $3 billion payout for DT as well as the handover of $3 billion worth of spectrum to T-Mobile. That spectrum probably won’t be enough to launch a nationwide LTE network (if it were, AT&T wouldn’t need to buy T-Mobile’s spectrum,) but assuming AT&T does fork over some of its own AWS holdings, T-Mobile could build upon it to become a much stronger mobile broadband player, Current Analysis research director Peter Jarich said in an interview.

“T-Mobile could say ‘let’s double up on AWS,’” Jarich said. “’We get AWS from AT&T. Let’s spend that payout on more AWS licenses at auction. Then let’s use it to build a new network.’”

But that new network might not necessarily be an LTE one. If T-Mobile could only piece together new licenses in bits and pieces, it might be better off allotting that capacity to its current HSPA+ network, Jarich said. Only if it could clear out a sizable chunk of AWS nationwide would it make sense to launch LTE. Even then, it depends on the size of the chunk. If it can only launch LTE in a 5 MHz-by-5 MHz configuration—half the size of Verizon’s network—it gains very little in overall capacity. Why deploy two mediocre mobile broadband networks when you can deploy a single massive one?

Ultimately, T-Mobile’s decision may come down to DT’s future plans for its U.S. arm, Jarich said. If DT wants to pretty up the company for another potential acquisition or partnership, then keeping with HSPA+ would be the way to go. If DT believes that T-Mobile USA can make it on its own, Jarich said, then it must bite the bullet and get an LTE network built.

The Other Guys: It’s a toss-up

As I wrote about last week, Verizon’s position on the merger is complicated. The last thing Big Red wants is a merger to pass loaded down with regulatory requirements that will bite it in the rear when Verizon looks to consolidate its own spectrum position in the future. If the AT&T-Mo merger just disappeared, Verizon would be happy: no new regulations on the wireless industry, no definitive decision to deny the mega-merger, no harm, no foul.

Sprint, of course, would celebrate the failure of AT&T-Mo, but ironically it might have actually benefited if the merger went through. T-Mobile is Sprint’s biggest threat as its business model evolves to focus on prepaid and budget-minded customer segments. Sprint would be safe from the wireless duopoly it so feared, but it would have also missed an opportunity to lock down the low-end of the market that neither Verizon nor AT&T serves well.

MetroPCS and Leap Wireless would miss out on their biggest opportunity to expand for some time. Any AT&T deal with the FCC or DOJ would have required massive divestitures of markets and spectrum, all of which Metro and Leap could have picked up to either expand their footprints or add capacity to their CDMA and LTE networks. Also, Metro and Leap may have been secretly hoping that the deal had gone through. Both could have picked off T-Mobile’s former customers as AT&T delved into a long integration process.

Image of boxing winner courtesy of Flickr user superwebdeveloper

Image of T-Mobile lanyards courtesy of Flickr user Stefan Evertz.

Image of Verizon cone courtesy of (CC BY 2.0) Flickr user slgckgc

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Following the Federal Communications Commission’s decision to send the $39-billion proposed merger of AT&T and T-Mobile USA to an administrative hearing on Tuesday, AT&T has withdrawn its official application to combine its spectrum with T-Mobile’s. The company also said that it will take a $4-billion charge against earnings should the deal fall through. Both actions, which were taken on Wednesday, indicate that AT&T’s confidence in the deal is waning, and could be the final actions before a formal abandonment of the purchase.

AT&T still plans to fight the antitrust case that the Department of Justice has filed and has not said it plans to walk away from its deal just yet, but it clearly has realized that the forces arrayed against this combination will be hard to quell. As I noted on Tuesday, unless AT&T or T-Mobile pull the plug between now and then, the next big date should be the Department of Justice lawsuit hearing in February. From AT&T’s statement:

AT&T Inc. and Deutsche Telekom AG are continuing to pursue the sale of Deutsche Telekom’s U.S. wireless assets to AT&T and are taking this step to facilitate the consideration of all options at the FCC and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice either through the litigation pending before the United States District Court for the District of Columbia, Case No. 1:11-cv-01560 (ESH) or alternate means. As soon as practical, AT&T Inc. and Deutsche Telekom AG intend to seek the necessary FCC approval.

