Farewell, Ma Bell

Today SBC AT&T turned off the phone service that we've had at our house in San Jose for nearly 10 years. I think this will mark (with a few brief exceptions) the first time in my adult life that I’ve not had telephone service with AT&T — over 30 years' worth.

As a high school phone hacker (not quite a phone phreak), I owned my own phones back before that was allowed. I had service in college (except my first year in a dorm) at UCLA and at MIT, and when I moved back to California permanently after college I turned on service the minute I had an apartment. The only exceptions were a) during a summer spent in Dublin my service was suspended when my apartment-sitter ran up the long distance bill and b) as a newspaper reporter, there were a few months where I couldn’t afford to pay the phone bill until I gave up my 1BR and moved in with someone else.

AT&T's loss was not due to their normal reason. Unlike our teenager — who I expect will have only a personal (mobile) number for her life — our household is keeping a landline.

And it’s not like I’m mad at The Phone Company — as I was at various points during the past 30+ years, even to the point of (in high school) making our own student film called “We Hear You,” a low-budget ripoff of “The President’s Analyst.” (I did special effects and played the bad guy driving my dad's menacing-looking sedan).

Nope, we’re switching (for now at least) to phone service from our cable company, for four reasons. One, it’s cheaper — mainly because US long distance is free. Two, they came up with a clever way to solve the power failure problem (which was highly salient for San Diegans after last fall). Third, our respective parents both have it and since neither of them are technically savvy, it must be pretty seemless.

Finally, it’s not just that it’s replacing AT&T with cable, but which cable company it is. In SoCal we get Cox, an innovative responsive company that did a great job for us (particularly on Internet) when we lived there before. If we were staying in the Bay Area, there’s no way we’d ditch AT&T for Comcast, which has been terrible and is a ruthless monopolist that would make ol’ Ma Bell blush.

So bye-bye, Ma. It’s been good knowin’ ya, and perhaps our paths will cross again.

Whither T-Mobile USA?

The Obama Justice Department filed suit Thursday to block AT&T’s proposed acquisition of T-Mobile USA. The case against the merger is compelling, but I never thought the administration would make the political decision to block the merger.

Perhaps the Justice officials bought into a slippery slope argument: if they don’t say “no” to AT&T buying T-Mobile, how could they say no to Verizon buying Sprint. Or maybe it was the strong signs of opposition from the Democrat majority in the Senate.

Even the Wall Street Journal reported that Ma Bell’s efforts to build political support never solved the legal condurum:

If breadth of backers was the main criteria, AT&T's $39 billion purchase of T-Mobile USA would have sailed through regulatory review. … But good corporate citizenry and lobbying expertise aren't the only criteria. And as the Justice Department's court challenge to the deal Wednesday demonstrated, the deal was always long on hype for how it would help consumers, and short on robust legal arguments.
…
AT&T's problem is that the legal issues aren't on its side. Antitrust lawyers had said in recent days that the company's chances of winning approval rested on political issues trumping legal concerns. The fact that the government challenged—months earlier than observers had expected—demonstrates that the legal issues won the day.

On the most basic level, it was evident before the filing, the combination exceeds concentration of market share levels—as defined by the Herfindahl-Hirschman index—that the federal government generally finds acceptable. Divestitures could resolve the concentration risk, of course. But AT&T will find it harder to get around the reality that a merger would reduce the number of national wireless firms from four to three—in the process eliminating a low-priced competitor.

Given that reality, it’s hard to understand why AT&T claimed to be surprised. Shareholders should demand an immediate investigation as to what Kool-Aid® they’ve been passing out at Whitacre Tower, headquarters for SBC AT&T in San Antonio.

AT&T may fight for half a loaf, but any partial AT&T victory would leave T-Mobile in even weaker shape that when the deal was announced — except for the temporary salve of the $3 billion breakup fee.

The problem is, T-Mobile USA (misleading ads with spokesbabe notwithstanding) has no 4G strategy and has been under-investing in the business as an endgame strategy. It’s too expensive to compete with Metro PCS (or Sprint’s Virgin Mobile) and lacks the phones or service quality to compete with the big three.

Of course, if #2 AT&T can’t buy #4 T-Mobile then #1 Verizon certainly can’t. That leaves #3 Sprint, or perhaps some foreign entrant.

