Tiered pricing and the rise of "proxynets"

This article over at Seeking Alpha is interesting. In it, Shelly Palmer argues that:

people with more money than time pay and people with more time than money steal. Piracy will run rampant, but it will be very easy to thwart because most of the consumption devices will require monthly data plans. If a device is connected to a network and the network operator has your credit card number or billing address, you will have a hard time using it to steal content.

The arms race will continue until the rigidity of the content provider pricing and network service provider greed overwhelm consumers or until a new technology evolves.

The new technology is what he calls "ProxyNets". In this scenario, the WiFi radios on smart phones will be used in the "ad hoc mode" instead of the "infrastructure mode" and will rely on mesh networking for interconnection. If the device density is sufficiently high (that is, the probability of participating radios being in range is high enough) then it will be possible to construct an informal network at low cost outside of a formal carrier relationship. You can even imagine jumping onto the Internet for some links (via an access point) if the density is not sufficiently high. The fact that such a network might exist outside of the control of a carrier, even if the quality is low, might be a "good enough" technology that could be the start of a classic "disruptive technology".

The argument is interesting and even somewhat plausible, especially since almost all smartphones now have wifi. In my international travels, I always jump onto a wifi network with my phone for data connections, since the carrier-based rates are punishingly high.

Google's Nexus One and unsubsidized handsets

I found this item over at the Technology Liberation Front interesting and worth reading. The article points out that the primary cause of Google's failed experiment is Americans' unwillingness to give up subsidies. This may well be largely true, but it fails to capture other aspects of the American telecom environment and this particular experiment that are also contributing factors.

My last two handsets have been unsubsidized and unlocked (by choice), and yes, one of them is a Nexus One. My carrier (AT&T) does not give me a discount for an unsubsidized handset, so I am paying the monthly price assuming I had a subsidized handset. In a sense, then, I am paying twice. I chose this route not for lower cost (obviously) but for flexibility. I am now free to use SIM cards of my choosing and I have a month-to-month contract, which I also like.

The other aspect of the Google experiment is that consumers did not have the opportunity to "try before buy". The brick-and-mortar retail experience does allow this while the virtual one does not. For a complex product like a smart phone, user experience is key (a lesson that Steve Jobs taught us). User experience cannot be assessed via a web page, no matter how well designed it is.

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.

LTE vs. WiMAX: The next standards rivalry?

Standards rivalries have always fascinated me. The dynamics are quite surprising sometimes. Until I saw this item over at GigaOm today, I thought that LTE had won the battle for the next generation mobile standard. What this article points out is that this may well be true for the industrialized world, but it is far from the case globally. So are not going to converge on a single mobile air interface (to facilitate roaming) this generation?

Smartphone statistics

This article from the financial blog "Seeking Alpha" does a good job of carefully analyzing smartphone market data. What Sidahmed shows in this article is that interpretation of results is very much in the eye of the beholder. While this is not news to people who have studied statistics, I think this article is a great example of how to do a more careful job in analysis.

The cost of customer service

This report on customer service problems Google is facing with its Nexus One phone is a case study on how success in one arena (software services) does not always translate well into another arena. Customer support is expensive. I remember reading cost studies of ISPs and telephone carriers in the 1990s that indicated that customer service accounts for 35-50% of total costs. What was memorable to me in those studies was that providing customer service was more expensive than operating the networks that the customers used! It seems that Google is learning this lesson now.

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

Business models for 4G mobile systems

This article over at Forbes essentially points out that there are two different business models implied by the upcoming technology: one that provides for higher bit rates and new services and another that minimizes costs.

The Big Four are scrambling to offset any drop in calling revenue by shifting their focus to new wireless opportunities. They are just beginning to spend tens of billions of dollars deploying new "fourth generation" cellular technology to greatly expand their data-moving capacity and make all sorts of new wireless devices possible, from e-books to dog collars that let you track Fido's whereabouts. Linquist [of MetroPCS] just signed contracts to buy the same 4G technology for a very different reason: He plans to use it to radically improve his ability to carry phone calls--and do it much more cheaply.

