Apple, Google, AT&T and Verizon

This article over at Seeking Alpha is interesting. It describes the "small numbers bargaining problem" in telecom. Quoting the article:

Verizon has already shown resistance to putting the Apple iPhone on its platform for fear that it will use tremendous amounts of data without sharing any of the third party application profits with the carrier. Now VZ is beginning to play games with Google saying that they won’t pick up the Nexus One, planned to be released spring of 2010. Google loses access to the carrier’s more than 90 million users, and seems to have stumbled for the time being in becoming a major player in the mobile handset market.

AT&T has not picked up the phone either. But AT&T has more problems than just Google, they are trapped in a mutually hated relationship with Apple now, where neither party can get rid of the other. It really is the marriage from hell. Apple doesn’t have another carrier, and AT&T can’t throw Apple off for fear that its massive amount of iPhone users will defect from its completely inferior network. So AT&T is trapped having to provide Apple with more and more bandwidth, towers and other infrastructure, as the public and media scream at AT&T to get their network up to Verizon’s standards, not to even mention how well Sprint (S) works. AT&T is for sure frustrated that they have to make these capital expenditures and see no increased profit from them, it’s like bailing out the water from a ship with a 20 foot hole in the bottom. You’re just spending energy trying to stay afloat.

Something has to give here, this can’t go on forever, and I think we are soon to see a resolution to the issue of the telecom giants paying for the network on which Apple and Google make tremendous amounts of money. Maybe the telecoms chose the nuclear option and just stop building their networks holding Apple’s feet to the fire. Steve Jobs can’t revolutionize the content distribution market without a network to do it on, and believe me, the stuff that he wants to do is going to take a lot more bandwidth than is available today. Do we really think the carriers are going to pay for that to happen? Maybe Apple will buy a carrier, or perhaps even build its own network with a next generation technology they have been developing.

I wonder to what extent the independent LTE network proposed by Harbinger (see this) will be the event that shakes things up? In many ways, the situation described above seems to be an analog of the drama being played out over network neutrality in that we have infrastructure investments required for applications that are not easily monetized by the infrastructure owners.

Lock-in and smart phones

This item over at Ars Technica is interesting. The article itself is an analysis of Palm's WebOS and why it failed to attain economic success. While many articles have been written about this (and even though the reports of Palm's death may be premature), I found this section of the article most interesting:

In at least one way, Palm's webOS was a victim of its own success. I ultimately found that the Pre's thoroughgoing cloud orientation, which I made a big deal about in my review of the device, meant that there was nothing tying me to Palm. And unfortunately for Palm, the Pre had to compete with client platforms from companies that also provided important cloud services, with the result that those providers could privilege their own clients and thereby gain a certain amount of vendor lock-in.

Three examples serve to illustrate my point that it was too easy to leave Palm, and that Palm's decision to be solely a client platform put it at a permanent, structural disadvantage against competition that offered both clients and services.

Back in January of this year, after unboxing my new, Google-provided Nexus One, I logged into a few accounts (Google, Facebook, Twitter, Evernote, Amazon) and voila—I had all my data on this new phone, along with my existing phone number (courtesy of Google Voice). Think about that for a moment: I ported all of my data and my phone number to a new phone on a new carrier, without so much as swapping a SIM card or calling a customer service number. And every cloud service that I used on Pre was immediately available on the Nexus One.

So it was that on the day that I got the Nexus One, I dropped my Pre in a drawer and didn't turn it on again for two months, all without missing a single message.

Leaving the iPhone was a lot harder, because—and this is my second example—I was in the habit of syncing my music with iTunes. iTunes syncing was the main way that Apple got its hooks into me, and everyone who followed the Apple vs. Palm battle over iTunes and Pre sync support knows that Apple guarded that key source of lock-in jealously.

....

In the end, Palm's fundamental problem wasn't the lack of reliable, first-party Google Voice or iTunes support, but the fact that Palm itself never offered a similarly essential service that it could use to lock users into the Pre. Google had Voice, Apple had iTunes, and Palm had nothing. The Pre didn't have first-party support for anything that I depended on or enjoyed, so it had no hold on me at all.

