Jason Devitt

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Via Tom Evslin

This is the last in a series of posts analyzing the forces that might break the hold that carriers have on the mobile market. See also parts I, II, and III.

(10) Regulation

I saved regulation to last, although not to build suspense. Like most entrepreneurs, I recoil from the subject. But wireless spectrum is a commons. There may be better ways of managing the commons than the frequency allocation chart above, but even in a world of open spectrum and software-defined radio we’d still need a licensing regime for new devices.

I’m interested in what kind of regulatory changes we might see in the next five years and their impact on my business.

Network Neutrality

I missed most of the kerfuffle over network neutrality while traveling this year, but now that Congress is in the hands of Democrats legislation seems inevitable. Partisan lines have been drawn.

The central issue is how to prevent a wireline carrier from deliberately degrading service to a content provider that refuses to pay a fee: is self-regulation enough or do we need an umpire? No one is even suggesting that a cable company or DSL provider should have the right to block access to a content provider completely. But wireless carriers do this all the time. Many mobile content providers in the US cannot get their content onto any network. The more people use the mobile web, the more this becomes a free-speech issue - a smart mob can’t use other media to communicate. How long will regulators let this go, not just in the US but in Europe? Or will mobile operators offer network neutrality themselves in exchange for eliminating their liability for content that goes over the network? 

Unlocked Phones

Carriers control the market because they control the phone. One way they do so is by ‘locking’ handsets to their network; they sell you a phone at a discount and one of the many strings attached is that you can’t take that phone to another provider.

But what if there is no contract? What if the contract is up? Why can’t I buy a CDMA phone directly from LG and demand that Sprint activate it on their network, so long as I pay for service? If I buy a phone from Sprint and switch to Verizon when my contract is up, I can take my phone number with me. Why can’t I take my phone?

A few weeks ago the Librarian of Congress (regulators are everywhere) granted an exemption under the DMCA covering software for unlocking cellphones. So far only Tracfone is seriously affected, because they subsidize handsets without forcing customers to sign a two-year contract. But regulators could go much further. Nothing would do more to increase competition in the US wireless market than legislation requiring carriers to accept other handsets on their network. Right now GSM providers can’t stop you; Verizon will allow it but makes it so hard that no one bothers; Sprint just says no. There is a clear precedent for change: the Carterfone decision.

Full Number Portability

Give someone control of a namespace and they will charge a rent for it. What would NetworkSolutions charge for a domain name if you couldn’t switch to a different registrar? IM interoperability wouldn’t be an issue if you could take your AOL screenname to Yahoo. But Wireless Number Portability is old news, right?

Not in Japan, where it was just introduced. Not in Canada, where they are still waiting. And we are all still waiting for Full Number Portability, between fixed and mobile networks. FNP makes it harder for carriers to charge a toll for terminating a call on a mobile network, a big issue in Europe if not in the US, because the customer can’t know in advance whether the number they are calling is mobile or not.

Restrictions on Subsidies

One way that carriers keep control of the handset is to lock it, but the way that they persuade us to give them that control is by subsidizing our purchase in the first place. Korean regulators have banned and encouraged subsidies at different times, to favor the adoption of certain technologies. Finland has always banned subsidies, to avoid favoring any. Neither country has a shortage of mobile phones as a result.

Banning subsidies makes operator pricing more transparent, and forces them to compete on price and service alone. If they use the savings to cut the price of voice and data, consumers are better off in the long run. If they shift the dollars into marketing instead, we just get more TV ads and expensive handsets. I don’t expect to see a ban in the US, but regulators in other countries may try it.

New Entrants

Regulators play a large role in deciding how many operators there will be in each market, by granting new licenses and approving or vetoing mergers. In the US there is not much on the horizon. Clearwire is rolling out a nationwide Wimax network in the US and European regulators will start auctioning Wimax licenses soon; we have yet to see whether Wimax can match the performance of cellular networks for mobile voice, but dual-mode GSM/Wimax handsets should be more reliable than the WiFi versions, and so cut into the revenue of the incumbent carriers.

Open Spectrum

In the next five years? Not a chance. Be grateful that the FM gadget for your iPod is finally legal in the UK. Hope that somebody can make Bluetooth easier to use. And be grateful for WiFi. Until everybody on your block gets it.

Uploaded by Whatknot

Cameron Marlow writes about how many taps it takes to enter a URL into a phone, and he’s written a tool to tell us. (Predictive text systems like T9 don’t help for URLs.)

Meanwhile, depending on whether you believe Gartner or the GSM Association, either 2005 or 2006 was the first year in which the number of SMS or text messages sent worldwide passed one trillion. Since fewer than 1% of the phones in the world have a Qwerty keyboard and spam is not yet a major problem (because of the economics), almost all of those one trillion messages were tapped out on a 10-digit keypad.

