The carriers don’t just know whom we are calling, when and where. They have the infrastructure in place that allows them to track the websites we visit and the applications we use on our phones and tablets.

They know all of this because it’s their job to know. When our phones connect to the internet they don’t just magically grok with Google or Facebook. That data is routed through carrier network cores, where packet-sniffing, traffic-shaping, and content optimization engines lie in wait. And — at least in the past — they’ve actually put such monitoring software directly onto our phones (more on that in a bit).

There’s nothing innately nefarious about such traffic management, though in some cases, such as speed-throttling and app-blocking, consumers aren’t happy with the results. The reason they’re manipulating our mobile internet traffic is to conserve limited wireless bandwidth, to provide a better customer experience, and to, yes, protect their own their own services and revenue streams.

The mobile internet has many eyes

Companies as diverse as Skyfire, Cirix Systems and Vasona Networks sell traffic optimization technology to mobile operators that lets them transcode video on the fly, tailoring it to the resolution and parameters of your phone screen.

Almost every major carrier uses some kind of policy engine, supplied by companies like Oracle and Openet. Those engines are the rule makers and the rule enforcers of the mobile internet. AT&T, Verizon Wireless use them to throttle back your speeds when they deem you’ve ‘abused’ your unlimited plan, while T-Mobile does the same when you’ve exceeded your data cap.

These technologies have been used for questionable purposes, for instance to enforce TeliaSonera’s short-lived fees on VoIP usage, but they’ll also become the basis of new forms of data pricing. For instance, Orange uses policy overseas to offer special social networking plans, giving customers unlimited Facebook access on what would normally be capped plans. AT&T and Verizon are both promoting the idea of a subsidized mobile internet where content providers like ESPN and Hulu pay the network freight charges for their content.

The point is that in order to apply these rules and optimize traffic, carriers need to know what that traffic is: which web pages are being rendered and which videos are being streamed. And ultimately they need to know to whose phone that content is bound.

The lesson of Carrier IQ

Mobile operators use of these technologies landed them in hot water two years ago, when a developer discovered a hidden mobile app on his Android device that appeared to log all of his smartphone activity and send it out to a company called Carrier IQ. It turned out that Carrier IQ’s software had been installed on millions of devices sold by Sprint, AT&T and T-Mobile.

Carrier IQ’s purpose was intended to be benign. It’s a diagnostic tool, used by operators to quickly identify and address network problems and to trouble shoot smartphone apps or services when customers called into customer service. But as Carrier IQ acknowledged its platform could collect some pretty specific data in pursuit of that diagnostic mission, including what URL customers were visiting and what apps they were using.

The controversy resulted in a firestorm of media coverage, a Congressional inquiry and led many U.S. carriers and device makers to excise Carrier IQ from their handsets. The scandal largely blew over after a few months, but the fact remains that carriers had installed hidden monitoring software on their customers’ handsets without telling them and without giving them a means to opt out.

(I reached out to Carrier IQ and was told that it has received no national security requests for its data, nor is it aware of any law enforcement agency interested in that data.)

Secretive operators and secretive governments make a scary combo

I seriously doubt that the operators have big gigantic databases storing every detail of their customers’ mobile internet habits. They have no reason to create them. Their interest in all of this data is to optimize their networks, bill for usage and making their customers stick the service rules they’ve set – all in real time. Most of that data becomes useless the moment after it traverses the network.

But it wouldn’t be difficult for the NSA to collect and aggregate that data from carriers networks, just it’s reportedly doing with web giants Google and the ISPs. The mobile operators are essentially ISPs that offer roving connections. It could get that information form multiple sources, gathered from within the network or on in some cases directly from our phones. All it would take, I assume, is the proper FISA order.

And there’s certainly precedence for governments going after such data before. In 2011, Nokia Siemens Networks attracted some unwanted controversy when it was revealed the mobile network it sold Iran’s state run telecom provider was being used to spy on its citizens’ IP communications.

