According to the Wall Street Journal, Disney-owned ESPN is negotiating with Verizon Wireless to let the operator’s customers partake in unlimited quantities of ESPN content without incurring any additional data charges. In essence, ESPN would pay Verizon to exempt its content from its data caps.

The Journal reported that no deal is imminent and ESPN isn’t even sure that the economics will work, but the fact that it’s entertaining the idea is significant. It turns the notion of a neutral mobile internet on its head. The hierarchy of the internet is pretty simple: customers pay for access in the form of data plans, leaving internet players free use of the mobile airwaves to deliver their content either for free or as paid services. If ESPN and Verizon strike a deal that hierarchy gets flipped, and there would be consequences.

The mobile internet has problems, but it works best when it remains neutral

Mobile operators have chipping away at the principle of net neutrality for years, banning certain apps here and restricting competing over-the-top services there. In Europe, carriers are battling with Google over carriage fees. But in this case, a carrier appears to be challenging net neutrality with the complicity of a content provider. I can understand why ESPN might be eager to take the plunge into subsidizing mobile data. In fact, I’m surprised a big name player like Netflix or Hulu hadn’t done it sooner.

One of the biggest obstacles to widespread video consumption on the mobile internet is overage fees. Who’s going to watch a 3-hour sporting event on their mobile phone or tablet if it drains your monthly data plan in the process? If ESPN wants to make consumers as comfortable using its mobile apps as they are watching its cable programming and using its web services, then it has to get around those data caps.

But there are enormous consequences to such a deal. The biggest and most obvious consequence is that it favors one provider’s content over another. If all access is created equal, then no content has an inherent advantage over another — which is the whole idea behind the wireline network neutrality rules the FCC established in 2010. But if consumers know they can get ESPN’s content without incurring any additional charge, they’ll naturally gravitate toward that content.

There’s an even bigger risk that ESPN’s competitors won’t just get penalized in the eyes of the consumer. Their traffic flow could be penalized as well. Embedded deep within Verizon’s network are policy servers that can distinguish an ESPN packet from any other packet. Not only could Verizon use that technology to exempt ESPN traffic form data plans, it also could use that technology to prioritize ESPN’s traffic from all others. The Journal’s story didn’t mention anything about traffic shaping, but you can bet its high on the list in any negotiation.

Do carriers really want to go down this road?

I suspect ESPN isn’t the only content provider interested in bargaining with the carriers. And I’m sure the carriers are thrilled at the prospects at an additional mobile data revenue stream. But there are risks for the carriers, too.

Operators have long complained about being reduced to mere dumb pipes, but these kind of subsidy deals would only make their pipes dumber. If all the big destinations on the mobile internet starting paying network fees for the consumer, then operators won’t have much left to sell. Consumers basically would be dealing with the big internet brands to get their content and their access. That leaves carriers selling smaller and smaller mobile data plans to customers who will increasingly gravitate toward those big content providers. Operators will have even fewer ways of distinguishing themselves from their competitors.

What’s more, operators are making the very dangerous assumption that they will always have the upper hand in such negotiations. Last week The New Yorker published a very insightful piece by Tim Wu about the growing threat to net neutrality. While Wu was making his case for wireline neutrality, his points apply to the mobile internet as well:

An important aspect of the Internet’s original design is that many prices were set at zero—what have been called zero-price rules. The price to join the network is zero. The price that users and sites pay to reach others is zero: a blogger doesn’t need to pay to reach Comcast’s customers. And the price that big Web sites charge broadband operators to carry their content is also zero. It’s a subtle point, but these three zeros are a large part of what makes the Internet what it is. If net neutrality goes away, so does the agreement to freeze prices at zero.

If mobile carriers and content providers start negotiating over access the delicate balance of the mobile internet suddenly goes off kilter. Right now it’s teetering toward the mobile operators but that might not always the case. ESPN, Google, Facebook and HBO are enormously powerful brands and their consumer influence is only growing. Meanwhile carriers are becoming increasingly less significant.

It’s not hard to imagine a day when ESPN asserts itself in mobile just as its done in the cable industry, turning the tables on the operators. One day carriers may have to pay ESPN for the privilege of delivering its sports content.

Featured photo courtesy of Shutterstock user Lane V. Erickson; Verizon photo courtesy of Flickr user slgckgc

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That’s where Jibe Mobile comes. The company has built a cloud product that makes it easy for carriers to deliver Joyn services to their customers. And it has an app-to-app platform that makes Joyn and its underlying RCS 5 technology accessible to application developers. And that has, in turn, caught the attention of Vodafone Ventures, which is leading an $8.3 million investment in Jibe along with Tokyo-based game creator MTI and other investors. It’s the first outside funding Jibe has taken on.