Back in the days of the (first?) bubble, people used to talk a lot about network effects and the overwhelming competitive advantages that they created. The more buyers visit eBay, the more sellers show up; the more goods there are for sale, the more buyers visit and so on until it becomes almost impossible for a new entrant to displace eBay. This was one argument used to support claims of "first-mover advantage" and strategies like "grow big, grow fast, or go home."

Network effects are real and powerful - eBay itself was defeated in the Japanese market because it was too late to enter, and more recently MySpace and Skype and Google’s AdSense (although not Google search itself) have demonstrated the power of networks.

However, during the bubble people made a much stronger claim for network effects: that a product or service could get ‘locked in,’ such that customers would still choose it over a new product that was clearly superior. Their favorite example was the Qwerty keyboard layout, which was supposed to be unassailable despite ‘better’ alternatives like the Dvorak layout.

Cute story, but it just wasn’t true. No one has ever demonstrated that the Dvorak or any other layout offers a meaningful advantage over Qwerty.

The rise of SMS should kill this myth. One trillion messages were composed last year using a keyboard that is clearly worse than Qwerty by any standard measure - speed, ergonomics, error rate - because a regular phone is smaller and cheaper than a Qwerty phone.

‘Smaller and cheaper’ are so important for phones that even RIM has had to degrade the keyboard on Blackberry phones in order to broaden their appeal.

Network effects are real, and confer real competitive advantages, but there is no such thing as lock-in. There is no product or service that a customer won’t drop if something better comes along. It’s just not always obvious what ‘better’ means. That’s part of the Innovator’s Dilemma.

Thanks to Jake for sending me Cameron’s post.

Update: A Citigroup analyst believes that 60%-70% of RIM’s Pearl phones are being bought by current Blackberry subscribers. Not only does this mean that RIM is having trouble breaking out of its niche, it also means that existing Blackberry owners are willing to give up a full Qwerty keyboard.

Photo by katiew.

I have an idea for a new company. No, I am not ready to publish it to the world. But I have been talking about it with several people, including former investors, colleagues, and friends, and their advice has been very valuable. (Thank you all.)

Which begs the question - whom do talk to about your ideas, and when?

Most entrepreneurs are paranoid. True, not everyone is out to get you, but a lot of capable well-funded people are, and it only takes one.

At the same time, unless you can name someone who has built a billion-dollar company literally all by themselves, you have to trust someone, sometime.

Recently a would-be entrepreneur asked me whether she should patent her invention, but refused to tell me anything about it. Another person would only tell me that "there is a human function that has never been automated … until now" and did I know anyone who could help him? Er … Toto?

When there is nothing but a raw idea, a sketch on a napkin or envelope, my rule is that feedback is free. If I know you or you are recommended by someone that I know, and you have an idea that you would like my opinion about, I am happy to give you some thoughts. I may or may not ask you to return the favor. (I almost certainly will.)

If once you start talking about your idea I realize that there is a conflict - that I am working on something related - I will stop you and say so. If we decide to go on, I may end up incorporating some of your ideas in my own project, and you some of mine.

There is a time and place for formal non-disclosure agreements, but not until there is something concrete to protect, or you are forced to talk to someone that you are not sure about. And if your idea is really patentable you should be even more careful, because disclosure could invalidate your claims. Otherwise:

1. Find someone that you trust.
2. Tell her that you value her opinion and would like her advice.
3. Make it clear that all you are offering is a thank you and a firm handshake.
4. Tell her your idea.
5. Listen to her opinion.
6. Repeat.

Ah, but what if you don’t know who to trust? Easy! That means you are not qualified to be an entrepreneur. You are destined to be ripped of by your partners, your investors, your employees, your vendors, your customers, your immediate family, your priest, pastor, and dog, so best to give up now.

And that feedback is free.

Last night Summer and I went to see Mortified in New York. Every performance is slightly different, but each night nine or ten people read extracts from their teenage diaries, locker notes, poems, or - last night at least - rap lyrics (by a 14 year-old white farmboy) and a draft screenplay for a porn flick (by a 12 year-old Jewish American Princess).

For the web geeks among you, this show is user-generated theater;
not open mike like YouTube, but filtered and edited like Metacafe.

It’s cringe-making, painful, embarrassing, and incredibly funny. Anyone can submit a piece and the producers in each city - so far L.A., New York, Boston, San Francisco, and Chicago - hold open auditions to find new material. Some of the best pieces from the last few years have been published as a book, just in time for the holidays.

Thoroughly recommended.

Nicholas Carr writes about EMI’s decision to release the new Norah Jones single as an mp3, as reported in the WSJ.

I see DRM as a futile attempt by a threatened industry to defend their existing business model, which for a hundred years has been predicated on manufacturing and selling some form of physical media (piano rolls, wax cylinders, LPs, or CDs) and earning a ‘breakage’ fee by selling people albums when most of the time they want singles.