The Department of Justice has come out against the deal, citing a lack of competition, while the FCC this week determined that the new entity wouldn’t create the jobs that AT&T has said it would, and in fact, would result in, “a massive loss of U.S. jobs and investment.” Since no one is buying AT&T’s and T-Mobile’s claims, perhaps the next big question is what happens next with T-Mobile. In the meantime, by taking a charge against its fourth-quarter earnings that reflects a $3-billion breakup fee and the $1-billion value of T-Mobile’s spectrum, AT&T is clearly prepping for trouble.

Given that the charge will occur before its day in court, I’m not sure if we should expect AT&T to walk before the close of this year, or if it’s just being cautious with Wall Street.

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The FCC could have required AT&T to divest spectrum and networks in numerous markets; FCC staffers had competitive concerns in 99 of the top 100 markets. It could have imposed deadlines for deployments and stricter requirements on the population and geographic areas those networks covered. It might even have dictated commercial terms on how it used that spectrum, spelling out the terms of data roaming agreements and maybe even imposing restrictions on what AT&T could charge for data service. All of these would have been anathema to Verizon.

Why? Because whatever restrictions and stipulations AT&T is forced to abide by if this merger goes through would return to haunt Verizon down the road. Verizon may be sitting pretty on a big fat LTE network today, but it readily admits it must go back to the market for more spectrum at some point. That means acquiring another operator, buying spectrum from a competitor or picking up new licenses at auction. Verizon may even weighing a bid on Sprint. Given the current regulatory environment, such a purchase would be out of the question today. But there are plenty of smaller players Verizon likely is eyeballing. Any future bid Verizon makes on a competitor or spectrum would be clouded by whatever requirements the FCC and U.S. Department of Justice would impose on AT&T-Mo today.

What’s Verizon really thinking?

Verizon’s official stance is that it’s “unopposed” to the merger so long as no new requirements are imposed on U.S. operators. Last week, at a Morgan Stanley investor conference in Barcelona, Verizon EVP and CFO Fran Shammo reiterated that stance: “There needs to be consolidation. And as long as there’s consolidation without regulation, we don’t have an objection to it.” (You can read the full transcript here).

A merged AT&T/T-Mobile would be a threat to Verizon just like it would be to Sprint. AT&T would gain enormous scale, and it could field an LTE network with twice the capacity of Verizon’s. Big Red has never lacked for confidence, though. It has no trouble competing against AT&T today when it has 100 million subscribers. What’s 34 million more that AT&T would gain from T-Mo? Verizon probably also feels it can take advantage of the inevitable chaos of a merger transition period to scoop up a lot of T-Mobile customers.

I think Verizon’s position on AT&T-Mo comes down to cold, hard Realpolitik: The enemy of my enemy is my friend. The biggest threat to Verizon’s future business isn’t AT&T; it’s the FCC and other regulators. Verizon’s interests are aligned with those of its arch-rival, but that doesn’t mean Verizon is supporting the merger outright. In fact, it’s playing a bit coy.

Verizon executives aren’t naïve enough to believe a AT&T-Mo could have flown through the FCC and DOJ unfettered. The public, political and regulatory outcry against AT&T guarantees that, if the deal were somehow to win approval, it would be loaded down with new regulations. Verizon’s aim was to minimize the damage.

The best outcome for Big Red

FCC Chairman Julius Genachowski

The FCC had three options: Approve AT&T-Mo outright, approve the deal with conditions or send it off to an administrative law judge for a hearing: the closest thing the FCC can do at this stage to denying the petition. The first option was off the table, so Verizon’s best hope was that the FCC and DOJ approve the deal with minimal requirements: some market divestitures here, some spectrum sales there.

Sending the merger review to an administrative hearing doesn’t bode well for AT&T, but it’s not an outright denial. AT&T can still save face by withdrawing its position. With no official decision made, there’s no precedence. AT&T would be free to try again with another potential acquisition, and Verizon could pursue its own consolidation agenda without a failed AT&T-Mo hanging over its head.