By not having any way at all to lock the user into webOS, Palm ended up betting the farm on the proposition that the Pre could and would deliver an overwhelmingly superior mobile client experience for a common slate of cross-platform cloud services. In other words, because Palm doesn't own any part of a user's data or identity, the user experience is the only thing that could tie a user to webOS.

There is economic research that supports the notion that lock-in is good and desirable for companies; in fact, companies work hard to achieve lock-in to avoid being commoditized. So, as we migrate to cloud-based services, how do firms and carriers create compelling lock-in for consumers? Is this a good thing for consumers?

One of the interesting things for me is that Google, with its Nexus One and Android experience, is trying to drive the value to the cloud through a device that works hard to NOT provide lock-in (i.e., contractual or standards), while Apple is trying to create as much lock-in as possible. This is no surprise, given their rather substantially different business models.

iPhone usage and AT&T's network

This item over at GigaOm is interesting:

iPhone users tend to use their devices in the evening and on the weekends, reports Localytics, a Cambridge, MA-based start-up offering mobile analytics services. According to as study conducted by the company, the mobile app usage in the US peaks at around 9 pm EST on week days. Over the weekend, the usage is at its peek during afternoon and nights.

Since these time correspond (historically) with lower voice traffic, why are there so many complaints about AT&T's network? Could it be that their network is only part of the problem (see this earlier post)?

Test of 3G networks in the US

Gizmodo recently ran a test of 3G networks in the US. The results are here. AT&T had the fastest average upload and down load speeds in the cities where the test was conducted. This is a bit of a surprise given the heat that the AT&T network has been taking recently from iPhone users. Gizmodo wonders whether it is the iPhone or some interaction between the iPhone and the AT&T network, and I can see why. These test results don't corroborate the belief that AT&T's network is (only) at fault.

Mobile operating systems

There are two articles related to Mobile OS that caught my attention. This one, in Ars Technica, shows that, for the first time, the total number of iPhone users have passed the total number of Windows Mobile users. This one, over at CNN Money, shows the growth of Android-based devices. Clearly the flat Android line in the first article will change as 1.5+ and 2.x-based devices enter the marketplace and start gaining in installed base.

This is significant in a number of ways. First, installed base is a key factor in the development of the "ecosystem" of a device. Apple, which has locked down the hardware as well as the OS on the iPhone, enjoys an unrivaled hardware ecosystem from third parties. By tightly controlling the application environment, they maintain a strong grip on the app store, which enables them to monetize this very profitable aspect of the iPhone ecosystem. Because of the size and momentum of the installed base, they will attract more applications developers.

Android does not have the hardware control and has a more open approach to the app store which does not lend itself to monetization in the same way. However, the more open approach may attract more innovative app developers. There is clearly momentum in the Android OS camp, even if the installed base is lacking at present.

Carriers have an interest in minimizing the number of mobile OSs they support. Adding a new OS is costly because the features and services of the OSs must be tested with the network and supported by the carrier after the device is released. Thus, OSs with little installed base or momentum are at risk of losing their sponsors (the carriers) which leads to a self-reinforcing downward spiral in their ecosystem. Thus, the stakes for Microsoft in its Windows Mobile 7 (due in 2010) could not be higher; for that matter, the same is true for Palm's WebOS. Failure to attract a user base means failure to build an ecosystem.

This creates a high hurdle, but it is not insurmountable. At one time, the Palm OS was the standard with a huge catalog of applications; it is no longer so dominant. Thus, dominance is not permanent even if it can be a huge advantage in the market place

iPhone Apps and economic networks

I have blogged around this subject before, so when this article in BusinessWeek showed up, my interest was piqued. When economists began looking at standards in IT in the 1980s, researchers like Joe Farrell, Garth Saloner, Carl Shapiro and Michael Katz began noting the importance of networks of tie-ins to the lock-in often associated with standards. They noted in particular the importance of software to the success of PCs vs. Macs (though this view was disputed by Margolis and others).