Some may claim that this will force a Sprint-T-Mobile merger, but it’s hard to see how. The two have incompatible technologies, and buying the Nextel incompatible technology almost killed Sprint. Also, Sprint’s market cap today is about $11 billion so there’s no scenario where they could approach AT&T’s $39 billion offer or even the $20-25 billion that analysts estimated last Christmas.

My best guess: T-Mobile AG will run the property further into the ground, with no 4G strategy and its advertising-driven price war. Then in a few years, the world’s richest man (not Mr. Bill) will buy T-Mobile USA for less than half of the $39 billion, and integrate it with América Móvil, Latin America’s most successful mobile phone business. It could put together special roaming agreements for the millions who live and call on both sides of the 30th parallel.

Meanwhile, T-Mobile USA won’t have the spectrum or money to build a 4G network, so someday it will have to rent time on a virtual 4G network, whether Sprint’s partner Clearwire or Leap’s Lightsquared.

I’m (temporarily) a T-Mobile subscriber. I suspect the prices will remain attractive as long as T-Mobile is fighting to preserve its subscriber base and prop up the eventual sale price. I’m curious to see whether T-Mobile will start any price wars, or will remain reactive to MetroPCS and Virgin price wars, but in the end I don’t think it will have any bearing on its survival.

Regulated duopoly vs. real competition

Last week, a Senate subcommittee held a hearing entitled “The AT&T/T-Mobile Merger: Is Humpty Dumpty Being Put Back Together Again?” The CEOs of three of the four major cellular companies got a chance to present their positions in between political grandstanding.

I was fortunate to catch the replay Sunday on C-SPAN (one of the few channels my monopolist cable company still provides on basic cable.) A low resolution version of the 2½ hour hearing is also available on the Senate website.

The expert (if self-interested) testimony confirmed what I already knew. As with any consolidation of four major firms down to three, the merger is about reducing rivalry, supplier power and buyer power — good for the surviving companies, bad for suppliers, customers and the smaller rivals.

The Case Against the Merger

The most enlightening testimony came from Victor Meena, CEO of small rural carrier (Cellular South) that (according to Wikipedia) is the 8th largest in the US (after Verizon, AT&T, Sprint, T-Mobile, MetroPCS, US Cellular and Cricket/Leap).

As someone who has spent 15 years studying the history of the US cellular industry — from the prehistory of the 60s and 70s to the boom era of the 90s — I believe Meena has it exactly right. Reducing competition back to a duopoly will bring us back to duopoly-style pricing and duoopoly-style non-competition.

Meena described the merger as a major step backwards for the industry and its customers:

When I began in this business in the late-1980s, there was a local duopoly in every market.… Carriers had virtually no market incentive to innovate or improve service offerings.… In a duopoly, the market can quickly reach equilibrium and, if both providers are reasonably happy with their position, innovation stagnates and prices rise.

The industry changed for the better in the late 1990s, when the FCC, pursuant to Congressional mandate, auctioned off PCS licenses and a substantial number of competitive carriers entered markets—launching a new, healthy competitive era of wireless in the U.S.
…
But this all began to change in the middle of the last decade. Through unfettered mergers and acquisitions, it has become clear that our industry is on a glide path toward Ma Bell reconstituting herself into the 2 Bell Sisters of the wireless industry: AT&T Wireless and Verizon Wireless.
…
Not surprisingly, this concentration of market power has led to less choice for consumers and the routine abuse of market power in an effort to prevent competition at every turn. Specifically, AT&T has used its enormous acquired scale to

1. restrict competitive carrier and consumer access to devices,
2. withhold roaming agreements, and
3. leverage its control over device and infrastructure vendors to Balkanize new spectrum and slow the deployment of 4G LTE technology in the U.S.

Meena and Sprint CEO Dan Hesse identified two other negative impacts of increased market power. As chairman of the CTIA, Hesse has been attempting to negotiate lower rates for wireline backhaul for cellular base stations — rates that AT&T and Verizon want to be high but the rest of the industry want to be low. And by consolidating carriers, Meena notes there will be fewer options for smaller carriers to find roaming agreements for 3G and 4G data, as mandated by the FCC last month.