The money will help Jibe build out its platform enabling developers and game makers to easily add Joyn’s rich media communications services. The first major apps and games to use Jibe Mobile to connect through Joyn will begin appearing in the first quarter.

Jibe co-founder and CEO Amir Sarhangi told me the first opportunities will be in mobile games, helping them get connected the way Xbox Live enabled gamers to participate together in games. He said Joyn can enable true mobile multi-player gaming with almost no lag. Over 4G, games can have have 40-60 milliseconds of latency, which can be improved if the carrier integrates with Jibe. That allows for some fast-twitch games that two players can participate in.

It also enables voice, video and IM communication during game sessions. Joyn also allows for easy sharing of photos and files and location data. That could all be useful for other social apps or it could be used by brands to provide better support to customers. There are also applications in education and health care.

Getting people on board Joyn makes sense for carriers like Vodafone. It keeps them in the conversation and helps them compete against over-the-top messaging services. And it ensures that subscribers use more data, which they can charge for.

But Sarhangi said there’s more to it than that. An operator could eventually charge more — say a few dollars a month — to mobile gamers who want a higher level of quality of service for their multiplayer games. That could allow the carrier to sell in essence a high-speed tier, kind of like what home broadband providers do. Operators could even share some of their added data revenue with mobile developers whose games drive these higher subscriptions.

“You’re going to see more segmentation on pricing of data because voice and data is going down. Carriers will try to recreate new value and services and this is a way for them to do it and be open about it rather than being a dumb pipe,” said Sarhangi. 

As I said with Rebtel’s new developer platform, which also helps voice-enable apps, it’s unclear how many developers will look to connect their apps. Jibe says it has more than 500 developers working on Joyn-enabled apps.

And with Joyn, you’ll need carriers to sign on. Movistar (Telefonica), Orange and Vodafone jumped on board with Joyn in Spain last month and Deutsche Telekom and Vodafone Germany are also joining along with MetroPCS in the U.S. Joyn won’t solve all the carrier problems but it at least give them something to put their hope in as they look to regain some of their declining voice and SMS revenue.

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Put simply, T-Mobile is upending the established business and device distribution models of the U.S. wireless industry, separating the handset from the service. It’s a model that’s thrived in Europe and other countries, but it’s one that’s failed to gain traction in the U.S. except in the prepaid market, namely because U.S. consumers like getting even the most sophisticated high-end phones on the cheap.

Traditionally a U.S. operator sells a device at a steep discount in an effort to lure customers. It doesn’t just write off that subsidy. It makes that money back and then some by charging higher rates for voice and data over a long contract term. It’s a model that’s worked well for big operators like AT&T and Verizon Wireless, turning them into two of the most profitable and highest revenue-generating operators in the world despite the fact that many multinational carriers have far more subscribers.

T-Mobile proposes to reverse the equation with its Value Plans. Customers pay the full cost of their device, either up front or in installments, or bring their own compatible handsets. In exchange, T-Mobile will offer them cheaper rates, in many cases $20 a month cheaper than it would charge for a subsidized phone plan. Do the math: that’s $480 in savings over two years, which in many cases is much more than the up-front discounts operators are offering on subsidized phones (For instance, a Samsung Galaxy S III subsidy on T-Mobile is $350 including rebate). Given that T-Mobile’s subsidized rates are already much cheaper than its major competitors, the savings from T-Mobile’s Value Plans are compounded.

The repercussions of T-Mobile’s strategy will be felt far beyond the point-of-sale and monthly bill, though. If successful, T-Mobile’s elimination of subsidies could have a huge impact throughout the U.S. mobile ecosystem, changing how we value our devices and our relationships with our carriers and handset manufacturers.