The BusinessWeek article is significant because it shows a weakening of the tie-ins to the iPhone, which would, according to the economic theories of standards, suggest that the durability of this platform in the face of other existing (and emerging platforms) is not particularly strong. Note that this is not unrelated to the "opaqueness" of the approval process by the Apple App Store and the relatively poor profitability of iPhone apps.

iPhone Apps and the war for the web

There are a couple of items that have come to my attention recently that suggest change is on the way for app stores (perhaps the iPhone app store in particular):  The first comes by way of Seeking Alpha.  In it, the author cites this item from Gizmodo, which argues that, in the not to distant future, apps will be very cheap or free.  This has been a significant profit center for Apple, but may not be in the future.  The second item, from GigaOm, discusses the opaque approval process for iPhone apps which can be frustrating for developers.

Taken in tandem, the second item suggests higher than necessary transaction costs for developers (since the approval process is uncertain) and the first item suggests lower prices (tending to $0) because of competition.  High transaction costs for no profit suggests that developers will seek to monetize their investment in other ways, through advertising or through other kinds of tie-ins (where price is not $0) that are outside of the control of the app store.

But as O'Reilly points out, there are limits to this too.  Apple is not shy about blocking apps that try to escape their business model.  The O'Reilly article is interesting in that it argues for the shape of competition to come and makes the case for the tendency toward market concentration that we see in the Internet.

Nokia sues Apple

This item at Gigaom (and elsewhere on the Internet) is interesting. So I wonder if this is sour grapes on Nokia's part or arrogance on Apple's? Either would be distinctly plausible, since, apparently, talks have been going on for a couple of years.

Update (2009/10/23): This article provides a little more detail, but still not that much.

End of handset contracts?

I found this item over at CNet interesting. Apparently, AT&T's profitability point in the iPhone contract occurs rather late in the two year contract cycle. Does this mean that the carriers will shift its strategy away from captive contracts for handsets? If it isn't particularly profitable for them to do this, then they would, presumably, stop (absent other benefits)?

Open platforms and walled gardens

These paragraphs (from this article) caught my attention:

Despite AT&T’s success and optimism for the future, Rinne also offered a warning. She pointed to the checkered history of AOL, which stood on top of the Internet world in the late 20th century but saw its subscriber base collapse after the advent of home broadband. The Internet industry witnessed a tipping point of its own, which foreordained the broadband revolution and the collapse of the walled garden. As AT&T rides the cusp of the mobile Internet revolution, it has to be cautious it doesn’t fall into the same traps as AOL, Rinne said. And that means being open to new and numerous applications and business models. Rinne pointed to AT&T’s growing portfolio of embedded emerging devices, smartphones and connected PCs as an example of how AT&T has discarded the notion of the walled garden — and how it’s clearly enjoying the spoils.

AT&T may have discarded the walled garden itself, but ironically the key driver to its mobile Internet success hasn’t. Apple’s (NASDAQ:AAPL) iPhone is probably the ultimate culmination of the walled garden approach in mobile — one implemented elegantly and artfully but a walled garden nonetheless, where a single entity controls the platform and access to applications. Rather than reject the walled garden, consumers are flocking to it, frolicking happily within its confines. The iPhone isn’t the only example. The success of the Amazon (NASDAQ:AMZN) Kindle was built behind high topiary walls. Every book, newspaper and magazine downloaded to the Kindle comes from the selections available offered at the Amazon store, which offers no access to hundreds of thousands of titles available across the Web from such sites as Google Books.

Rather than tearing down those walls, operators and application developers are erecting new ones. Android, Nokia (NYSE:NOK), Palm (NASDAQ:PALM) and Research In Motion (NASDAQ:RIMM) are launching centralized apps stores. What’s different is the number of variety of app stores out there. The industry is abuzz with this idea that an open and expansive mobile Internet is in our future. But today, consumers don’t want expanse; they want alcoves — nests of innovative content. Maybe as tastes evolve consumers will gravitate toward truly open devices and they’ll develop the sophistication to hunt down the content, applications and services on their own. But for now they seem content to hop between one walled garden to another, and the winners in such a world will likely be the companies that can lay out the best garden plans.