Supporting Cast

As expected, AT&T CEO Randall Stephenson said little to convince me that the merger is good for anyone other than AT&T, while T-Mobile USA CEO Philipp Humm seemed intent on deferring to his new boss. Verizon’s CEO was strangely absent, either to avoid making arguments that would haunt him when he wants to buy Sprint, or to avoid reminding people that two companies will control 80% of the market if the merger goes through.

Among the leftist activists, the self-appointed “consumer” representative was far more persuasive and honest than the union president. At least she knows what a Herfindahl-Hirschman Index is. Tellingly, she also asked: “have you ever seen AT&T advertise against Metro PCS or Cricket?”

The quality of dialog from the top of the dais was also mixed. The two ranking members of the subcommittee — Sen. Kohl and Sen. Lee — asked intelligent questions that attempted to draw out the witnesses. Two other senators (Franken and Grassley) were dim bulbs acting like a prosecutor and defense attorney for the accused. (Sens. Klobuchar and Cornyn were only slightly better — but at least viewers were spared Chuckie Shumer).

If Not Competition, then What?

Meena offered a stark (and I believe accurate) contrast between the two paths forward:

The prospect of this transaction brings us to a critical decision point for policy-makers: are we are going to continue down the path toward an era of nationwide duopoly, or are we going to lay the foundation for a second competitive era in wireless. There is no third option – either AT&T will be allowed to acquire T-Mobile (paving the way for Verizon to acquire Sprint and cementing a national wireless duopoly); or it will not.

If AT&T’s takeover of T-Mobile is approved, all that will remain is the endgame, where the remaining non-Bell carriers wait their turn to be acquired or bled dry by the biggest two carriers.

And, Meena notes, the likely consequence of returning to duopoly is returning to FCC micromanagement:

[I]f the takeover goes forward, policymakers must begin preparations to regulate every aspect of the day-to-day business of the duopolists. Without effective competition as a check on market abuses, the government will have to interject itself to ensure that consumers – the true owners of wireless spectrum – are protected. This means subjecting a future wireless communications duopoly to the same type of regulatory oversight that wireline telephone and electrical power utilities have operated under for decades.

This idea was echoed by Sen. Klobuchar, who suggested that a more concentrated US market — like the rest of the world — would be a more tightly regulated market.

Of course we know that government (or any central command-and-control bureaucracy) usually does a bad job of assuring either innovation or efficiency. So if the choice for consumers — and app developers and handset makers and website owners — is real competition or regulated duopolists, the best option is obvious.

Saving T-Mobile

If the merger is killed, it still leaves the question of maintaining T-Mobile as an effective competitor. It will take more than just a cute spokesmodel and dishonest branding to have it maintain its market share.

In particular, both Stephenson and Humm pointed to T-Mobile’s looming quandary in the 4G era, given that it hasn’t bought new spectrum in the recent auctions. Actually, the solution for the #4 carrier is relatively simple: do what the #3 and #7 carriers are doing for a 4G network: rent one.

Clearly T-Mobile is not going to join Sprint using Clearwire’s WiMax network, but if Clearwire switches to LTE, it would be an attractive option.

If not, it can follow the lead of Leap Wireless (dba Cricket) in renting the LightSquared network. It’s LTE, it promises to be nationwide, and the T-Mobile/Cricket customer base would be enough to make an attractive business (at least until MetroPCS buys Leap).

I dumped Sprint, but they're right

As I threatened more than a year ago, today I finally quit Sprint after more than 13 years. The long term reason was their smartphone surcharge — $80 for any smartphone — which prevented me from using a Palm Pre that I owned without paying the surcharge.

The final impetus came when my third Treo failed exactly the same way, but they refused to replace it (despite a $50/year repair agreement) due to false claims of “water damage”. Hah! More than a decade of loyal service wiped out by a penny-pinching denial of a legitimate claim. (I went 2 weeks without a cellphone before walking into T-Mobile and getting a SIM card for the Symbian phone I only use in Europe.)

Still, I couldn’t agree more with Sprint’s full page ad (which ran Sunday in my copy of the Merc and apparently the San Francisco Chronicle as well) attacking SBC’s ongoing attempts to re-assemble Ma Bell.

Competition is everything
…
Competition is American, Competition plays fair.
Competition keeps us from returning to a Ma Bell-like, sorry-but-you-have-no-choice past.

As the #3 cellphone carrier, of course Sprint is fiercely opposed to the merger of #1 and #4. Right now T-Mobile is the industry’s sick child, but if the merger happens that dubious honor will pass to Sprint.

