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October 19, 2009

Thought Leadership for the Wireless Industry
In This Issue
Net Neutrality and Wireless Economics
What's Next for T-Mobile?
Evolution of Device-Based Self-Service
Open Mobile Summit
Nov. 4-5
San Francisco
Operator fireside chat

Webcast: Wireless Trends and Directions- Planning for 2010
Aug. 13, 2009. Archived Version Available!

CTIA Wireless IT & Entertainment
Oct.7-9, San Diego
Moderated Mobile Apps Panel

Crystal Ball Conference
April 7, 2010, Montreal
Speech on wireless
Hello all,
The intertwined issues of network neutrality and open access are heating up, with comments due to the FCC this week. One issue that I feel has been under-recognized in the debate is that of wireless industry economics, which is the subject of this month's Lens.
On this topic, the timing couldn't be better for the Open Mobile Summit, November 4-5 in San Francisco. The event promises a compelling agenda, with high-level speakers representing key sides of the issue. I'll be leading a fireside chat with executives from Verizon, Sprint, and T-Mobile. The event is almost sold out, but Lens subs can still receive a $100 discount - use VIP code LENS. Hope to see you there.
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Wireless Economics And Net Neutrality/Open Access
This is crunch time for the intertwined open access/network neutrality issue. New FCC Chairman Julius Genachowski threw a shot across the wireless bow with his September Brookings Institute speech, but then assuaged the industry in his appearance at the CTIA show in San Diego, where he acknowledged that the wireless internet is "different".
The next few months will be critical in defining what open access really means in a net neutrality framework, and in working with the FCC to ensure a structure that is good for consumers while maintaining the health of the wireless industry.
One of the main reasons we can't easily apply the same principles of wired access to wireless are the unique economics of wireless. It costs a wireless operator today in the range of 4 to deliver a megabyte (MB) of data to wireless customers. The average iPhone customer uses 200 MB per month - which is about 10x that of a typical feature phone, and double what is was prior to iPhone 3G. The average mobile broadband customer uses close to 700 MB per month - again, double what it was three years ago. With 4G, that average cost to deliver a MB could come down by about half, according to discussions I have had. However, the 4G business case is built on PC-esque consumption models and multiple device penetration per user. So there's not a lot of relief in sight.
Now, let's plot that 4/MB against the intense pressure on wireless pricing, with new benchmarks like $50 unlimited voice and data (!) being tested by some operators today. Then add what's going on with devices: smartphones comprising some 30-40% of sales at some operators, and exhibiting usage patterns - time, apps, network consumption, and so on - closer to that of a PC than a phone; and the coming wave of netbooks and other wireless embedded devices.
In order to keep up with all this, U.S. wireless operators have continually invested some $20+ billion a year in capex - much more than their fixed broadband brethren, as a percentage of revenues. And, the "ante" they must pay for this privilege, through spectrum auctions: more than $50 billion dating back to the PCS auctions in the mid-1990s. Yes, Chairman Genachowski assured us at CTIA that more spectrum is on the way - but you know it ain't gonna be free.
Now, let's look at the fixed network side of the world. With 40% of all Internet traffic being video, given YouTube, Hulu, Facebook, etc. - one could argue that demands are similarly intense on wireline networks. But their economics are different. It costs a fraction to deliver that MB of traffic to customers compared to wireless. And over the past three years, your typical cable company has nonchalantly doubled the average throughput being delivered to homes - at much less cost in network investment. Nor have they paid for "spectrum". And while a data price war looms in wireless, have you noticed that fixes broadband pricing is not coming down?  As a side note, a growing cost of the mobile data "tsunami", as everyone has been calling it lately, is backhaul. This is a market largely controlled by - yes, you guessed it - local exchange carriers, and prices of those T-1s have remained stubbornly high.
One final dynamic worth pointing out is good 'ol wireless voice service. With limited capacity in every cell sector, wireless operators have the challenging balancing act of providing decent data throughput while also ensuring voice network availability, and contending with requirements for emergency services and wireless E911. The invisible line in the sand is that wireless voice will have to be prioritized over data. This becomes interesting as voice and data start riding over the same IP network. There is also an expectation of voice quality of service, which operators will have to distinguish between their own services and that provided by "Internet" voice applications such as Google Voice and Skype.
This is all going to lead to some very interesting discussions around pricing and open access. For example, one of the sparkplugs of the network neutrality debate has been carriers - fixed and wireless - "throttling" or "slowing down" applications that are bandwidth intensive. This is viewed as discriminatory. Another possible approach is to pass on this cost to the consumer, which we see every day in the form of DSL tiers of service. The piper has got to be paid, somehow. It just depends if it is Google or the consumer. Let's also recall that the big Internet guns - Google, Microsoft, et. al - ultimately chose not to participate in the 700 MHz auctions.
Which brings us around to wireless data pricing. An op-ed piece by Holman Jenkins in the October 15 Wall Street Journal focused on the inevitability of a usage-based pricing model for mobile data. I think that would be a nightmare. First, I think it will be very difficult for customers to understand usage pricing, and equally challenging to educate and appropriately bill for it. Second, we are accustomed to a flat rate pricing structure across most segments of the communications universe, from landline to cable to Internet, and, increasingly, wireless voice. It would be difficult to unseat that. Third, there are thorny issues, such as how do you distinguish between "send" and "receive"? It's one thing to charge a customer extra for streaming Hulu on their smartphone. But what happens when someone sends you a video clip or a 50 MB PDF document? 
So the question is, how to balance wireless economics while maintaining the framework of open access/network neutrality. Starting with the premise that most users, over time, will be on some sort of flat rate data plan, here are some potential approaches.
  • Tiered Pricing. One option here is a more DSL-like approach, sort of a bronze-silver-gold structure with the higher tiers providing some the best throughput and perhaps even combining with a certain amount of usage. Some might view this as discriminatory, but the telcos have been doing it for some time with DSL. Another option is to have some tiers based on type of device, based on their likely data consumption (ie. we know iPhone subs use a lot more data than feature phone subs). This latter discussion becomes more interesting as the line blurs between low-end laptops (netbooks) and high-end phones (iPhone, MyTouch).