• The rise of phone financing: T-Mobile knows that it will take a while for consumers to overcome the sticker shock of a paying full freight for phones. T-Mo CEO John Legere said T-Mobile would implement financing programs that would mitigate those up-front costs. In the example he gave, a customer could get an “iconic smartphone” for $99 down with monthly installments of $15 to $20 for 20 months.  This will look pretty similar to a subsidy plan to most customers – the device payments will just be separate from the service fees on the monthly bill. But operators won’t necessarily be the only ones financing. Handset makers, electronics retailers could offer their own programs.
• Greater portability of handsets between carriers: There will always be restrictions on where you can bring your phone due to huge variation in network technologies used by U.S. carriers. But moving to an unsubsidized model means for the first time consumers can buy their devices and then select their carriers. Keep in mind T-Mobile’s Value Plans are still contract plans (for now), but it offers prepaid plans as wells. By buying their phones up front consumers would have more flexibility in moving GSM/HSPA phones between T-Mobile, AT&T and the growing number of mobile virtual network operators (MVNOs) that use their networks.
• Less carrier control: If your carrier isn’t selling you your device then they should have less say in what services or apps you can use. That could be a simple as avoiding the pre-installed apps carriers load onto our smartphones, but it could also mean that you’re no longer dependent on your carrier to ship you OS upgrades. It will also be more difficult for them to restrict over-the-top services over their networks (read FaceTime) or limit you to their mobile payment services.
• A larger selection of devices: Carriers have always acted as device gatekeepers in the U.S. Until recently, Nokia couldn’t make a dent in the U.S. because it couldn’t strike the right operator deals. Unsubsidized phones mean that vendors can start marketing and selling directly consumers with no carrier middleman.
• Huawei and ZTE could become household names: These two Chinese juggernauts have made some in-roads to the U.S., but they’ve only gotten as far as the carriers have let them. Mostly their U.S. business consists of low-end feature phones or inexpensive carrier-branded smartphones like T-Mobile’s MyTouch. But a vibrant direct-to-consumer market could benefit Huawei and ZTE immensely. Both can make high-end smartphones at low prices, which would be very appealing to consumers paying the full cost of their devices.
• The development of a vibrant phone resale market: Smartphones are expensive and sophisticated devices, but their low subsidized cost in the U.S. has caused us to treat them like throw-away electronics. But if customers are faced with full sticker price of their phones, they would be more inclined to reuse them and sell them to recover their costs, and customers on a budget would be more inclined to buy used and refurbished phones.

Of course, T-Mobile is just one carrier. The other operators have also expressed discontent with the subsidy model, but they aren’t going to give up on it overnight. In fact, they will probably attempt exploit T-Mobile’s big strategy shift for all its worth. Verizon, AT&T and Sprint have a huge advantage: they will “sell” the same iPhone for $200 that T-Mobile is asking customers to buy for $650 – that’s a powerful argument.

T-Mobile has a tough job ahead of it convincing customers they will save money and benefit from its model in the long run. If T-Mo succeeds, other carriers will follow its lead, changing the U.S. mobile industry for the better. If it doesn’t, this will be just another noble but failed experiment for the history books.

Feature photo courtesy of Shutterstock user Robert Kyllo; T-Mobile image courtesy of Flickr user swruler9284

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That milestone is just for Android installs and doesn’t include iOS, BlackBerry, Windows Phone or Symbian and Nokia’s S40 devices. But it gives you a good sense of just how big this app is. It’s now in the 100 million download club on Google Play along with Skype, Facebook, Angry Birds and a bunch of Google apps.

WhatsApp is also the top overall paid app in the Apple App Store in 119 countries, according to analytics firm App Annie, and continues to be the top paid social networking app in the U.S. and among the top five overall paid apps here.

It’s possible and likely, even, that WhatsApp could actually have more than 200 million installs collectively when you count all the other platforms. And these users are also heavily engaged with WhatsApp. The company tweeted in August that it hit a new daily record of 10 billion messages sent and received in a day. That’s up from 1 billion messages a day one year ago. 

I’ve reached out to WhatsApp to get a word on its overall download totals, but the company declined to comment, only confirming that it passed the 100 million mark on Google Play last week. This is a huge group of people messaging at a prolific rate outside of traditional SMS. So you can understand why WhatsApp makes some carriers nervous.

WhatsApp, however, is also working with carriers and trying to encourage subscribers to buy data plans. It has struck deals with more than 10 operators including Indonesia’s Telkomsel, which released an unlimited data plan for WhatsApp, KakaoTalk and Opera Mini. In September, the company signed a deal with Hong Kong operator Three, allowing Three subscribers to gain unlimited data access to the app for $1 a month. Three users also had the option of paying $6 a day for a WhatsApp Roaming Pass in 78 places around the world.

With WhatsApp showing no signs of letting up, we will probably see more operators line up and try to secure deals with WhatsApp.

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How popular? Well, the company said it has now hit 90 million users, adding 20 million in just over two months. Those users are now spending more than 1.5 billion minutes on calls and sending over two billion text messages each month. And the messages should keep on flowing now that Viber is adding group messaging with Viber 2.2. available on iOS, Android and on the BlackBerry beta.

Group messages has been around for a while, so Viber is coming late to the party. But group messaging on Viber comes with a smart notification feature to limit new message alerts. There’s also a simple system for starting group messages, which can include text, photos and location.

