Smartphones a growing problem for networks

Vittorio Colao, speaking ahead of a keynote speech by Google's chief executive, told the Mobile World Congress trade fair in Barcelona that, instead of letting one group dominate, new business models needed to be created to cope with the demand operators are facing for data services.

The comments added to the impression at the annual gathering that, while handset makers, chipmakers and service providers are all flourishing from the rapid growth of smartphones such as Apple Inc's iPhone, operators are being left to fund the related improvements needed in network capabilities, while pondering how to make a profit.

Later, Google responded to say the mobile industry needed to rise to the challenge and work with the Internet giant to meet the insatiable consumer demand.

In his first speech at the fair, Google Chief Executive Eric Schmidt told a packed auditorium he relied upon the successful delivery of services from operators and said the two sides needed to work together.

Find a way to say yes, not no is our thesis, he later told journalists. We need them to go ahead and invest these enormous amounts of money at great risk and in return they need us to continue to build powerful new reasons to upgrade the connections and get a new phone.

BlackBerry-maker Research in Motion Ltd said it was well aware of the data problem, saying smartphone manufacturers must develop less bandwidth-guzzling products or risk choking already congested airwaves.

As users abandon traditional cellphones for netbooks, wireless modems and feature-rich smartphones, wireless data traffic has exploded and is threatening to saturate network capacity, co-CEO Mike Lazaridis told Reuters in Vancouver before setting off for the trade fair in Barcelona.

If we don't start conserving that bandwidth, in the next few years we are going to run into a capacity crunch, Lazaridis said. You are already experiencing the capacity crunch in the United States.

TURNING POINT

Colao said the industry was at a key point in its development, as it adapts to the new economic realities of the smartphone and the ever-increasing amounts of data that consumers wish to consume.

In order to succeed the industry needs to allow operators, content owners, application developers, search and operating system owners to develop new business models, to enable the operators to continue to invest in new and faster networks.

Within the search and advertising market, Colao said one player, Google, dominated the industry and held around 70 to 80 percent of the market, which should be looked at.

Spain's Telefonica SA said last week it was considering charging search engines and a source at the Spanish company told Reuters they had previously discussed the proposal with other European operators.

But Verizon Wireless -- the biggest operator in the United States and which is owned by Vodafone and Verizon Communications Inc -- said they were taking a more considered view.

I recognize like everybody else there is the scary aspect of Google which is similar to the scary aspect of Microsoft 10 years ago, Verizon Wireless Chief Marketing Officer John Stratton told Reuters.

Who knows where this Google thing is going to go. I do think there is a bit of a knee jerk response to anything that Google does.

Vodafone's call for a different approach stands in contrast to the makers of operating systems and those involved in the production of the handsets.

Samsung Electronics Co Ltd and Sony Ericsson unveiled new high-end smartphone models on Sunday aimed at improving their positions in the more lucrative part of the phone market.

Texas Instruments Inc told Reuters at the fair on Tuesday it was enjoying strong demand for its wireless chips due to the continuing rise of smartphones.

That's what's driving the industry, Greg Delagi, the head of TI's mobile operations said. It's the place where there's opportunities for differentiation.

And he also gave an indication things may only get tougher for the operators, explaining that TI was working on new capabilities such as filming and sharing three-dimensional video on smartphones which are even more data intensive.

Cisco expects data traffic to more than double each year over the next five years, with video making two thirds of mobile data.

(Additional reporting by Georgina Prodhan, Tarmo Virki and Nicola Leske in Barcelona and Nicole Mordant in Vancouver; editing by Greg Mahlich and Andre Grenon)