To me, it stands in contrast to this item by Tim Lee at TLF:

The typical life cycle of a technology goes something like this. Technologies are usually originated in the laboratory, where a small number of geeks invent it and explore its capacities. Once the time comes for commercialization, often proprietary versions are the first out of the chute because it’s easier to monetize closed platforms, and therefore to raise the capital necessary to deploy them quickly. So in the early years of any new technology’s growth, it often looks like the proprietary technology has a decisive advantage (think AOL in 1993). Then, as the technology begins to mature, the disadvantages of closed technologies become apparent. They can only grow and evolve as fast as their owners can manage them, and as their owners get larger and more bureaucratic (think AOL in 1998), these platforms begin to stagnate. Meanwhile, the open alternatives, which are not held back by centralized management, continues growing rapidly, equalling and then quickly surpassing the closed competitors. Finally, the open platform’s lead gets so large that the closed platform, facing a choice between interoperability or irrelevance, is forced to open itself up to the competition (think AOL in 2003).

And once an open platform has become firmly established, proprietary firms stop trying to dislodge it. Instead, they try to build new proprietary technologies atop the underlying open architecture. Mac OS X, for example, is a thin layer of proprietary software atop a big stack of open technologies. Similarly, Facebook is a thin layer of proprietary code atop a lot of open Internet technologies. But that means that even as a company is trying to establish the dominance of their new, proprietary platform, they’re reinforcing the primacy of the underlying open architecture. Which means that that open architecture remains available to be built on further by anyone who cares to do so. And that, in turn, ensures that the process I described in the previous paragraph can begin again at another layer of the software stack.

What happens, though, is that every time this process begins in a new sector of the economy—online access in the mid-1990s, e-commerce in the late 1990s, broadband access in the early 2000s, social networking today—folks on the left-hand side of the political spectrum begin wringing their hands about how this time is going to be different. Sure, open platforms have had a good run so far, but now the big, bad corporations are going to take over. And because the specific names and technologies are different each time, it’s always possible to come up with a theory about the specific developments that will bring about the triumph of the walled gardens. Their warnings invariably turn out to be overblown, but by the time it becomes clear that the last round of predictions were wrong—Lessig’s 1999 predictions about e-commerce destroying the Internet, say—there’s a new threat to obsess over.

This, incidentally, is why it annoys me so much when libertarians denigrate the value of open platforms. The triumph of open architectures over the last couple of decades has been a vindication of the Hayekian idea of spontaneous order. AOL tried to build a closed, centrally-planned network, and it got clobbered by the Internet for precisely the same reasons that the US economy outperformed the Soviet economy: central planners lack sufficient information to satisfy the needs of millions of users with diverse needs. What the answer to the Lessigs and Zittrains of the world isn’t that open systems are bad. It’s that precisely because open systems are good, they’re unlikely to be dislodged by closed systems in the marketplace. Even when the structure of the market is far from ideal, as it is, for example, in the broadband duopoly, the open architectures have turned out to be far more robust than anyone expected.

So, the "walled gardens" in the first article are indeed built upon a system of open standards -- WiFi, GSM/HSDPA, etc. Will we devolve to a battle of walled gardens? Or, is there some other business model that is waiting in the wings to clobber Apple, Amazon, etc?

Apple, AT&T and network capacity

I have written about this before (see this) so this article in BusinessWeek is an interesting follow up. This article highlights several things that I find interesting to note:

• The relationship between product development and service development. In the wireless market, handsets are provided by companies that do not provide services. Especially in the case of the iPhone, Apple made a considerable investment in developing a user experience and singular branding that required investment from AT&T to implement.
  