  • Bundle pricing into the application. The Amazon Kindle is actually one of the first examples of this: pricing is bundled into the price of the content. Over time, as the Kindle and other e-readers become more sophisticated, one can envision premium prices for multimedia or image-centric content will cost more.
Certain applications are far more consumptive of data than others - for example watching baseball live or listening to Pandora on your phone. Requirements can also vary - one application might be big to download while another requires less bandwidth but needs a more persistent connection. The premium price associated with these applications often has to do with type of content, but I can see some of the pricing linked to different characteristics of demand on the network. Either charge more for the app, or, for highly consumptive apps or sites, insert a time-based element within the application (ie. $2 per half hour). This would be sort of like a restaurant having a modest surcharge for some higher cost items on prix fixe menus, or the HDTV surcharge for some programming on iTunes. We might not end up usage-based pricing but one result from this whole discussion will be greater transparency about demands on the network.
One under-explored side of the network neutrality argument is whether operators could charge content or apps providers for certain bandwidth-intensive content, or charge for guaranteeing a certain quality of service. For example, with wireless, there is a difference between the theoretical throughput of 3G networks and what is actually delivered to a subscriber at a given point of time - based on a variety of factors. Could AT&T (Mobility), for example, say to Google: "we will guarantee a minimum QOS to subscribers for long form programming on YouTube, but at a certain premium charge". Then it would be up to Google to decide whether to pass this on to consumers. And how would the net neut proponents interpret this?
We might also want to get a little more intelligent about what types of network resources are being used, and under what circumstances. For example, with more devices being equipped with both wireless and WiFi, users might be encouraged to piggyback onto broadband networks when available, rather than using the WAN. Or, certain applications might only be permitted to work on a fixed broadband network. As for downloading high bandwidth content, perhaps there are incentives to encourage users to do this at times when there is more network capacity - for example, if you want to download Mad Men on your phone, perhaps it costs less to do it off-hours.
An interesting debate, where net neutrality is concerned, is how much of this network demand is passed on to the consumer. Let's take an example of a user wanting to watch a program on Hulu on their wireless device. Currently, the Hulu model is like TV: content is free but ad-supported. Now, in the strictest interpretation of network neutrality, the wireless operator could not block Hulu. One gray area is whether they could charge Hulu a premium for use of the wireless network, or for guaranteeing a certain network throughput to ensure a good experience for the subscriber. Could they charge a premium to the subscriber for using Hulu over broadband wireless? Could some of the extra "cost" in serving the program up over a wireless network be recouped by inserting extra ads and asking Hulu for a split of the revenues?  As an interesting aside, when I tried Hulu on an iPhone, the site was not blocked but I couldn't play the content because Apple does not allow Flash players on their devices. What rules of network neutrality apply here? Hmmm... 
We must use this moment to help those in the debate understand wireless economics and the physical/spectrum constraints on wireless networks (which the FCC is in part responsible for). We also have to consider who might absorb the "costs" of network neutrality and the extent to which it might ultimately get passed on to consumers. Is it, ultimately, a hidden tax?
What's Next for T-Mobile?
T-Mobile USA has been a consistent performer for several years, with its reputation as the "value" operator, success in the youth market, and innovative MyFaves plan. But the company has had a couple of difficult quarters, and seems to be "caught in the middle" - between Verizon and AT&T, who have pulled away from the pack - and Metro/Leap/Virgin/Boost/Tracfone at the low end, who are nibbling away at T-Mobile's young, urban customer base with attractive pricing, and a more mainstream combination of handsets, coverage, and data services. As the other operator in the "middle",  I would argue that Sprint has done a more effective job of late, with its support of "flank brands" (Virgin, Boost), open-ness to new business models (Kindle, Clearwire), and experimentation on pricing. So the question is, how can T-Mobile differentiate? Read more from my recent Fierce Wireless column.
The Evolution of Device-Based Self-Service
One area we have been looking into lately is how device-based self-service can represent an area of significant opex savings for Mobile Operators. Please e-mail me to receive a complimentary copy of the recently published White Paper, Evolution of Device Based Self-Service.
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Open Mobile Summit

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The Open Mobile Summit is two weeks away...and is almost sold out! Please join me on November 4-5 in San Francisco for this important industry event, as we debate new and alternative business models for a more open ecosystem. All of the major players in this debate will be represented. I'll be leading a fireside chat with representatives of mobile operators. Use VIP code: LENS for a $100 discount.