Good technology can be used for bad purposes. That doesn’t mean we should toss out the technology. In the case of Carrier IQ, many consumers might welcome the idea of their carriers knowing the reasons why their phones aren’t working properly. Traffic optimization prevents an entire network cell from being bogged down streaming an HD video to a tiny phone screen. Policy servers could eventually lead to incredibly customizable cellular service and maybe even the widespread re-adoption of some form of inexpensive unlimited data plan.

But there’s also a very scary proposition here. We have a government with no qualms about secretly collecting information on its citizens. And we have a mobile industry that isn’t up front about what data it can and does collect from its customers. It’s bad enough information we know is tracked is being secretly shared with the NSA. But what about the information we don’t know carriers collect?

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I have no access to the original post, but based on the numerous reports circulating the web, developer Joseph Brown identified several lines of code in the iPhone that he claimed introduced artificial barriers to the device’s performance — the network equivalent of putting a restrictor plate on a race car. I’m no coder, but AnandTech’s Brian Klug is, and he has posted an in-depth piece thoroughly debunking Brown’s conclusions.

AT&T’s HSPA+ network (in dark blue)

It’s pretty technical stuff, but what it boils down to is this: Brown was just plain wrong in his interpretations of the code’s purpose. Brown interpreted the word “throttle” in the code to mean downgrading network connection speeds, but as Klug points out throttle in this case refers to “retry interval throttle,” which is the mechanism that prevents a phone from continuously searching for an LTE signal when there are none present.

The other bullet to come out of Brown’s smoking gun is a reference to the “Category 10” speed restrictions in the AT&T iPhone’s code. In industry parlance Category 10 is an iteration of HSPA device technology — in general, the higher the category, the more performance you can get of a handset. Category 10 can support a maximum theoretical downlink speed of 14 Mbps. Brown argued that AT&T’s networks could support much faster speeds, so by limiting devices to category 10 connections it was — by default — throttling speeds.

First off, AT&T’s 3G network historically has only supported category 10 speeds. AT&T simply has older gear than operators who came later to HSPA like T-Mobile, making its upgrade path to 21 Mbps HSPA+ more difficult. AT&T claims that it did make the jump to 21 Mbps as well, though the upgrade doesn’t appear to have stuck. According to AT&T network watchers I know and trust, AT&T hasn’t supported a connection higher than category 10 in years. The point is AT&T’s HSPA+ network can’t maintain a connection faster than 14 Mbps, no matter what code is in the phone. The network just isn’t capable.

To top it all off, though, Klug found that the code Brown was referencing actually applied to the iPhone 4S, which was never really a full-fledged HSPA+ device in the first place. The 4S came with a category 10 chip. Even if AT&T had the most bleeding-edge 3G networks in the industry, the iPhone 4S would never be able to connect to them faster than 14 Mbps.

There is nothing sinister going on here. As Klug points out, these are just different carrier-specific device configurations that all phone makers use. Don’t get me wrong: I’m not saying AT&T would never throttle speeds — in fact, it readily admits to doing so in some cases — but there are far easier and more elegant ways of doing so than by locking down a phone’s code.

As I’ve pointed out before, all of the major carriers have finely tuned traffic-shaping machines called policy servers in their network core. Not only could they throttle back speeds to a particular class of devices like the iPhone, they could restrict bandwidth to particular customers, particular apps and even at particular locations and times in the network. They could prioritize certain customers or certain applications packets over others.

If AT&T wanted to throttle, it would do it from its network operations center, not in Apple’s code.

Code screen shot courtesy of iTweakiOS via Apple Insider

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Content providers could do this through direct payments to carriers, Stephenson said, but according to Fierce, he also said they could subsidize data costs through some kind of advertising revenue share. The end result, though, would be the same: content providers who pay would see their traffic exempted from customers’ mobile data caps.

Randall Stephenson

Stephenson comments come a week after reports that arch-competitor Verizon Wireless is in discussions with ESPN for just such a toll-free data deal. What seemed like a crazy suggestion from AT&T and other carriers last year, now looks like it might become reality. But is it a reality we really want?