That doesn’t mean AT&T didn’t inflict any damage on Verizon. On Tuesday, FCC Chairman Julius Genachowski didn’t just recommend the commission shuttle AT&T-Mo off to an administrative hearing, he also circulated a draft asking commissioners to approve AT&T’s pending purchase of Qualcomm’s 700 MHz FLO TV spectrum “with conditions.” The FCC didn’t elaborate on what those conditions might be, but whatever they are neither AT&T, nor Verizon, is going to like them.

From Verizon’s perspective, the longer AT&T continues to press its case the more damage it can do. Verizon just wants this deal to die.

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René Obermann, Chairman and CEO, Deutsche Telekom and Randall Stephenson, Chairman and CEO, AT&T

The Federal Communications Commission put up a roadblock to the proposed AT&T and T-Mobile merger by calling for an administrative hearing, and even AT&T seems a bit daunted by the opposition lined up against the $39 billion deal.

According to Larry Solomon, senior vice president of Corporate Communications, AT&T:

“The FCC’s action today is disappointing. It is yet another example of a government agency acting to prevent billions in new investment and the creation of many thousands of new jobs at a time when the US economy desperately needs both. At this time, we are reviewing all options.”

In previous setbacks, such as when the Department of Justice came out against the deal in August, AT&T’s repsonse was a bit more strident. In a statement attributed to Wayne Watts, AT&T Senior Executive Vice President and General Counsel, the company said:

“We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated.

We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive effects and we intend to vigorously contest this matter in court.”

Even the switch from the company’s legal eagle Wayne Watts as a spokesman, to the head of corporate communications seems fraught with meaning. But while Ma Bell may have a bit less to be thankful for, there are still plenty of moving parts surround this deal, that have to come together to ram it through or even for AT&T to retreat.

The federal case (now cases): The FCC’s decision to hold an administrative hearing carries less weight than the DoJ’s lawsuit and the upcoming hearing before U.S. District Court Judge Huvelle scheduled for February. AT&T has made its case in its filings so far, but the DoJ trial will be the model for taking this deal down through the courts. The DoJ’s lawsuit may follow the arguments already tested in a summary judgement hearing earlier this month in a case brought by Sprint and C-Spire, formerly Cellular South. That judge had doubts about what the consolidation might do to device choice and freedom for consumers.

Meanwhile the FCC’s process could take as long as a year to complete, but in an FCC press conference today, agency officials said that they would work with the Department of Justice. It’s highly unlikely that the agency will have to see its administrative hearing through to the bitter end as the DoJ lawsuit and Judge Huvelle’s ruling is seen by many deal watchers analysts as the key factor in the case.

The breakup fee: But even if AT&T were to decide that the DoJ, the attorneys general of seven states, Sprint and Cellular South and a variety of consumer groups are too much to keep fighting against, it still has to handle a large $3 billion breakup fee plus give up some spectrum worth up to $3 billion to T-Mobile. For analyst firm Stifel Nicolaus, the threat of continued and extended review, “could put added pressure on T-Mobile to seek to exit the merger, though it would have to negotiate with AT&T over the $3 billion break-up fee and related roaming and spectrum terms if it wanted to get out before allowed under the current deal (lasting at least through March, with two extensions allowed through next September).”

The big takeaway: So after today, the questions become whether in spite of almost unified opposition AT&T stays true to T-Mobile through the court trial scheduled for February 2012, or if T-Mobile’s parent company decides to cut its losses, renegotiate a smaller breakup fee and attempt to find another suitor. The last time the FCC sent a merger to administrative review in 2002, the two parties gave up. So far, AT&T may have cut back on its toughest language, but it hasn’t thrown in the towel.

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• 2012: Data, spectrum and the race to LTE
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In comparison, second quarter net postpaid adds increased 9.2 precent year over year – a quarter where there is traditionally no new iPhone to offer operators a bump, but this year was aided by Verizon’s snagging a CDMA version of the iconic device. The two major iPhone slingers didn’t do badly in the third quarter, but in UBS’ view their net adds were nowhere near the numbers either operator would have achieved if they had new iPhones to offer subscribers.

Verizon Wireless reported 882,000 net postpaid adds, while AT&T recorded 319,000, with a combined 4.7 million new iPhone activations between them.