It doesn’t help that the early betting is that the Obama administration won’t block the deal, but let the deal happen with conditions.

The problem for consumers — but not Sprint — is that the arguments being used to justify the AT&T/T-Mobile merger would then justify Verizon Wireless buying Sprint.

This means an oligopoly would become a duopoly. After the two mergers, the top two carriers with 152 million and 130 million subscribers — with more than 90% of the US market of some 300 million subscribers. The next seven carriers would total 21 million, led by MetroPCS with slightly more than 8 million.

Independent analysts say that AT&T’s problems are of its own making — delayed LTE rollout, dropped calls, lack of capacity. It also removes T-Mobile scrapping for customers, offering a low priced alternative to the big two vendors.

So while I’m no longer a Sprint customer, I agree with its (self-interested) argument that the merger is bad for the US telecom industry. Unfortunately for Sprint, the new AT&T is the largest corporate donor and lobbyist in the US — and third overall after a Democrat PAC and a public employee union. No how many citizens file complaints, it seems like 2012 will have a very different competitive landscape than what we have today.

Cellular smackdown

Visiting the CTIA Wireless IT conference here in San Diego has called into focus the direct rivalry between the two largest carriers that account for two thirds of all US cellular subscribers. AT&T is the innovative device company and Verizon Wireless is the network quality company.

Neither were present at the MobileFocus press party Wednesday night, which featured the other two major carriers and four of the world’s five largest handset makers (plus RIM but not Apple). However, one of the keynotes this morning (after the former and current Qualcomm CEOs) was by John Donovan, CTO for AT&T.

Donovan presented five principles for a mobile network operator

• Growth happens. Eyeballing the graph, it looks like mobile data on AT&T mobile is about 15-20,000 terabytes/day. Wireless data has grown 4932% (50-fold) over the past 12 quarters, and not just because of the 8.3 million iPhones activating in the last year.
• Law of the jungle. AT&T is spending heavily on 3G rollout to provide HSPA 7.2 in cities like LA and Chicago this quarter, everywhere by Q2 2011. (To me there was an implication that smaller carriers would be unable to keep up.)
• Innovate or Die. There's 85% penetration, so innovation in services and business models (like renting rather than buying music) will drive growth
• Customers Demand Open. It’s not clear if AT&T is more open than VZW, but they say they are.
• Invest for the Future. AT&T plans to trial 4G LTE in 2010 and rollout beginning in 2011.

Interestingly — in contrast to Verizon’s reputation (deserved or not) for network reliability — Donovan’s presentation was a bit defensive about network reliability. He said he is well aware of press coverage of network issues, but “I don’t plan our network based on blogs. … no one knows more about the wireless network experience than AT&T”.

(AT&T sent both its wireless CEO and corporate CTO to keynote on successive days, but unlike Verizon didn’t have a booth to answer questions.)

However, Donovan recounted AT&T’s impressive record of firsts in innovative mobile devices. AT&T (or more likely its predecessors like Cingular) was the first US carrier for Palm, Windows Mobile, BlackBerry and the iPhone. Windows Mobile launched Pocket IE (for better or worse) at a time when the rest of the world still thought WAP was the future.

Donovan argues that its experience with the iPhone (and its 75,000+ apps) means that it understands what consumers expect from the latest mobile applications. It’s a plausible argument.

Perhaps now carriers differ in their quality, but eventually wireless bandwidth will be a commodity. The higher levels of the stack — applications, services, connecting people and not hardware — will become the drivers of growth, usage and revenues.

All of this is happening at the device level and above, which is why VZW will need to shed its parent (Vodafone’s) historic desire to commoditize handsets, and seek out the latest hardware. The rumored Dell Android phone for 2010 will be just a start.

But making it up on volume

Martin Peers of the WSJ’s “Heard on the Street” column reports today that data suggests that Cingular AT&T is losing money on iPhone customers:

Users of iPhone download games, video and other Web data at two to four times the rate of other smartphone users, according to comScore. Yet AT&T charges iPhone subscribers the same fee of $30 a month for data that it levies on other smartphone customers. And aside from restricting certain activities, like file sharing, AT&T doesn't limit how much data can be downloaded.