A content provider-subsidized internet would be appealing to many consumers, especially those on AT&T and Verizon since carriers have hunted the unlimited data plan to the point of extinction. Imagine streaming Netflix movies and ESPN games to your heart’s content without ever worrying about exceeding your data cap or incurring overage fees.

But as I pointed out last week there could be some major unintended — or if carriers are being really cynical, intended — consequences to adopting these kinds of subsidy models. Legally mobile operators aren’t subject to the same net neutrality guidelines as the wireline broadband providers, but if mobile carriers created two separate classes of mobile data traffic they could upset the delicate balance that makes the mobile internet the mobile internet:

… 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  [Wall Street] Journal’s story didn’t mention anything about traffic shaping, but you can bet its high on the list in any negotiation.

What’s particularly noteworthy about Stephenson’s comments, though, is the mention of using advertising as a former of subsidy currency. Stephenson could just be talking about inserting carrier-generated advertising into their app ad engines as compensation for their free ride on the network. But the other implication is that AT&T wants a true revenue share, taking a cut off the top of any revenue generated from YouTube ads or any Netflix subscription used on mobile.

This is an old idea the mobile industry first proposed way before the advent of the smartphone – in an age when the mobile internet was still a walled garden and carriers its gatekeepers. The idea was that operators would become equal partners with content providers, and that’s a scary proposition. I doubt that content providers want to give the gate keys back to the carriers.

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Zact is one of the new breed of mobile virtual network operators (MVNO), though ItsOn CEO Greg Raleigh refuses to use that term to describe his company. Like any MVNO, Zact doesn’t own any spectrum or wireless network infrastructure. It buys its access from a larger carrier instead – in this case Sprint. But Raleigh argues that MVNOs typically repackage traditional mobile voice and data plans, selling them at cheaper prices and without contracts. Meanwhile, Zact is offering a radically different way to buy services, making its plan options so granular that customers can tailor them specifically to their mobile habits.

Zact is actually a lot like Ting, an MVNO launched by Tucows last year that allows customers to select their voice, data and SMS usage separately, lets customers share those services across multiple phones and charges customers only for the minutes, texts and megabytes that they actually use. Zact, however, is taking that concept one step further.

The company plans to offer plans you can customize by the app. For $5 a month you could choose an unlimited Facebook or unlimited navigation and mapping plan, which would exempt either service from your monthly data usage. The virtual carrier is also supporting granular parental controls, which could let adults remotely control when their kids use their phones, but also who they call and what types of apps they can access.

The mobile industry has been talking about such app-tailored plans for years, but, except for a few limited cases, carriers have yet to implement them. The reason Zact is ahead of the curve is because ItsOn core business is in the policy management technology that powers such service models. While there is a huge segment of the wireless industry dedicated to building network-based traffic shaping and policy service technology, ItsOn is trying upend that market by virtualizing all of those capabilities in the cloud.

ItsOn is already trialing its technology with four major carriers – three in Europe and one in the U.S. – but the company wanted to jumpstart demand for such customizable service plans by launching its own service provider, Raleigh said. He added though, that ItsOn has no plans to shut down Zact even if it proves successful selling its cloud policy service to carriers.

ItsOn, however, faces a lot of competition on both sides of its business. The big telecom vendors like Ericsson, Alcatel-Lucent, Oracle and Cisco Systems have been upping their game in the policy management space, in many cases buying up smaller policy players. Alcatel-Lucent recently unveiled a new consumer-facing phone client and back-end management system called Smart Plan that supports most of the same plan tailoring features Zact and ItsOn offer.

The MVNO market is becoming an increasingly crowded one, as well. Ting not only has a head start over Zact, it’s also supporting many new and popular smartphones like the Samsung Galaxy S 4. Meanwhile Zact is selling two older LG Android devices for now. Dozens of other MVNOs are vying for consumers’ attention, and though they may not have the granularity of Zact or Ting’s service plans, they’re all trying to distinguish themselves with other features just as likely to attract consumers’ attention such as ultra-cheap pricing or unlimited data.

Multiple smartphones image courtesy of Shutterstock user Reno Martin

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In February, Oracle announced it would buy VoIP signaling vendor Acme Packet for $1.7 billion. The terms of the Tekelec deal weren’t disclosed. Once it closes on both investments, Oracle is set to become a signaling powerhouse.