That means the fourth quarter could be a bonanza for the wireless industry, combining the usual holiday craziness with the traditional third-quarter new-iPhone bump. UBS predicts a whopping 11.7 million iPhone activations between Verizon, AT&T and Sprint in the final three months of the year. That will result in 1.3 million total postpaid adds for national operators, up from 1 million in last year’s fourth quarter, UBS projects.

A lot of those customers will go to Verizon and Sprint – as the iPhone newbies – but UBS thinks the big winner will be AT&T. It will have the only “free” iPhone as the 3GS will be entirely subsidized with a two-year contract. UBS also believes that AT&T’s network will actually work for it rather than against it. The iPhone 4S has a 14.4 Mbps high-speed packet access (HSPA) chip tailor-made for AT&T’s network, compared to the slower CDMA EV-DO chips used to access Sprint’s and Verizon’s 3G networks. That may sound a lot of gibberish to the typical consumer, but AT&T merely has to say that its iPhone is faster than the others.

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The app was developed with communications and VoIP provider 8×8 and will work on Android, iPhone and BlackBerry devices, although many Android and BlackBerry models are not supported. You can check what devices work with the app here.

The new app will allow users traveling overseas to also take advantage of these rates when calling over Wi-Fi on Android and iPhone handsets. Once users establish an account, they can make phone calls right from their address book, with calls billed to their credit card. They will be able to manage their bill online.

It’s an interesting move for AT&T in that allows it to offer international calling to a wide range of users via VoIP. It shows that even the big boys can get into the VoIP market and offer cheap mobile calls overseas. But it also makes you wonder why AT&T couldn’t make this phone on its own.

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Republic Wireless’ love affair with Wi-Fi.

Republic Wireless has made Wi-Fi the linchpin of its mobile service with a cellular network provided by Sprint as its backup. Customers will join the service by paying $199 to get a phone and then $19 a month after that with no contracts. There’s a 30-day window for someone to return the phone and get their money back. So how does this work?

By default all calls, data and texts are sent via Wi-Fi networks when possible, and switch only to cellular if no Wi-Fi access is available. That’s one reason for the low price on the service, as most people can access an existing Wi-Fi network in their home or office for free. Brian Dally, the general manager of Republic says he expects at least 60 percent of the traffic to go over Wi-Fi networks. But he assures me that when he says unlimited data that it does extend to the 3G portion of the service as well.

Update: Looks like I should have ignored Dally and paid closer attention to the terms of service that note users who spend too much time on the cellular network will be booted out of the Republic club. Karl Bode over at Broadband Reports explains the situation and Republic’s Cellular Usage Index which is Republic’s Orwellian phrase for people who use too much cellular. The service regards fair use on cellular as about “550 minutes, 150 texts, and roughly 300 megabytes of data.”

Om said this sounds a lot like UMA, the technology that T-Mobile used for its Home Zone products and that many people loved. But Dally said Republic is not using the Kineto technology that UMA is based on, and that the user experience won’t be quite seamless when it comes to switching from one network to the other. At the moment users will hear a tone in the middle of a call signaling the change in networks, but the call will continue. That’s better than it cutting off entirely, but Dally says he’s still looking for feedback on the user experience and invited me to check back in a few weeks on the forums to see what users think.

Cheap matters but hardware does too.

To ensure the primacy of Wi-Fi, Republic had to build software that puts Wi-Fi first. It chose to do this using the Android OS not only because the platform is hot but it also allows developers to access the hardware. The first phone for the system will be the LG Optimus. If that’s not optimal, Dally promises that more phones are coming but he was mum about the timeline and particular devices.

The  LG Optimus Android smartphone runs the Gingerbread version of Android and will come preloaded with the Republic software. A first-time user will be asked to put in his Wi-Fi network and then for information on other Wi-Fi access points. The phone will remember that information. Users will also be able to download apps to help manage authentication and payment for Wi-fi networks if they want, but Republic won’t preload any of that onto the handset.

The use of Sprint as the network partner means the phone uses Sprint’s CDMA network, so it won’t roam internationally. And, if Sprint coverage doesn’t work well in your area, think carefully about taking it up. We expect Kevin Tofel to take the handset through its paces later this week.