• The differing investment life cycles of products, software and infrastructure services. Apple has gone through at least three generations of its hardware, more than three generations of its software (if nothing else than to break jailbroken phones). In the same time period, AT&T has still been implementing its original network technology (HSDPA/HSPA) throughout its network. The cost and complexity of delivering infrastructure support is far higher than the product that users directly see and interact with.
  

Google voice and the iPhone

The dust-up around the Google Voice iPhone application has been fun to watch (see this for an update). There are many things going on here, including (possibly) AT&T's involvement (which both it and Apple deny). I found this item over at TechCrunch an interesting analysis of Apple's response to the FCC's inquiry.

I have to agree that it seems largely about Apple's control over users. AT&T would get either the data traffic or the voice traffic and, unless there is a serious difference in the profitability of one service over another, they should be largely indifferent.

Welcome to life in Apple's walled garden.

Update: The plot thickens ... according to this item, AT&T and Apple did have an agreement regarding VoIP, but it did not cover third party apps.

iPhone and network capacity

This article, which describes how the iPhone is putting strains on AT&T's wireless network is interesting. It further illustrates the close relationship between carriers, content and network devices that I blogged about here. As the article shows, reducing handset prices increases network capacity (and revenues) and also increases the use of social networking applications. It seems likely that there is some revenue sharing going on to facilitate this ...

iPhone in Germany

You might find this item interesting. This is very similar to the situation in France, except it is ex post instead of ex ante, which is less favorable for Apple. The comments on the Gizmodo post are worth reading. Is this a precursor of what we will find throughout Europe?

Suit accuses Apple and AT&T of monopoly

Speaking of walled gardens ... you might find this story interesting. They NY Times says a little more about it in this article. This seems to get at the heart of the "wireless Carterfone" discussion that I have been blogging about. This seems to be an attempt to get from the courts what you (they) could not get from regulatory agencies. On the other hand, it is exactly what you could (and should) expect using ex post regulation.

Regulation and technology adoption

One of the recent discussions in the US telecom policy circles has been the idea of a "wireless Carterfone". Such a policy would basically uncouple handsets from wireless service providers. That is, buyers would be free to choose handsets and wireless service providers independently (much like today's unlocked GSM phones). Carriers tend to bundle handsets and services for several reasons, including:

• Lowering the barrier to entry (or use) by providing subsidized handsets
• Ensuring reliable services by testing feature sets on supported phones
• Strategic and economic purposes

This article suggests that the introduction of the iPhone in France may not happen because of regulations like this. Do you think that this is an example of regulation inhibiting innovation?

Update (2007-10-17): This article in Gizmodo is reporting that the iPhone will be on sale in France after all. Does this alter your opinion about this question? What does this say about bargaining among these titans?

iPhone Owners Denied Warranty Service

Some mad iPhone users are 'seeking respondents for possible class action lawsuit against Apple Inc. relating to refusal to service iPhones and related accessories under warranty.' Alexander Wolfen in his post analyzes reaction of users on Apple's claims to void any warranty services for unlocked or with third-party software or used as data-storage by some other software.
Apple once again repeats the same mistake (as it was with iPod). It was obvious from the very beginning, that a product with such an aggressive marketing and tremendous popularity will be eventually reverse engineered and unlocked. And now when it finally happened Apple is threating iPhone owners. We also remember that all these people are (or may be better to say 'were') Apple's clients and so threating is not good for business. Especially if scandal grows into suite case.
Initially, position of Apple about custom third-party software was not clear (pro, con). Now it is clear to everyone.

Verizon and content control

This article in today's NY Times illustrates the deeper linkage between content and carriage that is occurring in today's networks. This is a feature of walled gardens of any sort ... here Verizon chooses to control content and elsewhere Apple chooses to control applications on the iPhone.

What do I think?

• Verizon is on a slippery slope, just as the FCC was under its "fairness doctrine". I am guessing that they will reverse this policy once they realize this.
  
• This issue will become the "poster child" for the network neutrality folks, even if Verizon ends up reversing its decision.
  
• Verizon, whose opposition to network neutrality is on record, made a really boneheaded decision in what is basically a political issue.
  

