iPhone: joining the subsidized pack

While the masses praise Apple for the new iPhone 3G, one should remain mindful that this release is actually a giant step backwards for the US cellular industry. Let me be clear, the iPhone 3G is another stunning design encapsulating new, cool features into a superior form factor. The problem is not the handset itself. The problem is the way that the handset will be marketed and sold.

Previously, Apple garnered praise for championing the movement to a more open mobile ecosystem. But, since that time, Apple has continuously acquiesced to the pressure from AT&T to play by the carrier-centric rules of the game. Yes, as has been explained in an earlier posting, the carriers in the US rule the mobile world with an iron fist.

While professing to support consumer-benefiting progress, the carriers have no intention whatsoever of actually loosening their tight grip on consumers. But, let’s not let the consumer off the hook too easily. US consumers are suckers for anything “cheap” or “free”, to their own peril. This deadly combination results in the continued practice of carriers subsidizing handset sales in exchange for consumers signing up for long-term contracts. From that point on, the consumer has no real option to switch carriers and therefore the carriers have no real incentive to improve their offerings, or provide new and innovative services.

Remember the old rhyme:

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.

Except, in our case, for the want of a free cell phone, the whole US mobile kingdom is lost.. or, at least, is 2 generations behind mobile service in Asia.

Openness in Mobile: depends on what the meaning of the word “is” is

A long, long time ago, in a galaxy far, far away the mobile universe was all abuzz and basking in the radiance of openness. You remember it well, don’t you? The date was November 27, 2007. Verizon, the long-time stalwart finally drank the koolaid and agreed to open their network to any device and any application. Remember, in October 2007, when Apple relented to public pressure and agreed to allow third-party developers to build applications for the iPhone? Remember, in January 2008, when the declaration, “First and foremost, the wireless industry does not block text messages of any type,” was made by Steve Largent, president of the CTIA, the wireless industry association?

Well don’t look now, but that flash you’re seeing out of the corner of your eye is the mobile operators backpedaling faster than a BALCO-fueled sprinter, although I doubt they will ever put on a similar public display of repentance for their transgressions.

Wireless operators have been working long and hard to roll-back the hands of time and hold on to their outdated ways. Given the threat of truly open spectrum that was forced by the efforts of Google, Verizon and AT&T shelled out a combined $16 billion in the 700-MHz spectrum auction. And, while publicly maintaining support for openness, the carriers have been working behind the scenes to stop any mandate for such openness. The latest hits to the openness movement were inflicted by FCC Chairman Kevin Martin, who drew applause from mobile industry stalwarts when he announced:

In light of the industry’s embrace of this more open approach, I think it’s premature for the commission to adopt any other requirements across the industry. And thus, … I am going to circulate to my fellow commissioners an order dismissing a petition by Skype that would apply Carterfone requirements to the existing wireless networks.

Doesn’t the FCC realize that the only reason the operators have “embraced an open approach” is because the FCC mandated that a large swath of the 700-MHz spectrum be open? No major US carrier made any declarations in support of openness before that mandate was announced. And, even after the auction, AT&T still believes that spectrum is more valuable when it is tightly controlled, as is evident from the statements of Ralph de la Vega:

The results of the auction bidding demonstrate that the B Block was the most attractive the most valuable spectrum available, and it was the best investment for AT&T and its customers. The lower 700 MHz spectrum that AT&T acquired from Aloha Partners is not subject to the same strict regulations imposed on the upper C-Block spectrum the FCC recently auctioned. With fewer costly and complex regulations we have the certainty and flexibility needed to move faster in rolling out new mobile technology and more customer choices in devices and applications.

I’m sorry, is Mr. de la Vega living in a different, parallel universe where the grass is blue and the sky is green? In this world, the US is far behind Europe and Far East Asia in mobile technology… about 2 generations behind! (Even wireless broadband in Japan and Korea is an order of magnitude faster than the fixed-line broadband, cable or DSL, that is available in the US.) The reason for this lag has been the long-time in-fighting within the US cellular industry (e.g. AMPS vs. TDMA vs. CDMA vs. GSM). Rather than work together and let the “rising tide lift all boats”, the operators fought to maintain control of their own little fiefdoms, and they continue to do so!