What’s interesting about this story - in the light of my own posts about the wireless business - is the immediate cause of EMI’s move. It’s not that some Norwegian kid has cracked another DRM code, it’s that Apple’s DRM strategy - for now - has proved too successful!

Apple has a near-monopoly over sales of digital music. More importantly, they have a lock on the market for digital music players. Music sold through any other DRM channel won’t play on an iPod, so why bother? EMI’s best hope of selling digital music outside Apple is to sell mp3s, which will play anywhere, including iPods.

And mobile operators? Mobile phones will compete with iPods as portable music players, but most people will load up the songs that they already own from their PC, and the carrier will make no money apart from the initial handset sale. ("The iPod makes money. The iTunes Music Store doesn’t.") I can understand people downloading music over the air to their phone on impulse, and paying a premium to do so, but that will be a small business for the record labels and a negligible one for carriers. So why do they even bother? And why don’t all the carriers collaborate on a DRM strategy and build a single channel to compete with Apple? The answer to both questions is that content is the cupholder.

By the way, ‘Chris_B’ in a comment to Carr’s post says that unauthorized duplication of CDs is a much bigger problem than online file-trading. He is probably right for now, but I think that while the music business will survive the transition to digital content in some form, the CD duplicators will not. The only people who buy pirated CDs today are the ones who don’t have Internet access yet.

Traveling all over South-East Asia this year, I rarely saw anyone selling music - a few stalls in the Khao San Road in Bangkok, some sun-faded CDs in a store in Hoi An, Vietnam. Why? Because all the likely buyers were Western tourists and backpackers. And all of us had mp3 players.

On the other hand I saw two Internet Cafes - one in Cambodia and one in Laos - that were charging for the right to download music.

This week the Carnival of the Mobilists, a round-up of articles from all over the web about mobile, is at Mopocket. Many thanks to  host Justin Oberman for naming my recent posts as his personal favorites.

This is the third in a series of posts analyzing what forces might break the hold that carriers have on the mobile market. Part I is here and Part II is here.

(6) Open Standards

Well, obviously. Wide adoption of open standards will reduce the carriers’ ability to control the handset and what you can do with it. The question is why will carriers adopt technologies that threaten their business models? Because they need to deploy those technologies themselves in order to reduce costs and launch new services. This means IP end-to-end, open operating systems, and a growing reliance on open source software. Vodafone has announced that all of their future phones will be based on Windows Mobile, Symbian, and Linux. It will be very difficult for Vodafone to prevent customers doing whatever they want with those phones; consider Cingular’s efforts to cripple dial-up networking on the Treo 650.

(7) Demand from Enterprise Customers

If phones are going to be widely used for Internet access, enterprise customers need a lot more control over employees’ phones than they have today. Remote access; provisioning of software from behind the firewall; the ability to wipe the memory of a lost phone; locating staff; companies like Ford and Citibank do not want to rely on wireless operators for these services any more than they want to let Google host their web applications. Above all they want ‘fixed mobile convergence’, the ability to treat a mobile phone as just another extension on their PBX, another node on their wireless LAN. Carriers can’t deliver FMC without giving up control of the phone.

(8) The Southwest / Ryanair Strategy

Sometimes it seems like every major operator in the world has the same strategy: become the number one branded provider of wireless voice and data services in their market. MVNOs may focus on one segment (people with poor credit or heavy data users or immigrants phoning family members at home), smaller players like Alltel and Leap in the US or 3 in the UK may compete on price because they have no choice, but the major operators will all tell you that their target market is "men and women aged 18-34." Sooner or later one of the majors (perhaps T-Mobile in the US or Softbank in Japan) will give up and adopt a different strategy entirely: become the lowest-cost provider. And the best way to do that for data services is to offer customers unrestricted access to the Internet.

(9) Network Parity

Europeans can stop reading at this point. For them, the idea that one wireless network could offer better coverage than another is a quaint memory by now. Why in 2006 can people not get a wireless signal in many parts of the US? It is not simply because US carriers use a variety of technologies while Europeans standardized on GSM; the three biggest Japanese carriers use three different technologies. It is just that the US is one of the largest and least densely-populated countries on Earth. And local communities have a habit of objecting to new cell towers even while they complain about poor service. Nevertheless, one day there will be very little to separate Verizon, Sprint, Cingular, and T-Mobile in terms of network coverage, and at that point they will have to compete on price, handsets, and data services, just like carriers in Europe.

One more post to come.

In a previous post I mentioned how the IPO market has almost dried up in the US, mainly due to Sarbanes-Oxley.

The "Interim Report of the Committee on Capital Markets Regulations" recommends changes to Sarbox among several other reforms, but according to the New York Times nobody is happy. Elliott Spitzer calls it "wayward and wrong-headed", the National Venture Capital Association thinks that the recommendations don’t go far enough.

Meanwhile the (original) Times reports on the peformance of US companies that have chosen to list on London’s AIM (Alternative Investment Market), where the regulatory burden is much lower.

This is what they call adverse selection.