Tekelec specializes in the signaling protocols and load balancing technologies that prevent mobile networks from getting overloaded. For instance, the outages Verizon experienced on its LTE network in late 2011 were partially attributable to signaling overload. Meanwhile, Acme Packet makes session border controllers (SBCs), which manages VoIP and multimedia control traffic that pass between carrier and enterprise networks.

Oracle, however, will get more out of Tekelec than just signaling expertise. Tekelec is also a big player in the traffic-shaping world. Mobile operators use its policy servers to prioritize bits from certain type of applications – and certain subscribers’ – over others. The result is a bunch of things most of you don’t often find pleasant, such as throttling back your data speeds when you exceed your monthly cap or detecting when you use your phone as a mobile hotspot and charging you extra for it.

But eventually those same policy management features will be used for a much broader range of features and tailored data plans. Jasper Wireless is using Tekelec traffic shaping technology to make data flow more smoothly in the internet of things, for example. And operators are weighing new types of tiered data plans that allow customers to customize their network connections based on the types of apps they use.

“Oracle has in the past partnered to provide these capabilities, but by bringing them in-house it will have more opportunity to shape the roadmap and combine the capabilities in a more tightly-coupled solution,” Ovum Principal Analyst Dana Cooperson said in a research note. “Expect Oracle’s telecom-focused competitors (Alcatel-Lucent, Huawei, Ericsson, etc.) and it’s IT-focused competitors (HP, SAP, SAS Institute) to do more strategic soul-searching and, as their financial situation allows, to pursue acquisitions of their own.”

Many of them already have. Cisco Systems bought policy management firm BroadHop in December, while Citrix System acquired ByteMobile.

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Vasona is one of a myriad of companies that develop traffic shaping technologies for mobile networks, but Vasona sets itself apart not in what it optimizes but where it does that optimization. As I wrote back in January:

Where Vasona distinguishes itself from the lot is in the level of precision it can target with its traffic shaping techniques, said Biren Sood, CEO of the Santa Clara, Calif.,-based company.

Most optimization technologies apply the work across entire classes of data in the network core, or they follow specific subscribers as they move to and fro, throttling back their speeds or compressing their videos regardless of the prevailing network conditions.

But Sood said that the network should be treated as a collection of its parts, rather than as a unified whole. Congestion occurs at the individual cell, so carriers should optimize their networks accordingly, applying traffic management techniques only where congestion dictates, Sood said.

“We understand the nature of the cell, and we understand the capacity of the cell,” Sood said. “With that understanding we can get the right bits to the right applications in the most efficient way.”

I checked back in with Sood on Monday, and he told me that Vasona plans to use the funds to scale its operations and trial activity globally. The company is already engaged in several trials with operators, Sood said, though he wouldn’t reveal specific operators (given Vodafone is an investor, it might be a safe bet). Vasona has now raised a total of $22 million.

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It may sound like another arcane bit of telco gear, but you’re likely much more familiar with policy engines than you might think. The policy server or manager is what throttles back your mobile broadband speeds when you exceed your monthly data quota, it tells your operator when you’ve been using your phone as a mobile hotspot on the sly, and it charges fees for services that some operators restrict like VoIP.

So what does a machine-to-machine (M2M) communications specialist like Jasper need with a high-powered policy engine? I put that question to Tekelec when we discussed the Jasper deal, and it turns out that policy is much more crucial to M2M and running vast networks of connected appliances and gadgets than I thought.

What it comes down to is that not all “things” in the internet of things are created equal, Tekelec Director of Strategic Marketing Joanne Steinberg said in an email interview. In the world of consumer applications, we chafe at the thought of one service or app being prioritized over another. But when we start talking about prioritizing devices, that all changes.

“For example, if I have a smartphone, a diabetes monitor, an alarm system and my child’s gaming device on a shared data plan, I may want my smartphone to have priority at certain times, and I would want my diabetes monitor and alarm system to always have a higher priority,” Steinberg said. “If I am an enterprise customer tracking multiple machines around the world, I may want my security cameras, safety and inventory tracking devices to have a higher priority than my vending machines.”