Apple’s recent about-face should not go unnoticed either. After swimming in praise for creating an SDK to allow third-party developers to build applications for the iPhone, Apple is apparently showing that those old stripes don’t change so easily after all. Apple has apparently rejected the application of nearly all third-party developers to join their program. That’s right, the iPhone is actually only open to the anointed few select partners.

Mobile Industry, you either welcome the movement with (pun intended) open arms, or fight to hold onto your walled gardens. Thinly veiled lip service won’t cut it. Open is open… regardless of what the definition of “is” is.

Google has cellular industry caught in a pincer movement

While Apple utilized a frontal assault on the cellular carriers, Google is attacking with a classic pincer movement. Let’s explore the underlying differences between these companies and how that drives the different strategies.

Apple is the preeminent consumer electronics brand today. No consumer goods company carries the same cachet that Apple does. No other brand has such a rabid, fight-to-the-death following. And nobody gets more out of their consumers than Apple. Steve Jobs use of the stage and the buzz ever-surrounding Macworld conferences is enough to draw the spotlight away from CES and the entire rest of the consumer electronics industry.

With Apple’s strengths being in designing consumer devices and the fervor of its devout followers, Apple’s foray into the mobile space was, of course, from a strictly consumer-facing, handset manufacturer angle. Apple wanted to create a device the way it wanted to create it. And, Apple knew absolutely that their device would sell to a significant number of people.

The carriers are always looking for a competitive edge against their oligopoly-brethren, and their tried-and-true approach to gaining such an edge is through the use of exclusive agreements. Knowing this, Apple played a game of “let’s make a deal.” Apple offered an inside track on cheap and easy acquisition of legions of the most loyal consumers in the world. In exchange, Apple wanted the power of control over the platform. There was no way a carrier would give up control over handset requirements without getting exclusivity in return. This deal was first offered to Verizon, which declined. AT&T, which as Cingular had been one of the more conservative of the carriers, wanted to inject new life into AT&T Mobility, so they grabbed for the brass ring. And, as I touched on in an earlier post, AT&T must have expected that Apple, owing to its history of maintaining tight control over its technology, would keep the platform closed. So, for AT&T, this probably didn’t seem like such a huge risk and came with a big upside.

Google’s strengths and history led it down a different path. While Google has a brand that takes a backseat to nobody, Google does not manufacture physical goods. Google provides web-based software services. So, it’s too big of a stretch to think that people will flock to use a phone that is running a Google-OS just for the sake of it. But, what leverage Google does have lies mostly in its substantial war chest. Through the threat of entering the 700 MHz auction, with the very real prospect that it could win such an auction, Google can force the carriers to the table.

The threat is what a Google-owned spectrum would mean to the cellular industry. First, let’s set aside the notion that Google would actually enter the cellular carrier market. That’s just too far from Google’s core and would require too great a commitment of resources to physical infrastructure. What’s much more likely is that Google would license the spectrum to one or more of the carriers, but that would come with many strings attached. In essence, Google could use the carriers’ own arguments and tactics (“It’s our network/spectrum, and if you want to use it, you’ll follow our rules.”) against them. One such string would undoubtedly be that any device running on that spectrum would have to be Google-powered.

So, in dealing with Google, the carriers are between a rock and a hard place. They are not “induced” to work with Google by the allure of advertising revenue splits, they are compelled to do so. Either they negotiate some revenue split now (with the greater portion of that split going to Google, of course), or have a worse deal force-fed to them later. Either way, the carriers are losing their tight grip on the mobile universe, which is a good thing.

Even though the unspoken Apple-Google alliance’s efforts against the cellular carriers is ultimately leading to a more open mobile network (hooray!), let’s not forget that this is in no way an altruistic endeavor on either company’s part. Apple was forced by consumer backlash to open its platform. Google is simply looking to expand its advertising reach into the emerging mobile arena. In this respect, Google seems to be setting itself up as the default advertising platform for mobile devices in a manner eerily similar to how Microsoft leveraged the Wintel monopoly to win the browser wars with Netscape.