Is it too good to be true?

The idea of disrupting the cellular world is not a new one, and while VoIP calling over Wi-Fi has come a long way, the quality of experience can be sub par. Dally agrees that delivering better quality of service on Wi-Fi is something he hopes will happen, but he’s also confident that today’s Wi-Fi networks and the ubiquity of access is enough to make this service viable.

And beyond providing cheap mobile service, Dally espouses some of the same ethos that his parent company Bandwidth.com shares– The idea is to take telecommunications from the realm of a few large carriers and make it more egalitarian and IP-based. “The phone prefers WiFi because its ubiquitous and cheap and it’s not controlled by a few large companies,” Dally said. Bandwidth.com owns an IP network (which Republic will use to connect calls) that currently provides VoIP services to Skype, Google Voice and other IP voice providers.

Between Bandwidth.com’s network, Sprint and your home Wi-Fi points, Dally believes he has a service. And given the emphasis on public in all of the company’s branding, I’m wondering if there’s a Fon element to be found here, where members can sign up to share their hot spots. And while today Republic isn’t signing partnerships with existing hot spot and access providers such as the AT&T-owned Wayport, Boingo or even iPass, Dally doesn’t rule them out in the future. Such partnerships which would give it even more flexibility to default to Wi-Fi coverage.

So it’s possible that Republic could flip the mobile phone model so cellular connections and pricing goes the way of satellite phone pricing — expensive and suitable only for a select few who roam the uninhabited wilds. I’ll be eager to see how this experiment plays out. The beta starts Tuesday with Republic offering to ship a cluster of handsets every Friday based on a first come first served basis, and folks can sign up at the company’s web site.

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Motorola’s subsidiary 3LM, which it bought in February, has finally launched its security, management and remote access platform for Android devices that provides BlackBerry Enterprise Server-like support for devices. The service, which can be controlled through a server console, allows IT managers to control the devices they support and protect corporate data while still enabling users to bring their own devices, something more and more workers are doing now.

Specifically, 3LM will enable:

• Device encryption of full memory and SD card data; selective encryption of corporate applications; remote wipe capabilities and whitelist/blacklist of applications; and control applications’ access to corporate resources.
• Enhanced security and control of device, OS, and applications; remote installs of critical enterprise application; device tracking.
• Secure remote access to enterprise resources and device health and status checking.

The 3LM software, which has been in trials in the first half of this year with government, healthcare, retail and education customers, will go on sale this month. Motorola also announced a new enterprise tablet called the ET1, a rugged tablet with a swappable battery, business apps and a HTML5 web-based developer environment called RhoElements.

Meanwhile, AT&T announced a new application called Toggle that allows workers to create two modes for their Android devices that separate business and personal use. The technology appears to be based on software from Enterproid, a company I profiled, which just raised $11 million.

With Toggle, users will be able to segregate their personal usage on the device, which allows them to keep all their private data, like text messages and web and app usage, private from IT managers. When it’s time to work, users can enter work mode and access  corporate email and applications, and all the work environment data can be managed by IT managers. From a web portal, IT managers can remote wipe enterprise data from a device; add, update or delete business apps; and control employee access to company resources.

Toggle works for Android 2.2 devices and higher and will be available later this year with any service provider. The plan is to have Toggle work on other platforms in the future.

The new software solutions help Android in a world in which now 60 percent of companies support devices brought in by their employees, according to Forrester Research. Forrester also recently found that 48 percent of information workers buy smartphones for work without considering what their IT department supports.

In this new era, iOS has proven more popular than Android with workers and IT departments. Good Technology, which offers a popular mobile device management service for non-RIM devices, said in the second quarter of this year, the iPhone represented two-thirds of all smartphone activations while Android smartphones represented the remaining activations. When tablets and smartphones were tallied together, iOS commanded 75 percent of activations compared to 25 percent for Android.

IOS has had more early success with users, and it has been well received by companies, which have been incorporating iPhone and iPads at a high rate. Apple, for example, said 93 percent of Fortune 500 companies are testing or deploying iPad. The iPad’s success over its Android tablet rivals is a big part of the iOS’ lead in the enterprise. But with better management tools that augment what already exists on Android, it may help boost Android’s acceptance in the enterprise, more likely with handsets at first but perhaps more so down the line with tablets.