You don’t want your medical alert device to wait for a soda machine to finish uploading its inventory data before it transmits its emergency alert. Policy servers will assume the role of traffic cop not just over these millions of different connections, but the applications riding over them. A device like a security camera might normally have a low priority when it uploads its daily feeds to a video server, but when a crime is in progress the authorities need to see those video packets in real time.

What’s more, policy will pay a key role in billing for those different kinds of connections. In a world where millions of devices are always connected but only transmit intermittently, the concept of the monthly data plan goes out the window.

An individual customer could have millions of devices – for instance Amazon and its Kindles – sharing the same “quota pool,” Steinberg said, but in the case of M2M the value of a megabyte of data can vary greatly depending on the application. The amount of data an entire grid of smart utility meters could consume might be miniscule compared to the data a single tablet could eat up each month, but the utility would wind up paying far more due to the sheer number of connections supported.

“You can think of policy as the brain of the ‘Internet of Things’ because it intelligently defines the rules for all the ‘things’ that are and will be connected to the Internet based on network conditions, application and device priority, speed and bandwidth requirements, time of day and so on,” Steinberg said. “It will determine, when different devices and applications will have priority, what bandwidth and speed will be assigned, when to send alerts or new service and software updates – the list is endless!”

We’re going to see these kind of policy rules set not just in the internet of things, but in the plain old internet of phones and phones. Carriers are already weighing a new type of tiered plan, in which the tiers aren’t determined by monthly data allowances, but by service quality. It might not be much longer before we have the option to pay higher rates each month to ensure our traffic is sent via network fast lanes. Of course, if we opt not to play those higher rates, we might just get stuck in the on-ramp.

Feature image courtesy of Shutterstock user Lightspring

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Denver-based BroadHop has developed a traffic management and policy server deployed in more than 70 wireline and mobile carrier networks around the world. The technology allows a carrier to develop service tiers based on bandwidth or application. Such a “policy” could take the shape of a simple speed boost – customers who pay more each month could get access to a faster pipe. The reverse is also true: it’s a policy server that’s downgrading your bandwidth when carriers throttle your data connection.

But BroadHop’s technology can be used to create much more sophisticated tiers than merely “fast” or “slow.” Policy could be used to craft video-streaming or VoIP plans, which prioritize video or IP communications packets over all others from the network core all the way up to the airwaves. That traffic could not only be shaped for different service tiers, it could be used to charge different rates for different types of traffic.

It’s that kind of advanced packet prioritization that Cisco seems most interested in, particularly as it mobile carrier customers search for ways to replace their threatened voice and SMS revenue.

In the Cisco blog post, VP of Corporate Business Development Hilton Romanski said that BroadHop would become part of Cisco’s mobile carrier group and its technology would become the baseline from which Cisco would build a raft of new applications. For instance, Romanski said BroadHop tech could be used to power a mobile video-on-demand service where a customer paying for a movie would find his bandwidth boosted and his video bits prioritized over all other traffic.

Operators like Verizon and Leap are already experimenting with the concept of a “turbo” button on mobile phones, and AT&T is broaching the delicate subject of having developers foot the bill for their mobile traffic their apps generate. If these concepts ever see the light of day, the policy servers like BroadHop’s are going to become critical elements in the network.

Cisco certainly isn’t the only one who spots this trend. All of the major mobile infrastructure and software vendors have acquired or invested in building up their policy portfolios in the last few years. The most recent is Citrix, which bought Bytemobile earlier this year.

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Bytemobile has two core products: Unison and the T-Series Adaptive Traffic Management System, both of which use a combination of content caching, deep packet inspection (DPI), policy management, analytics and video and web traffic optimization technologies to shape mobile data traffic as it traverses the operator’s network.