Peers estimates that iPhone 3G users (from July 11 to March 28) are 7.5% of all AT&T subscribers.

While everyone knows that iPhone users love to surf the web, the bad news is that (based on data compiled by Lucent) web browsing (surprise!) takes 16x the bandwidth of email. Web browsing is 32% of the usage but 69% of the bandwidth, while for email it’s 30% and 4% of the bandwidth. (Web browsing is 1.9x data intensive per minute as P2P). Or, as they say, AT&T is losing money on every unit, but making it up on volume.

While the supply of iPhone applications is a classic software positive network effect, use of the network is a negative externality. As my friend Rudi Bekkers wrote in his book on 3G networks:

Negative network externalities, for instance, when a telephone or computer network becomes congested or overloaded and the value of that network for an individual users decreases.

Peers argues that for AT&T and Verizon Wireless, the only solution is to abandon “all you can eat” data plans for cellphones, the way they have for laptops. The only problem is that there are cracks in the oligopoly:

With competition, the temptation to discount will be hard to avoid.

That competition will be from Sprint (trying to stem its sliding market share) and T-Mobile (still trying to gain share).

American consumers are used to “all you can eat.” They long enjoyed it for wireline voice communications, and forced it upon AOL for dialup ISPs. The wireless voice business is moving in this direction, with $50 unlimited service plans niche carriers like Metro PCS and Leap, as well as Nextel’s seven-year-old prepaid division, Boost Mobile.

All-you-can-eat (possibly with some sort of reasonable cap) is the only way that American consumers will adopt the mobile Internet. The iPhone users have shown there’s a pent up demand for mobile web browsing, but if it means the risk of $100 data bills, they won’t do it: instead, they’ll wait until they get back their wireline Internet.

So if the Big Two aggressively price data services, they may get too many users (shades of AOL’s excess demand for unlimited dialup services). If they charge too much, they’ll lose customers to smaller carriers, or to WiFi hotspots, or people will stay with their wired Internet.

One possibility (as suggested by GigaOM) is congestion pricing: give away megabytes of download bandwidth only when it’s unused, and charge a premium when everyone wants it. In the extreme, it would be like the cellphone (voice) pricing strategy of the 1990s: free night and weekend minutes, but expensive minutes on weekdays and at rush hour.

In the short term, the numbers don’t work for 3G unlimited data plans. In the long run, plans to build 4G networks assume high levels of usage, and proponents claim that LTE networks are 2x-4x more efficient than their WCMDA counterparts. I’m not sure that even that is cheap enough bandwidth to support all-you-can-eat.

I think it’s long past time for American carriers (as do European like Orange and T-Mobile) to embrace WiFi as a complementary service to their mobile networks. Much of the Internet browsing occurs in coffee shops and similar locations, so now that people are starting to embrace the mobile Internet, there’s no reason why phones can’t be programmed to prefer the high-capacity (and easily expanded) hotspot over the scarce 3G bandwidth.

Here, AT&T and T-Mobile are well positioned with their existing hotspot networks, with AT&T growing its network last year when it purchased Wayport. Meanwhile, Sprint has been selling hotspots, and presumably it hopes that its WiMax network will obviate need for 802.11 hotspots. To catch up, Verizon would have to buy Boingo; rumor has it that it will soon announce a partnering agreement.

Consequences of AT&T and Google coopetition

In the out-takes of the interview with AT&T CEO Randall Stephenson published in the WSJ Digits blog, there was a rather pointed complaint about the Google-Apple coopetition.

“In some areas you look at Google and say, ‘They’re a competitor,’ and in some areas you say, ‘They’re a partner’…You’re always going to have points of tension with these folks,” Mr. Stephenson said.

People close to the situation say plenty of tension has built up over issues ranging from digital privacy to “open access” rules for wireless network operators. When the two sides were talking in 2007 about Google’s Android mobile operating system, Mr. Stephenson and other AT&T executives felt Google CEO Eric Schmidt misled them by understating Google’s wireless and regulatory ambitions, the people say. Mr. Schmidt, meanwhile, told colleagues he thought AT&T had a “jihad” against Google. Mr. Stephenson says he has “no inherent conflict” with Mr. Schmidt. A Google spokeswoman declined to comment.

I can see why AT&T (like Verizon and the rest of the cellphone industry) would be mad about Google’s support for net neutrality.

