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Wireless operators have been working long and hard to roll-back the hands of time and hold on to their outdated ways.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.

Record profits: it does not bode well for the Oil industry

Should an industry continue to receive government subsidies and tax breaks when its members are posting record profits? Apparently it should, when it’s the oil industry.

Not only did both Exxon and Chevron, on February 1, post record profits for the quarter, but Exxon posted the highest-ever quarterly and yearly profits for a US company. Let’s take a second to appreciate the magnitude of this last statement. Exxon is the most profitable company that the US has ever seen!

But, such historic success is hardly attributable to internal prowess on the part of the industry players and much more due to the structure of the industry itself and external factors. The overlaying, reinforcing components are many but boil down to artificially high oil prices and the structure of the industry.

Oil prices are at historically high levels, with a barrel of oil averaging about $90 over the last quarter with a high over $100 per barrel. This was due in large part to the law of supply and demand. With the increased demands of developing nations and the growth of the economies of India and China, demand has risen steadily over the past decade. However, supply has not kept pace. In fact supply has been kept artificially low by OPEC, which operates as an international cartel, outside of the constraints of US anti-collusion laws. (A similar situation exists in the diamond industry, where DeBeers uses what might be considered strong-arm, anti-competitive tactics to keep the price of diamonds artificially high.)

The structure of the oil industry in the US is that of an oligopoly comprised of only a small number of participants. But, as opposed to the airline industry, where the industry structure leads to fierce price wars, triggered by attempts by one firm to gain marginal market share from the others, which ultimately keep consumer prices low, the oil industry does not succumb to the same pressures.

But why not? First, because the cost of raw materials (the oil) is set artificially high and is made uniform by the international cartel. So industry participants can do little, if anything, to differentiate themselves based on this primary resource. This, in turn, provides a disincentive for oil companies to innovate. They continue to turn the same crank the same way they always have and the rising tide of increased demand raises all boats.

Second, the industry avoids price wars because it is so vertically integrated that there is no place in the value chain that the oil companies don’t control, which might allow a new entrant to gain an advantage or even compete on the current field. The incumbent oil companies control it all: the exploration for new oil fields, the pumping of oil, the refining, the delivery to fueling station, and the final sale to the end customers (be they automobile driver, airline, or electricity generation plan).

Gas station owners have even protested the amount of control that the large oil companies exert over their “independently owned” affiliate stations.

This level of vertical integration harkens back to the great monopoly of Standard Oil or reminds us of the old company towns associated with the mining and lumber industries of years past.

Even at the pinnacle of business, with all-time record profits, industry analysts are claiming that the oil industry is in huge trouble because they can’t grow production. But, rather than address the issue head on, and encourage an evolution of the industry, government seems content to give big oil a bonus for doing business the same old way, in the form of heightened subsidies for oil exploration and production.

Unfortunately, this strategy of clinging desperately to the current business and fighting against innovation has been proven time and again to eventually fail. Companies in all industries throughout history have learned the lesson that they either need to evolve or perish. Railroad companies were stuck in their railroad business mindset and failed to see they were part of the larger transportation industry. Eventually they were relegated to second-class status with the rise of trucking.

So too must oil companies reinvent themselves as part of the larger energy industry or else suffer the fate that certainly awaits them: irrelevance.

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.