Taking Out the Middleman

Wireless phones are one of the few devices that regularly are sold at less than cost, and salespeople still are compensated handsomely for selling at these ridiculously low prices. Everyone knows, of course, that payback comes to the carrier through monthly bills with potentially lucrative airtime, long distance and miscellaneous charges. A good customer pays for his "free" phone many times over. The low prices are unlikely to change, but what about the handsome commissions for signing up customers? Could they be trimmed to a more modest level?

Over-the-air activation (OTA) is intended to do exactly that. By allowing phones to be sold at discount stores and taken out of the store still tightly wrapped, OTA gives carriers the benefit of programming their own customers' phones (as well as all of the responsibilities). Discount stores will accept a much lower margin on the phones, so although the middleman is not eliminated, he is at least put on a strict diet. Can OTA fulfill this dream? Are the technical and business challenges too great?

It is natural to want to use the radio interface to program phones, but this creates problems -- the interface is noisy, sometimes congested and public. OTA standards, which are available for both TDMA and CDMA digital phones, have to overcome these hurdles.

STANDARD PROCEDUREAn OTA session starts out after a subscriber removes the phone from the box. He may have to dial a special number (a toll-free number or a "*" feature code), or when he attempts to make a call, he may be connected automatically to the OTA operator. The first step is to obtain the name, address and credit information for the prospective subscriber, which only can be done manually. When this phase is complete and the subscriber is approved for service, the automatic phase sets in. This entails programming the phone with all of those mysterious parameters such as MIN and system identifier that are necessary for operation.

One of the problems with an OTA session is that it might end abnormally at any time, due to the battery dying, loss of signal or interference. The OTA software in the phone has to store all of the information that it receives in a temporary location and only load it into memory when the transaction is complete.

Programming a freshly picked phone is an example of the bootstrap problem. The phone initially does not even have a valid identifier -- MIN or international mobile subscriber ID (IMSI) -- and a number cannot be assigned right away because the OTA session might fail, leaving an identifier stranded, or worse, in use by multiple phones. Consequently, the phone starts out with only an ESN. It is assigned a temporary MIN for programming purposes and then is assigned a permanent MIN and IMSI during the OTA session.

SECURITY BREACHAnother issue with OTA is security, especially if authentication keys are being programmed over the radio interface. It seems contradictory that authentication's aim is to keep the secret keys from being made public by carefully ensuring that they are never transmitted across the radio interface; yet, OTA needs to transmit this information. There are complex methods for protecting data between two partners that have no physically secure mechanism to exchange keys, but often they are vulnerable to man-in-the-middle attacks, where an eavesdropper sets up a false base station, receives transmissions from both parties and then retransmits them. It is not clear how practical this type of attack is, but it does not have to be too likely to scare carriers away from using OTA to transmit authentication data.

Behind the scenes, OTA requires a variety of network communications between the MSC that is serving the mobile, the HLR that will store the new subscriber record, the authentication center that will store security data for the subscriber and the over-the-air function (OTAF). OTAF acts as an interface between the wireless network and the customer-service computers that store complete subscriber information, including billing parameters. The OTAF coordinates network operations to ensure that records are synchronized properly and that OTA session failures do not result in data left lying around. These operations are based on the TIA/EIA-41 protocol, with heavy use of the messages that currently are used to transmit short messages. TDMA OTA attempts to program phones using short messages because this is most likely to be transparent to intermediate network elements such as a visiting location register.

The technical challenges to OTA are significant, although the standards that have been published go a long way toward resolving them. Just as important, however, are the challenges on the business side of the equation. These answers are less forthcoming.

FROM RED TO BLACKThe business challenges arise because OTA-capable phones must be sold to discount stores at far below cost, perhaps even at no cost. The discount store must be able to sell phones at a lower price than traditional dealers, and it will not be sending the customer out the door with a signed contract. Thus, a commission based on a signed contract is not possible. When the customer walks out the door, the carrier already has lost money on him. The customer must use the phone for the carrier to get that money back. However, many scenarios suggest that the carrier easily could come out the loser:

* If the customer decides that the purchase was a mistake and leaves the phone on the shelf, the carrier loses money.

* If the customer lives in an area where the carrier does not have coverage, he cannot use the phone, and the carrier loses money.

* If the customer is able to break the subsidy lock and activate the phone on another carrier's network, the carrier loses money.

* If the customer has bad credit, and the carrier refuses to activate his phone, the carrier loses money.

* Worse yet, if the customer makes modifications to the phone for fraudulent purposes, the carrier loses money both on the sale and on airtime use.

The customer must activate his phone on the right carrier's network for the carrier to make money. Carriers must control the subsidy lock carefully so that they make their money back on their phones while not preventing customers from changing systems at a later date. They must put as many anti-fraud checks in the system as possible, both against technical and subscription fraud.

If phones are sold for little money, they often may be purchased with cash, which provides no information about whether the customer has the credit rating to be a viable client for wireless service. Carriers may try to insist that phones be purchased with credit cards, but stores may not like this special treatment for phone purchases. Because the OTA transaction is remote, it is impossible to verify photo ID or signatures. Carriers will have to be much more vigilant with customers activated with OTA than with those activated through more traditional means.

The big question with OTA is whether it will save wireless carriers money, or whether it simply will make them appreciate all those things that dealers do for them -- credit checks and customer education being some of the most important. Will the burgeoning love affair with OTA last, or will carriers revert to DFA -- dealer's finger activation?