The 2.2 update also includes an HD voice engine to improve call quality and reliability and the ability for users to add photos to their contact lists. And for Android users, Viber offers support for Arabic, Chinese, French, German, Hebrew, Portugese, Russian and Spanish with expanded language support coming soon to the other platforms.

Communications apps like Viber are scaring carriers, who are seeing some of their most profitable services undercut by over-the-top services. Viber’s fast growth will only ratchet up fears that users will reduce their dependence on voice and texting plans. It’s going to force carriers to get creative with pricing, something we’re seeing with the new shared family plans from Verizon and AT&T. 

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KakaoTalk, which now boasts 52 million users worldwide, launched in 2010 just a couple a months after the debut of the iPhone in Korea. It quickly shot to popularity thanks to its messaging features, which like WhatsApp, TextPlus, BlackBerry Messenger and iMessage, provide an alternative to SMS text messages. But its breakthrough came in early June when it finally launched a VoIP service in Korea after first introducing it internationally. After three days, users in Korea were making 20 million calls a day. That’s when the two biggest carriers stepped in.

SK Telecom and KT began degrading service for the lowest two tiers of their data plans, causing enough dropped calls that it was unusable for many users, said Kate Sohn, VP of international business development at Kakao Corp. Subscribers with more expensive unlimited 3G or LTE plans were able to make calls without disruptions but they still faced limits on how many megabytes they could use on VoIP calls each month. That stopped KakaoTalk’s voice service right in its tracks. The app has not reached 20 million daily calls since the two carriers started degrading servie, Sohn said.

Any hope that the government would step in on the side of KakaoTalk and other VoIP providers went out the door last week when the Korea Communications Commission, South Korea’s equivalent of the FCC, ruled that operators could block these apps or charge extra fees to use them. This came after the carriers complained about strain on their networks and declining revenue due to mobile voice services.

Earlier this week, LG U+, the third-place carrier in Korea, which beforehand had simply blocked KakaoTalk’s voice service, decided to cash in on the new regulations. It introduced a new pricing policy that allowed users to use VoIP services, but only up to a limit each month. If customers go over that VoIP limit, a $7 fee kicks in.

I talked with Sohn about the challenges facing KakaoTalk and other VoIP providers. She welcomed the change of heart by LG U+, saying it was an improvement. But she said it’s still unclear what SK and KT will do. And that uncertainty means there’s a danger to all app makers that they could be blocked or stifled by the big carriers.

“In the short and mid-term it’s absolutely important to collaborate but in the long run if we, the country and the major players, don’t set the right example and direction, there’s a going to be significant damage to the industry,” Sohn said.

Ten years earlier, Korea went through an internet boom with a lot of new companies springing up to feed the demand for content. But Sohn said the broadband operators stood as gatekeepers and made it hard for many start-ups to compete. Most didn’t survive. Now, she’s worried that Korea’s revived startup scene, which is leaning heavily on mobile, will see a similar fate if the carriers are able to block applications that they don’t like. Ideally, she said the carriers would work together with application developers and figure out a way to collaborate.

The Korean carriers are in the same boat as many other operators around the world. They’ve invested a lot in the data networks, but their biggest revenue and profit comes from voice and SMS. Over-the-top services are chipping away at their most profitable services and it’s forcing carriers to respond. Some are going directly after services such as Skype. In Sweden, TeliaSonera is planning to charge people extra to use Skype and other VoIP services. In the U.S., network neutrality rules aren’t extended to wireless networks, but the FCC has said it would look askance at operators who try to discriminate against services that carriers also offer such as voice and messaging. Verizon Wireless has been the most aggressive operator in protecting its voice and SMS revenues: it’s new Share Everything family plans require customers to buy unlimited voice and SMS plans. It’s also protected itself from OTT players like Skype by partnering with Skype directly.

This is going to be a tough transition for carriers as they adjust their business models to account for the fact that voice and text messages are just data in their pipes. Some carriers may make life hard on OTT services, but the smart ones will accept the changing reality and reshape their business plans and partnerships accordingly.

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Case in point: Disney’s just-released iOS apps for kiddie cable channels Disney Channel, Disney XD and Disney Jr., which seem to steer viewers looking to stream older episodes toward Netflix.

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The three apps let the 22 million subscribers of the No. 1 pay TV service, Comcast’s Xfinity, watch live feeds of the Disney channels, plus a limited selection of repeats, on iPhones and iPads. A more limited amount of content is available to non-Xfinity users who can’t authenticate their subscription through username and password.