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Apple has to love this deal–it basically ensures a nice revenue stream for them, even if the world goes into recession and demand for mobile phones stalls. Second, it takes away some of the Android momentum at one carrier where Android has done well. (I know T-Mobile wants an iPhone too, and too bad they are not getting it.) Now for Sprint, I agree there are risks, but they are calculated risks. The exclusivity of iPhone 5 to Sprint is what reduces the risk around this arrangement.

For starters, globally, the average revenue per user for iPhone is about 1.5 to 2 times the average ARPU for all other phones. The numbers are better in the U.S. On an average, in the U.S., average revenue per user for iPhone is about $90 a month, according to Chetan Sharma, principal at Chetan Sharma Consulting. That works out to about $1,080 a year.

Now if  Sprint manages to match Verizon’s performance (it added 2.2 million iPhones during the first two months of the launch of the iPhone 4) during the first six months and another million iPhone users in the next six months, it can attract about 3 million iPhone customers to its roster. I am presuming these will be new customers who would switch to Sprint because of the “exclusive” availability of the device on the Sprint network, or they are fed up with AT&T or Verizon.

That works out to about $3.2 billion in revenues. And given that analysts estimate Sprint to clock in revenues of around $34 billion in 2012, what we are talking about a nice 10 percent bump in revenues for the company. The presence of the new iPhone would also reduce the churn on Sprint’s network and thus would provide the much-needed stability to their revenue stream.

So as I said –crazy yes, but not completely loco!

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Isis announced Tuesday that HTC, LG, Motorola Mobility, RIM, Samsung Mobile and Sony Ericsson will launch NFC-enabled mobile devices that use Isis’ NFC contactless technology. It’s unclear when the hardware partners will start rolling out Isis-capable handsets and what exactly their support entails. But it sounds like it will probably happen next year when Isis launches. Isis said it is teaming with DeviceFidelity to enable other smartphones to enable NFC connections. DeviceFidelity makes SIM chips microSD cards and handset cases that enable a phone to have NFC support.

“Isis’ technology standards provide the direction and certainty needed for the development and deployment of NFC devices and the mobile commerce ecosystem,” said Scott Mulloy, chief technology officer, Isis. “Working together with the device makers and our founding mobile carriers, Isis can provide the consumer choice and scale necessary for widespread adoption of mobile commerce.”

The news is an important achievement for Isis, which is competing with Google’s Wallet NFC platform. Isis executives have told me that the carrier relationships with manufacturers is a key asset for Isis, allowing the operators to help push the adoption of NFC. It’s unclear how the news will affect Google Wallet, which launched earlier this month but on only one handset: the Nexus S on Sprint. Isis said last week that its platform would work on the Android operating system and other smartphone OSes.

The news today may explain why Google has not been able to announce any other handsets that support Google Wallet. Going forward, it will be interesting to see how Isis’ NFC technology works alongside Google Wallet. Almost all the Isis handset partners are Android licensees, including Motorola, which is in the process of being bought by Google. Motorola’s Christy Wyatt, corporate VP of software and services product management, said the company will work with not only Isis but the broader “Android ecosystem” to provide consumers with NFC-enabled handsets.

But stepping back, the news is good for NFC in general, which is having to overcome a perception of hype. Rivals PayPal and Square have both been dissing the technology, saying it doesn’t add value right now. But with the support of handset makers, it could quickly become a powerful tool for not only mobile payments but also mobile marketing, loyalty programs and targeted offers. And the partnerships will help fulfill some estimates for NFC shipments such as IHS’ projection for 550 million NFC devices by 2015. NFC will take some time to become a mainstream technology but the handset makers are showing the necessary support to help it get there.

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Together, these state represent a third of the American population. The addition of the attorneys general to the lawsuit comes one day after members of Congress wrote to President Obama, asking him to approve the deal. AT&T sent the following statement:

It is not unusual for state attorneys general to participate in DoJ merger review proceedings or court filings. At the same time, we appreciate that 11 state attorneys general and hundreds of other local, state and federal officials are publicly supportive of our merger. We will continue to seek an expedited hearing on the DOJ’s complaint. On a parallel path, we have been and remain interested in a solution that addresses the DOJ’s issues with the T-Mobile merger.