The platforms can be used to pare down payloads bound for the mobile phone – for instance scaling video to the resolution of each device’s screen– and manage congestion over an operator’s 3G and 4G data networks. Another key feature is the ability of Unison and T-Series to prioritize certain packets over others. Carriers already use traffic prioritization to throttle customers that exceed soft data caps. But the technology could become more significant in the future if carriers decide to give their own VoIP services preferential treatment and start favoring specific content partners’ video and Web services through “toll-free” traffic agreements.

Privately held and based in Santa Clara, Calif., Bytemobile isn’t the biggest infrastructure vendor in the wireless industry – it has 300 employees – but it certainly has a lot of reach. Bytemobile equipment is in 130 carriers’ core networks, which collectively serve 2 billion subscribers in 60 countries. The firm estimates that 20 petabytes of data pass through its networks daily.

Citrix and Bytemobile already have a relationship to build on. At Mobile World Congress, Bytemobile announced it would house its T-Series management platform on Citrix’s NetScaler cloud networking platform.

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But operators are on the battle lines of cutting-edge innovation alongside their Valley counterparts. They may seem slow and ungainly to most, but they’re the ones deploying LTE and high-speed packet access (HSPA) networks so critical to the mobile data revolution. Yet Verizon and AT&T are among the more boring stocks of the NYSE, while Google and Apples’ NASDAQ prices pivot crazily.

All hail the smart pipe

Tellabs, however, thinks there’s a way for operators to make the leap from value companies to growth juggernauts and thus enjoy the big stock gains, high price per earnings ratios and low – often non-existent – dividends of their ‘high-tech’ counterparts. Tellabs has commissioned another one of its big market studies telling operators their business (The last one, on the rapid trend toward mobile data unprofitability, attracted quite a bit of controversy), this time from STL Partners.

You can read the full report here, but what the argument boils down to is operators need to abandon the dumb pipe path they’re careening down and build “smart pipes.” Apple and Google may control the devices and application servers at either end of the network, report author Chris Barraclough concludes, but there’s plenty of ways operators can jazz up the data flowing between them. Here’s an excerpt:

“The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints.”

What’s a little traffic shaping among friends?

Tellabs and Barraclough propose several ways of doing this, which naturally include many technologies that Tellabs sells: better transport efficiencies such as network sharing and Wi-Fi offload, shaping traffic to prioritize different types of applications based on their use of network resources, and taking advantage of operators’ vast databases of customer information to get some skin in the m-commerce game. The report also recommends that operators abandon per-MB charging models for methods that spread the bill around to over-the-top content providers, advertisers and applications providers, as well as their end customers.

The report’s logic follows that these smart networks will boost return on network investment by as much as 7.5 percent, which STL says is double what the typical operator normally sees. Those increased earnings would subsequently elevate share prices, relieving pressure on operators to return value to shareholders in the form of dividends. Free to invest those earnings back into the company, the cycle will reinforce itself, turning these operators from mere wireless utilities into high-tech wunderkinder.

The fine print

Of course, there are several obstacles that prevent operators from doing just what Tellabs and STL recommend. In fact, the operators would be doing all of these things right now but for the firestorm of protest that would ensue from their customers, public advocacy groups, regulators, and Congress – not to mention the aforementioned Valley companies seeking to protect their own turf.

Start using customer data to ‘optimize’ services and big privacy flags go up. Start discriminating against different bits of data – even if it means getting better video while your email arrives a few seconds later – and operators risk running afoul of emerging, yet still politically contentious, net neutrality rules (though the FCC does seem willing to give mobile operators a pass in its proposed regulations). Plus, the Internet and content companies are perfectly happy with the arrangement they have today: They ride wireless airwaves for free, letting the carriers pass the cost along to their customers.

Also, it might be a bit of a stretch for Tellabs to infer that its customers can boost their stock prices if they would just buy more of its backhaul, mobile offload and policy management gear. But as other Tellabs reports have in the past, this one cooks up some meaty food for thought. Ultimately how their investors, customers and partners view operators’ role in the mobile Internet age will depend on how much and how well they vest themselves in the content and services they’re delivering. They may be spending billions on new networks, but if they become pipes, people will look at mobile broadband access as a commodity, the same way they look at the electricity that powers their gadgets.

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