This is the second in a series of posts analyzing what forces might break the hold that carriers have on the mobile market. Part I is here.
(3) Subsidies Lose Their Power
Almost 90% of people in the US buy their mobile phones from their carriers; now almost 50% of people in the UK do the same. This allows the carriers to control what people can do with their phones.
So why don’t more people buy mobile phones and wireless service separately, the way they buy PCs and Internet service? Because carriers subsidize the cost of handsets, cutting $100 to $300 off the retail price of a new phone, provided that you sign a two-year contract.
(Why don’t regular ISPs do this? I know of one that tried during the dot-com boom: Gobi. But the math doesn’t work. A broadband ISP would have to keep you as a customer for four years just to earn back the cost of an entry-level Windows PC. A wireless carrier can earn back the cost of a free RAZR in four months.)
There are three ways that subsidies could go away. The first is regulatory change, but I’ll leave regulations until a later post.
The second is that a carrier could decide to abandon subsidies and use the savings to slash the cost of service, betting on consumers switching to their network and bringing their old phone with them. A new European MVNO, Blyk, is taking this idea to the extreme: no phone, but completely free wireless service - in exchange for receiving ads.
The third possibility is that phones will become cheap enough to make carrier subsidies irrelevant.
We almost got to that point in 2000. Every new phone seemed to cost less than $50, and pumping up the price took upholstery or goldplating. Then came color screens and games and internet access and cameras and music players, and average prices began to climb again.
I believe that some time in the next five years we will reach another plateau, similar to where the phone market was five years ago and where the PC market is today: smaller, lighter, prettier, cheaper, please, but no new features. The price of new mobile phones will head back towards zero without a subsidy, and carriers will lose their power.
(4) Operator Overload
With great power comes great responsibility. By insisting on controlling all the services that pass through your phone, operators take on huge costs and uncertain legal liability.
Imagine if Dell or AOL were to insist on approving every web site in the world before it went live: content, usability, features, legal compliance, everything. This is the one of the implications of a ‘walled garden,’ and some wireless carriers are still trying to do this. It is not possible. You can let everything through and caveat emptor; you can let almost nothing through and make no money from data; or you can burn millions of dollars searching for a technical solution, a third way that doesn’t exist.
Recognizing this, some operators have begun to allow consumers unrestricted access to the Internet. They still put their own sites and ‘approved’ partners out front, but for how much longer? 74% of Americans already go straight to the mobile site of their favorite portal.
What do I mean by unknown liability? Assume that you are Verizon: Are you responsible for faulty merchandise sold by a mobile commerce site? If you have to approve every site on your deck, how do you offer adult content? If someone downloads an mp3 over your network, are you liable for copyright infringement? The solution is the same for wireless operators as it was for wireline ISPs - become a bit-pipe and disclaim all responsibility for what passes over your network.
(5) Flat-rate Pricing
A lot of people seem to think that operators are bound to move to flat-rate pricing for data, and that this will lead to unrestricted Internet access. Yes to the first part, no to the second.
Over time, all communication technologies seem to move towards simplified pricing, such as flat-rate pricing for mobile data. Note that ’simpler’ doesn’t necessarily mean ‘lower.’ Consumers often pay a premium for simplicity.
But switching to a flat rate for data doesn’t make your carrier indifferent to how you use the network. If you pay by the kilobyte, they want to maximize the amount of bandwidth that you use: streaming video, music downloads, multiplayer games. If you pay a flat rate, they want to minimize the amount that you use. Only when it becomes cheap to deliver all kinds of content do they cease to care.
UK operator "3" announced flat-rate pricing for data services a few weeks ago and were greeted as messiahs. I am reserving judgment until I hear what the flat-rate price is, what the usage restrictions are, and why a company that is promising unfettered access to the Internet still needs a partnership with Yahoo. (And since 3 has only 5 million subs, I still won’t care.)