Let’s just hope that Google isn’t using the banner of openness as a trojan horse for creating its own monopoly, but stays true to its”Do no evil” mantra, because mobile users in the US have been oppressed for too long already.

Web-IV: the name that says it all

Web-IV is here. Yes, the messages of the past 6 months combined with the announcements of this past week have signaled that the evolution has completely bypassed Web 3.0 (I always hated that moniker anyway). The Web has skipped a generation.

So, what is Web-IV? Web-IV is the ultimate convergence:

• the Internet
• the Web
• the Mobile Web
• Cellular networks
• Wi-Fi, WiMAX, and their brethren
• content
• applications
• consumers
• producers
• enterprises

Obviously, the ultimate convergence is kind of a big topic. It’s much too big for a single post. So, this blog will be exploring the theme over the course of several entries to come. But first, if you’ll indulge me, I’d like to take a moment to explain why I chose Web-IV as the name for this stage of the Web’s evolution.

I’m a firm believer in the power of symbolism and Web-IV embodies the ultimate convergence not only as the name that, as I said before, indicates that the Web has skipped a generation. But, delving deeper, let’s look at all the constituent parts of this symbol: Web-IV.

“Web” is the obvious part. It represents what we’ve come to understand as the world wide web in its first and second incarnations: dot-com and Web 2.0.

“I” stands for the Internet, which is the underlying networking infrastructure on top of which sits the web.

“-” symbolizes the expanded infrastructure that has evolved. This includes the cellular networks and the wireless technologies that untethers the web from its traditional edge: the desktop.

“V” indicates convergence, that all the various aspects outlined above are being brought together into a single, coherent whole.

And deeper still, the “IV” is a Roman numeral for the number 4. This is relevant for a number of reasons. First, the Roman numerals are used to further emphasize convergence, playing off the saying “all roads lead to Rome.” Second, the number 4 is a homophone of the word “for” and is commonly used as a shorthand in text messages and IM chats. Thus reading the phrase with the homophone, “Web for …” speaks to the unlimited possibilities of the ultimate convergence.

Now that we’ve named the phenomenon, soon we’ll explore the phenomenon itself.

Apple has seen the light

Wow! Who woulda thunk it? A tiger can change its stripes.

Apple has announced that it is opening the iPhone and iTouch to third-party applications. Yes, believe it. This is the same company that lost the PC wars to Microsoft and Intel because it refused to allow the Mac to be cloned or to license the Mac OS. This is the same company that only allowed iTunes songs to play on the iPod and only allowed the iPod to play songs bought through iTunes (or open source MP3 files). And, this is the same company that released a software patch and turned any “unlocked” (read: hacked) iPhones into useless bricks.

Suddenly, Apple has reversed itself on over 20 years of business strategy. Steve Jobs has all but admitted that that business strategy was wrong. The poster child for tight control has seen the light of open-market economics.

Why now? Why has Steve Jobs had this epiphany at this particular time? Two reasons: Facebook and MySpace. That’s right, Apple didn’t learn from the Mac debacle in its own history. Apple is reacting to what’s happening in the Web 2.0 world right now. And, the analogy is an apt one. Apple sees that Facebook is rapidly gaining on MySpace and that the reason for it is that Facebook opened its platform to third-party application developers. MySpace got so scared by Facebook’s growth that they could only counter by opening up their platform as well.

Apple understands that to maintain its position atop the cell phone world it has to do more. Other manufacturers are introducing touch-screen cell phones. The iPhone runs the risk of being just another handset in a crowded market. So, Apple pulled out its trump card, the one thing that Apple has that no other handset manufacturer has: the upper hand in the handset manufacturer / wireless carrier relationship. Through its deal with AT&T, Apple secured the power of self-determination. And, contrary to what both parties must have believed at the time, Apple decided to share that power with the rest of the world.