[SNIP]

The new gear is so powerful that he will be able to simultaneously increase the quality of cell phone calls while cutting the cost of providing each minute, from just under a penny today to closer to a tenth of a cent. Linquist charges 2.1 cents a minute, just under half of the industry's average revenue. He'll continue cutting, confident his singular focus on running the cheapest voice network will keep his costs well below those of the rest of the industry.

A decade ago there were three phone businesses: local, long distance and cellular. The first two have already collapsed, done in by advancing Internet and cellular technology and the cutthroat competition they unleashed. Americans paid $110 billion annually for long-distance phone calls nine years ago. It's now down to $55 billion and still shrinking. Local phone companies took in $126 billion at its peak eight years ago; that sum has fallen to $86 billion and is dropping fast.

Another interesting quote (it is always nice when data is included):

MetroPCS has pioneered the use of new technology that lets it pack more bits into high-traffic areas. On a recent afternoon in East Los Angeles, dozens of parents waited to pick up their kids from school, many chatting away on their phones. While most calls linked invisibly to large cell phone towers, the MetroPCS subscribers unknowingly connected to a tiny antenna no bigger than a car radio antenna that dangled from a nearby telephone pole. From there the calls traveled via fiber-optic cables that snaked alongside old phone wires back to a dingy building and then to the main network. These clever minicells are only one way the company keeps chopping the cost of providing each customer with unlimited calls. Providing unlimited calls now costs the company $16.82 per customer per month, down from $18.23 a year ago.

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)?

Mobile as the new mass medium?

I found this item over at Seeking Alpha interesting. For business, public policy, etc., determining the most effective way to reach people is clearly critical. Over time, this has moved from leaflets to newspapers to broadcasting (in fact, the Gutenberg press was arguably the first mass communication technology). This article suggests that we may be at the cusp of another (disruptive?) transformation in mass communication media. If this is correct, then we can only expect the battle over mobile operating systems, carrier "opennness", applications, advertising relationships, etc. to intensify.

The future of WiMAX

I find it worthwhile looking in the financial literature when it comes to new technologies since it is often a more worthwhile predictor of where things are going than the technology press. Thus, I found this item interesting. The article states:

The much-hyped next-generation (4G) technology of WiMAX is quickly losing ground to the alternative technology of Long-Term Evolution (LTE). Large telecom infrastructure equipment makers are gradually shifting from WiMAX to LTE, and as a result the WiMAX field is getting less crowded day by day.

Later, the article notes that there is a role for fixed WiMAX even as the fortunes for mobile WiMAX seem to be fading. If this is true, it seems as though perhaps Sprint erred in choosing mobile WiMAX as its 4G technology to gain first mover advantage!

The Iridium saga continues

Iridium has been an interesting case study in the telecom industry. This article points out that there is still a business model its LEO satellite-based system. Without going into details, Iridium was designed to be a system that would enable people to be in touch anywhere. It was developed prior to the widespread deployment of terrestrial mobile systems (eg. GSM) and when voice was the only application of interest. By the time it was deployed and open for business, this had all changed and terrestrial mobile systems satisfied many of the needs for which Iridium was developed and offered diverse handsets, data services and indoor capabilities, which were not available from Iridium. Its fortunes plummeted and was purchased on the cheap in bankruptcy. Today, its 347,000 subscribers generated annual revenue of $1.2 billion (or an Annual Revenue per User of about $3460 per user), so there motivated users (mostly government) exist. I wonder if the new satellites will have data capability ...

Update (7 Oct 2009): BusinessWeek posted this article on Iridium which covers much of the same ground as the previously cited article, but with more analyst insight.

AT&T and LTE

There were some interesting bits in this article that I think are worth highlighting:

The upgrade to 7.2 Mb/s [HSPA] along with the addition of new HSPA data carriers and removing choke points in the backhaul network will ease many of those problems. But the advent of LTE in 2011 will provide the ultimate antidote. Not only will AT&T be able to deliver far more capacity over the new network, it will be able to deliver it much more efficiently and cheaply. Rinne estimated that the cost of delivering a megabit per second of capacity over LTE was just 3% the cost of delivering that same megabit on an EDGE network, compared to the 14% of the EDGE’s cost on the HSPA network.

