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Cell phone perks, Napster-style

/ Source: Forbes

Movie theaters' core business may be selling movie tickets, but a giant profit kick comes from the concession stand, where popcorn, candy and soda can be hawked to captive audiences at a stiff markup. That's a model today's cell phone companies — tired of selling only regular phone service at declining prices — hope to mimic. Customers who signed up for phone service can now use their phones to buy a rapidly expanding array of products, such as music, Internet access and video games, that are the high-tech equivalents of $5 popcorn.

There's just one problem.

Just as thrifty theater-goers can save a buck by smuggling in their own Junior Mints, so too are cell phone users finding ways to download their own phone upgrades without paying a big margin to their carriers.

The very same phones that give users the power to download new services also give them the flexibility to find other ways of getting new content into those phones. For instance, an avid text messaging fan in Britain who owns a Nokia 6600 can save money by using a service run by an outside company such as Fastchat, which provides unlimited text messaging for a flat fee.

Such fee-dodging tactics are about to become a major threat to the cell industry, according to a new study by Mako Analysis, a British research firm specializing in mobile communications. New operating systems such as Symbian Series 60 are capable of working with all manner of extra applications.

"A savvy user can use this open operating system to completely bypass a range of services that are normally charged for by their mobile operator," the report says.

Fee-dodging tactics
Other recent announcements add weight to Mako's warning. A new product from TDK Systems lets mobile phone users download ring tones and games from their PCs to their phones — all they need is Bluetooth, an increasingly common wireless standard for transferring data over short distances. The company is straightforward about its gadget's purpose: It "lets you personalize your mobile phone without paying [an] additional charge."

The cell phone industry has poured billions into new 3G networks that were built with data services in mind and are just now being unveiled. The average U.S. cell phone user's bill climbed 3.1 percent last year, to $49.91, barely ahead of the rate of inflation. New data services are widely viewed in the industry as the key to accelerating that growth.

The data diversion problem is the kissing cousin of a threat the cell phone companies' main business faces. New phones have the ability to sense free Wi-Fi networks whenever they are available, and can route calls over them instead of the more expensive cell networks. Motorola and Nokia have both announced such multi-mode phones.

In the face of such threats, cell carriers face a tough choice. If they restrict their users from using flexible phones, it could boost profits in the short term while risking the chance that disgruntled customers will flee to another carrier with less restrictive policies. One thing is certain, Mako analysts concluded: "The threat will only grow over time, and operators need to consider how they are going to deal with the problem before it is too late."