We remain confident that we’ll reach a successful conclusion and look forward to delivering the merger benefits of additional wireless network capacity to improve customer service, expanded LTE deployment to 55 million more Americans, $8 billion in additional investment, and a commitment to bring 5,000 wireless call center jobs back to the United States.

AT&T responded last week to the DoJ lawsuit, arguing that the DoJ is wrong, and has vowed to fight for its right to buy T-Mobile. As of now, the attorneys general piling on is one of several continuing blows to the nation’s No. 2 carrier as it seeks to swallow its smaller rival. Even stalwart AT&T supporters, such as industry analyst Craig Moffet, are questioning whether or not Ma Bell can prevail against the DoJ. On the other hand, a Standard and Poor’s analyst seems to think it’s still going to happen.

If the deal falls through, all eyes will turn toward T-Mobile’s future as an independent company, or as a buyout target for Sprint or a private equity firm.

Chetan Sharma, an industry analyst told me last week that consolidation is inevitable in the telecommunications sector, and the DoJ lawsuit means that neither AT&T nor Verizon could go shopping for a big deal (although maybe they can pick up smaller assets). So, while consumers may rejoice, it’s still not clear that T-Mobile, or U.S. mobile broadband competition is out of the woods yet.

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So what happens to T-Mo if AT&T’s can’t buy it? Here are some thoughts on possible outcomes:

T-Mobile goes it alone. With the infusion of $3 billion in a break-up fee from AT&T as well as added spectrum, T-Mobile might give it another go as a standalone network and upgrade to LTE. It’s unclear what spectrum would be handed over and if it would be enough to build out an LTE network. But Reuters has previously reported that the spectrum would be worth $2 billion, while a roaming agreement for T-Mobile would also be valued at $1 billion. It’s unclear if all that would be enough for Deutsche Telekom to change its mind. T-Mobile’s parent company sounded pretty disappointed that the $39 billion deal didn’t go through, but the break-up fee could help keep T-Mobile in the game for longer now.

Sprint could make a play to merge with T-Mobile. It would have to scrounge up a lot of cash, arguably more than it has. The company has about $4 billion in cash on hand and $900 million in borrowing capacity, but it faces a $2.3 billion debt due by March and a network-modernization project that will cost at least $4 billion over the next three to five years. But if it could get the deal done, Sprint could move from a distant third into a respectable rival at the top of the cellular market. The language of the DOJ suit suggests that Sprint may face similar opposition if it tries to go after T-Mobile but even a combined Sprint/T-Mobile wouldn’t rise to the level of a No. 2 carrier. Of course, Sprint would still have to figure out its spectrum issues with LightSquared and Clearwire. And after the nightmare of merging with Nextel, the hefty integration work for Sprint, which uses CDMA as compared to T-Mobile’s GSM technology, could also kill any deal.

T-Mobile could end up being an appealing pick-up for one or more cable companies. The cable companies have come together in the past with Clearwire and Sprint to offer wireless service, and they could band together again to buy T-Mobile. This would give them a more credible wireless play as traditional telcos like AT&T and Verizon move into the TV business. And they’ve got some wireless spectrum assets of their own. It’s still a tall order, but it makes sense if the cable companies can come to an agreement.

A private equity firm could look at taking on T-Mobile. A PE firm could try to run T-Mo themselves, perhaps for a few years while they search for a buyer. Or they could look at selling off the assets if no single buyer emerges. Again, this is another stretch, but there may be some firms that think they could make T-Mobile into a winner, or at least more valuable for sale.

Deutsche Telekom could sell off T-Mobile in parts. DT could just cut out the private equity middleman and start selling off the pieces of T-Mobile. It probably wouldn’t fetch the $39 billion AT&T was willing to shell out, but it could still be a lucrative exit out of the American market. It would probably depend on how much interest DT receives in T-Mobile from any other suitors.

We’ll be talking more about the carrier situation at our GigaOM Mobilize Conference on Sept. 26-27 in San Francisco.

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