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.

Developments regarding LTE

There have been a few interesting things related to LTE that have emerged in the last month or so. I have been rather distracted by other things (IEEE DySPAN among them), so I have not blogged about them. On the other hand, it may be interesting to consider these developments on the whole rather than individually.

First up, this article in the NY Times notes the following:

But the superior efficiency of L.T.E. networks will tend to minimize the overall cost of transmitting voice calls, as conversations are converted into tiny packets of 1s and 0s in a process similar to that used by Internet voice services like Skype that give away some Internet voice service free.

Operators, which generate about 80 percent of their revenue from voice services, want to hinder a new downward price spiral. Revenue from termination fees makes up 15 percent of an operator’s sales and profit, said Jacques de Greling, an analyst at Natixis, a Paris bank.

Many smaller operators would rather adopt the billing regime used by Internet service providers and mobile operators in the United States, called “bill and keep,” which splits the costs of interconnection between the caller and person being called, eliminating additional costs for callers. The U.S. system has enabled flat-rate mobile plans and has promoted cellphone use.

Despite the push by large operators for an L.T.E. standard that would preserve their lucrative billing status quo, it is uncertain whether they will be able to extend the European system of termination rates into the L.T.E. era.

But last year, the European Commission, seeking to encourage the greater use of mobile technology, raised pressure on the operators by adopting rules that would require countries to develop a uniform method of calculating an operator’s costs for delivering voice service when determining the termination rates charged in a country. The new rules are expected to reduce E.U. termination rates from a current average of 7 cents a minute to less than 2 cents by 2012.

In Brussels, an advisory council made up of European national telecom regulators is scheduled to consider a plan in May to switch the European regime from termination rates to one akin to the U.S. system. Most operators remain opposed to the change. But given the rapid decline in mobile termination rates, such a changeover may be superfluous.

Then there is this item about the private equity firm Harbinger, who plans on building a nationwide LTE network in the US. The cited article (from GigaOm) does a bit of analysis of the announcement. Such a network that is not affiliated with a major carrier could serve as a "wholesaler" to MVNOs, which could provide an interesting challenge to the competitive landscape of mobile in the US. It could also serve as "overflow" capacity for the existing carriers, enabling them to roll out a footprint more quickly than if they relied exclusively on their own investment and deployment resources. On the other hand, it has been pointed out that this might be a "smoke and mirrors" strategy to boost the value of the spectrum controlled by Harbinger in advance of a potential sale.

AT&T and the Internet of Things

This item over at GigaOm is interesting. To me, beyond the numbers, the most interesting observation was this:

The irony here is that M2M connectivity in many ways represents the dumb pipe future that AT&T is so worried about — it’s not providing anything to its partners but the bits. On the call, AT&T executives explained that the number of bits sent via the network are high-margin bits and the machine-to-machine clients have very low churn.

Customer acquisition costs in wireless are quite high, so low churn is a rational cost management strategy. The observation is right that M2M clients would not turn over very fast, if at all.