Rinne does not define what "cost" is here. I suspect it is spectrum use rather than capital and operating cost, but it is hard to know for sure.

The principle of "good enough" and telecom networks

This article at the PFF website caught my attention. In the article, Adam Thierer, in reflecting on the recent Gmail outage, applies the ideas of this article from Wired to telecom. The telecom network has been engineered (at high cost) to 99.999% (i.e., "five nines") reliability; the question is whether this quality level is anywhere close to what is demanded by the market.

In some sense, we have a test case in that we are willing to consume different feature sets in telecom at different prices. Wireline telephony is the most reliable with the highest voice quality at price $x, mobile telephony is less reliable and has lower voice quality (with mobility) and is offered at price $y and VoIP has probably less reliability and lower quality than either at a lower price ($z). As a note, I don't think it is fair to say that $z=0 because we do pay for internet access and the computer that runs the VoIP software.

So is there only a marginal demand for quality, which might partially explain why wireline access lines are on the decline? Or is it strictly due to the substitution of mobile for wireline access?

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.
  

Termination charges in mobile systems

This post discusses a paper by economist Sandy Levin comparing Wireless Party Pays and Calling Party Pays. The paper rightly concludes that CPP systems require ongoing regulation because there is no competition for termination charges, so they can get quite high. The subject of high termination charges has been the subject of EU regulation as well as complaints by the US Trade Representative.

New spectrum license fee in the US?

Spectrum license fees are one way to encourage spectrum users to use spectrum efficiently. The trick is to set the fees properly; if they are set too high, then spectrum will be underutilized with respect to their social benefit, and set too low and it doesn't accomplish efficient utilization. On page 126 of his recent budget proposal, the President is proposing increasing revenues from spectrum licenses to US$550M to US$50M over four years, 1000% increase.

There is little but speculation about which spectrum will be taxed, since the Office of the President is apparently saying little about this. The PFF has remarked that, if applied to mobile carriers (which have already paid for licenses through auctions), the tax is quite regressive. According to this item, this fee may just apply to broadcasters. If this is the case, it will help motivate broadcasters to refocus on being programming producers (and possibly aggregators) since it will cost them ever more to transmit their product to an ever-diminishing audience at even higher costs than before. Michael Marcus just posted this related item.

Cox launching mobile phone network

I found this story over at USA Today interesting. Apparently, Cox, a cable TV operator, has become convinced that better profits can be achieved by building and operating their own mobile network than becoming an MVNO. Either they are being unrealistic about the cost and expertise required to operate a new technology to them in a completely new competitive marketplace, or they have done a sober, realistic assessment and believe that the returns from bundling and close operational coordination are sufficiently high.

p>My guess is the former is true. It will be hard for them to compete with nation-wide, facilities based carriers with established brands. Remote control of entertainment is a relatively new idea (and it may not be bad), for which future returns are quite uncertain. Furthermore, how difficult would it be for someone to develop an app that runs on Windows Mobile, Symbian, etc. that could do essentially the same thing?

Olga Karif over at BusinessWeek is also skeptical, though for different reasons.

SMS vs. telephone calls

I found this item over at Nielsen, especially in light of this earlier item on this blog.

Given this data, is it any wonder that carriers would try to hike rates? After all, text volume seems remarkably inelastic given prior price increases. Economics suggests that they would raise prices in this case!

Regulation of Text Messaging?

In this previous post, I had discussed rising text message rates in the US. According to this article in Forbes, it has gotten the attention of Sen Herb Kohl (D-Wis) as well. Here is the announcement from his website. While specific action is unlikely in this session given the upcoming election, Forbes notes a possible connection with the EU's action on mobile phone price regulation.

While Kohl blames this on industry consolidation, I believe that there are other interpretations that should be considered. For one, the price increase is for a-la-carte messages, not for packages or bundles of messages. Second, carriers often offer cheap or free messages between users in their networks as a way to increase switching costs for users. Should they be prevented from doing this?