As noted Friday by BTIG Research, which test drove the new apps and audited their content, pretty much every show from each of the three youth-targeted networks is represented. (Having streamed The Avengers: Earth’s Mightiest Heroes on my iPhone, I can verify this.)

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Notably lacking, however, is catalog depth. BTIG cited the example of Disney Channel show Good Luck Charlie. The Xfinity app lets users watch seven episodes spanning two seasons. Netflix, on the other hand, offers 56 episodes comprising three full seasons.

With the Disney apps being among TV Everywhere’s early major content offerings, a strategy has emerged whereby media companies like Disney who do business with Netflix or other streaming services attempt to steer clear of undermining the subscription video on demand service.

In recent interviews, Netflix CEO Reed Hastings and chief content officer Ted Sarandos have stressed their company’s role in the television ecosystem as one of a “catch-up” service, providing comprensive libraries of repeats and steering clear of fresher episodes.

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Certainly, giving Netflix that space to operate makes sense for Disney. According to Sanford Bernstein research, the conglomerate makes about $100 million a year from licensing “library content” from networks including Disney Channel and ABC Family to Netflix, with which it has a one-year licensing deal that expires Oct. 31.

What remains to be seen: Will other channels that license content to SVOD services, like Viacom’s Nickelodeon, release TV Everywhere platforms with the same approach to archival episodes?

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At its heart, the policy manager identifies individual subscribers on the mobile network and applies rules and restrictions to the services each uses. For instance, the policy manager is what throttles back your data speeds if you exceed the soft caps AT&T and Verizon Wireless have imposed on their unlimited plans. The manager also manages the intricacies of tiered data pricing, making it a key element in handling Verizon’s new shared data plans. Platforms like Openet’s will track how much each device in a shared plan consumes and subtract that usage from the communal data pool.

The policy manager is going to have an even bigger impact as carriers start implementing more complex data plans. Verizon and AT&T are both enjoining content providers to start paying the carriage bills on their own content, essentially creating “toll-free” data lanes for specific services and traffic. The policy manager will not only identify which traffic is exempt from a subscriber’s data allotment, but it could also prioritize those services across the network, ensuring, for instance, that YouTube packets have the right of way over Vimeo packets.

In telco-speak this kind of traffic shaping is called “quality of service,” but what it really boils down to is favoring certain content over other. This technology will become especially important when carriers launch their own VoIP services over LTE. One of the key ways carriers will differentiate their core services from over-the-top services such as Skype and WhatsApp is by giving their voice and message packets access to a fast network lane.

Openet is competing in a crowded market. ABI Research estimates there are between 40 and 50 vendors selling policy platforms. They range from small specialist companies like Volubill and Tango Telecom to the big telecom infrastructure vendors, who have largely bought up the most successful policy players in the market. Tekelec picked up Camient in 2010, followed by Ericsson’s blockbuster $1.2 billion purchase of Telcordia last year. Billing giant Amdocs also scooped up smaller policy vendor Bridgewater in August.

Openet may be small but it has some impressive customers, including AT&T and Verizon, Bell Mobility, Orange, and Vodafone Netherlands. Given who led this latest funding round, Openet may be looking to use its new cash to expand into Asia. Japan’s NS Solutions, a subsidiary of Nippon Steel, was the lead investor in the $16 million equity infusion, which also included participation from Balderton Capital, Cross Atlantic and Kreos Capital. Since the company’s founding in 1999, the company has raised a total of $55 million.

Former Aircom CEO Margaret Rice-Jones is also joining Openet’s board, which could wind up being a strategic appointment. Wireless consultancy Aircom has relationships with operators around the world and has helped many of them set up the types of tiered data plans that would require the services of a policy management platform.

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The company that sells a 1 Gbps connection for $20 a month is happy admitting to the world that they are selling a “big dumb fat pipe”. I don’t expect AT&T or Verizon or British Telecom are doing that. After all, their copper/fiber is special, handcrafted in factories high up in Italian mountains. The Hong Kong service provider, however, has a different take:

[At] Hong Kong Broadband Network, a wholly owned subsidiary of City Telecom, we are proud to be a Big Fat Dumb Pipe provider, easily handling average bandwidth consumption of over 100GB/month per user across our 600,000 plus FTTH/B customer base.

At HKBN, we embrace Over-The-Top (OTT) content providers who help fill up our excessively Big Fat Dumb Pipes. We happily co-exist with OTT providers, as together we create value for our customers. Our superior bandwidth capability is the LUCA (Legal Unfair Competitive Advantage) that drives our industry leading 17.5% return on equity1,” said Mr. Lo Sui Lun, Chief Technology Officer of HKBN. (HKBN Press Release, PDF.)

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