Jason Devitt

Another week, another laughable announcement from a major carrier: I will be able to watch a handful of videos from YouTube on my Verizon phone. Videos carefully screened by Verizon. If I sign up for their $15 per month VCast service. Wonderful. Meanwhile carriers have made it even harder to do something as simple as forwarding email alerts to your own employees via SMS, even if your company is paying for the phones.

Imagine if there were only four major Internet Service Providers in the US. Now suppose that most of the time you had to buy your PC from your ISP - even if you were General Motors or McDonalds or the US government. What kind of PCs would you expect your ISP to offer? What kind of services? And at what price?

The correct answers are ‘crippled’, ‘Soviet’, and ‘too much.’  It would be infuriating. But this is precisely how the market for mobile phones operates in the US and Japan today, and the rest of the world is not much better off.

What will it take to break the carriers’ hold on the market?

Most of my peers believe in some form of technological Manifest Destiny: that change is inevitable, that carriers will see the light or be swept away, that the brave warriors Linux and Ajax will march around the Walled Gardens seven times blowing their trumpets and lo, the mobile Internet shall be ours.

For my business, I care about when and if this is really going to happen, and so I am trying to think about the market forces that may lead to it. I’ll break this up into several posts. Thoughts and comments very welcome.

(1) More Competitors. Please.

The more carriers the better. Competition has driven the cost of long-distance phone calls in the US to near zero. But that took a hundred years and unlike Skype two guys in a garage cannot launch a nationwide wireless network good enough to compete with a Cingular or Vodafone or KDDI.

‘Mobile Virtual Network Operators’ or MVNOs help a little. These are companies like Amp’d and Virgin that lease carrier networks and sell services under their own brands. They have shamed the larger carriers into improving services and trimming prices. But starting an MVNO is like sub-letting your apartment; tenants may prefer dealing with you but you will never put your landlord out of business this way. ESPN and easyMobile have already given up.

New technologies can enable new entrants. There are two WiMax networks planned in the US, but one of those is Sprint’s, so that means net one new entrant this decade. (Estimated cost of building a nationwide WiMax network: $5 billion.)

WiFi? No one can live on WiFi alone. As Roger Entner from Ovum says in this New York Times article, “Everybody who tries a Wi-Fi phone will get down on their knees and thank the wireless phone people for the good job they’ve done on coverage.” As well as spotty coverage and calls that drop even when you are stationary, WiFi drains batteries faster. Hybrid WiFi/cellular handsets actually help the carriers - they get to offer better coverage indoors without building any new towers and they can shift traffic off their own networks. The best we can hope for hope is that customers in turn will shift to lower-priced plans, squeezing carrier revenues.

(2) Market Saturation

The good news is that even without any new competitors, there can still be increased competition.

For twenty years, mobile operators enjoyed continual growth; prices fell every year, but this drew so many new first-time customers that total revenue kept going up. Investing in the network and keeping suppliers and vendors in their proper place was never a problem. Carriers that were modestly successful got bought by carriers that excelled. Failure was rare. 

Now in most developed countries there are at least seven mobile phones for every ten people, which means that pretty much every adult has a phone. In countries like Taiwan the ratio exceeds 100% - almost everyone has a phone and many have two.

This raises the cost of a marginal subscriber; operators have to steal customers from each other or persuade their current customers to stick around and buy more services.

Anything that cuts into revenues or margins forces carriers to rely more on their partners - handset vendors, software companies, content providers, Google. And that is good for all of us.

More to come … stay tuned.

This entry was posted on Tuesday, November 28th, 2006 at 5:12 pm and is filed under Mobile. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.