Do you think that this is a harbinger of things to come? I build an equivalence between Apple and Verizon ... is this appropriate? If not, what are the differences that are notable?

UPDATE 2007-09-27: On they Cybertelecom Mailing List, Sean Donelan had this to say, which I think adds a bit of nuance:

he article [sic] briefly mentions, but doesn't really explain the difference between standard user-to-user SMS texting and SMS short code campaigns.

For whatever historical reasons, subscribers seem to view user-to-user SMS texting as the wireless company acting as a "common carrier" but subscribers seem to view SMS short code compaigns as the wireless company acting as the "information service" responsible for those messages even those created by third-parties.

Members of the Klu Klux Klan buy wireless phone service and send standard SMS messages to each other; but none of the wireless phone companies will operate SMS short code campaigns on behalf of the Klu Klux Klan.

For example, consider this link to Google's content policy for Google Adwords, which is different than the content policy for Google's basic search index. https://adwords.google.com/select/contentpolicy.html

Here is a link to several SMS carrier policies for SMS short code campaigns, as opposed to standard user-to-user SMS.
http://www.emexus.com/Corp/media/downloads/20060424125933_Emexus%20Carrier%20Requirements%20FAQ.pdf

Update (2007-09-27): According to this article, Verizon reversed its policy (as I expected they would). Still, from their perspective, I believe that the damage is already done.

Walled gardens and innovation

The topic of "walled gardens" comes up here (and elsewhere) from time to time (see this, for example).  So, you might find this article, by economist Tom Hazlett interesting.  As his article points out, there is a tension here ... on the one hand, people seem to like their "walled gardens" -- that is, closed systems where the user experience is controlled.  Recent examples include the iPod-iTunes, AT&T-iPhone, or the Microsoft Zune "gardens". 

On the other, these systems often lead to systems that can be viewed as restrictive and/or anticompetitive.  The recent EU antitrust actions and the interest in structural separation and "wireless Carterfone" are also examples of this.

I don't agree completely with Hazlett.  I think that the pursuit of walled gardens promote innovation.  By analogy, consider the competitive era in US local telephony (1894-1920). A winner-take-all battle drove network investment and innovation.  When the battle was over, innovation lagged.

iPhone in Europe

It has been announced that the iPhone will make its (official) European debut in the UK on the O2 network ... with Germany to follow (see this) on T-Mobile's networks. But questions remain about whether it will be as successful there as it was in the US. According to this article:

But analysts say Apple may have a tougher time in Europe. They expressed disappointment that the iPhone to be sold in Europe was identical to the one in the United States, meaning that it would be unable to take advantage of faster European wireless networks for Web browsing and media downloads.

[snip]

Mr. Jobs said the iPhone would overcome this hurdle by relying heavily on Wi-Fi technology, which provides broadband Internet access for laptop computers and other devices, though only when they are stationary. When iPhones are on the move, they will shift to a mobile technology called Edge, which is also use by AT&T, Apple’s exclusive network partner in the United States.

[snip]

Also, 20 percent of British mobile users already have 3G-enabled phones, according to M:Metrics, a research firm. “There’s no doubt it’s going to be an obstacle for Apple,” said Paul Goode of M:Metrics. “You’re going to be asking people to downgrade in terms of capability.”

Apple is also going against the grain of the European mobile business by charging £269 ($538) for the phone in Britain, and locking customers in to 18-month contracts at monthly rates of £35 to £55 ($70 to $110). Typically, carriers discount even high-end cellphones in Europe.

Furthermore the carrier O2 has spotty EDGE coverage; the compensation will be free access to a network of WiFi hotspots, according to this article. Interestingly, this article has also raised the specter of competition between wifi and 3G, a topic that has been the subject of several academic studies (see this, for example).

To me, this highlights the potential difficulties firms face when transferring a technology that is successful in one commercial/social environment to another. Can you find other examples of telecom-related technologies that did not translate well? How are these different from technologies that did transfer well?