But, does Apple understand the ramifications of this decision? This has done so much more than just open up a platform for developers. What Apple has done will send shock waves throughout the wireless industry. By striking the iPhone deal with AT&T, Apple put a chink in the armor of the wireless carriers. Before that agreement, the carriers maintained a stranglehold on the device manufacturers and forced them to comply with a telephone-book sized list of requirements and constraints. The chink in the armor was that Apple negotiated the power to control the device, and even forced the carrier to create service plans specifically for their device.

By opening the iPhone platform to third-party developers, Apple has not only set the device manufacturers free from the carrier’s control, but has also now ushered in the age of Wireless Net Neutrality. Since all iPhone service plans include unlimited data plans, Apple has now created a world where any person anywhere can create a mobile application and not have to negotiate with the carriers for the privilege of deploying the application.

In over 20 years of trying, Apple was never able to overcome Microsoft. But, in less than one year, Apple has thwarted Verizon, Sprint, and AT&T.

Missing the Point: wireless carrier regulation bills

Today, Senator Mark Pryor introduced a bill to regulate the wireless carriers. As the RCR Wireless News article points out, the Pryor bill is backed by the wireless industry and will compete for backing with a bill introduced a mere 10 days ago by Senators Jay Rockefeller and Amy Klobuchar.

Consumer advocates are backing the Rockefeller-Klobuchar bill. The wireless industry is backing the Pryor bill. Both bills have good and bad points. Since the Rockefeller-Klobuchar bill arrived first, let’s start there. This piece of legislation would require the carriers to make their bills more transparent. The authors claim that carriers are mislabeling as governmental and regulatory fees what should just be considered standard operating costs and paid for in the normal monthly plan pricing. If anyone has actually reviewed their cell phone bills, they would probably agree that some clarity and “truth in billing” would be helpful.

The Pryor bill would put the FCC in charge of policing the wireless industry, and would close the current loophole that allows for each state to impose its own regulations. This is important because consumers and businesses should expect the same level of service no matter what state they are calling from. Allowing the states to impose their own regulations can only lead to fragmented, unequal service throughout the country.

So, what are the problems with the bills? With the Pryor bill, too little is imposed on the industry in terms of “truth in billing” and other consumer protections. With the Rockefeller-Klubochar, the FCC will investigate cell phone “locking,” which is a pointless and unnecessary study.

Here’s why cell phones are currently locked and why contracts call for $250 early termination fees: with the carriers subsidizing consumer phone purchases, acquisition costs are $300-$400 per customer. If a new customer signs up for a $40 per month plan, that’s an 8-10 month break even period. The carriers shouldn’t be expected to subsidize handset costs and then not be allowed to lock in customers.

Now, I’m not saying that the carriers should be allowed to lock in customers. I’m saying that everyone is looking at this from the wrong point of view. The aspect that nobody is talking about here is the power that the carriers wield with the handset manufacturers. If the handset was unbundled from the service, the whole ecosystem would prosper.

Of course, each group would gain something and give up something. Consumers would gain freedom to shop around for the handset of their choice, the service plan that best meets their needs, and would be able to switch when their needs change or a competitor in the market provides a better value proposition. But, consumers would have to pay full price for the handset. This is the common model in Europe, but the American consumer is spoiled by cheap handsets. Sorry consumers, you gotta give to get.

The carriers would reduce their acquisition costs. This would allow them to focus more on the service instead of misusing their money by paying for handsets that consumers have shown they are willing to pay for themselves, if the product is right. (See iPhone) But, carriers would then have to compete with each other more fiercely on service, which means an increased investment in innovation. And, the carriers would have to give up on the idea of locking in consumers with two-year contracts. That won’t be justified.

What also wouldn’t be justified is the carriers’ stranglehold on what services are delivered on the cell networks. Consumers in the US have been deprived of innovative new services that are commonplace in Asia and Europe. It’s time that the Democratically led Congress starts addressing the real issue: Wireless Net Neutrality. Isn’t the wireless industry clamoring for less regulation? Now’s the time for the carriers to walk the walk.