After reading this quote, I’m even more skeptical about the idea that AT&T is going to join the Android bandwagon.

Right now, AT&T is shipping the iPhone and various BlackBerry models. Based on this latest development, I think AT&T will embrace Nokia and Symbian long before they do anything to help the success of Android.

T-Mobile is going to stay with Android. I believe Sprint — with their sizable investment in the Palm Pre (due May 17) — are unlikely to move to the gPhone soon, but might do so in 2010.

So that to me suggests that after T-Mobile, the next Android phones in the US will come from Verizon Wireless. Yes, they have the same issues as AT&T does — but they don’t have the hit iPhone. Embracing Android would threaten Verizon’s traditional walled garden approach, but without a killer smartphone, maybe they will be more eager to get a hit device.

AT&T loves iPhone, but...

The WSJ Wednesday ran an interview with AT&T CEO Randall Stephenson that emphasizes the company’s desire to push more aggressively into wireless.

The article estimated that the iPhone 3G brought 1.7 million new customers to AT&T Wireless in 2008. Because of that success, Stephenson is seeking to extend expiration of its US exclusive on the iPhone from 2010 (presumably June 2010) to 2011.

The free side of the WSJ website includes a few interesting tidbits, including Stephenson being keen on Cisco telepresence (as a substitute for air travel) and the inevitable decline of its wireline business.

Two of the interesting tidbits are on the iPhone and expansion of the Cingular AT&T Wireless network:

Apple: AT&T engineers privately chafed at being blamed by bloggers and some industry watchers for early problems with the iPhone 3G that led to dropped calls. It turned out to be an issue mostly related to Apple’s operating software and hardware and was addressed through software updates. Neither side publicly cast blame on the other, and Mr. Stephenson says the relationship is strong. “Any relationships as tight as this one, they require hard work at the most senior levels,” he said.

Wireless networks: He said the challenge of increasing network capacity isn’t just about cell towers, but also about beefing up the “backhaul” trunks that carry data back from those sites underground. He says AT&T will build a fourth-generation LTE network in the 2011-2012 time frame. “There’s no panic or rush to get there,” he said, because the highest-bandwidth wireless applications, like high-definition video streaming, are still a ways off. “It’s about having capacity for the applications users actually want now.”

AT&T's partly unlocked iPhone

As reported by the Boy Genius Report, AT&T will be offering iPhones without the normal 2-year contract at a $400 premium ($600 and $700 vs. the subsidized $200 and $300).

The “No-Commit” policy means there is no written commitment to keep AT&T service, but it’s not clear if the phone will still be locked (from a technical standpoint) to only work on the AT&T network. If the phone is still locked, then this option is only useful with GoPhone, AT&T’s prepaid network.

This isn’t much of a breakthrough for openness, and far short of what regulators are compelling Apple’s European carriers to do.

Of course, users have been figuring out how to hack the iPhone to run on the only other GSM network in the US — the T-Mobile network. There’s a discussion thread on MacRumors with more than 400 posts just about this topic.

DTV pandering hits telecom operators

The House voted Wednesday to support President Obama’s plan to delay the end of over-the-air NTSC broadcasts to June 12. Despite all the public announcements we have been hearing from a year ago through this week, the DTV changeover will not happen on February 17.

The delay will prevent Qualcomm from rolling out is MediaFlo mobile phone TV service for another three months. Efforts to exempt four key markets were ignored. Two of the markets Qualcomm asked to exempt were Boston and San Francisco: if these markets are not tech savvy and educated enough to understand that DTV is coming, who is — or ever will be?

Verizon will also be impacted in their use of the 700 MHz spectrum, which they planned to use for their LTE rollout. Congress did not vote to refund a portion of the billions paid in the auction for the spectrum. The three most affected companies — Qualcomm, Verizon and AT&T — paid a total of $16.6 billion in the 700 MHz auctions.

This is bad policy on so many levels. Besides pulling the rug out from under businesses that made these multi-billion dollar investments, there is no evidence that the delay will have any significant impact on the supposed 6 million households that are not ready. If they are watching TV, they have seen the ads, and another 4 months of ads are not going to change that. Last month, the leading House opponent said it best:

“I guarantee you, no matter when you set the date — Feb. 17, June 12, July the Fourth, Valentine's Day — there are going to be some people that aren't ready,” said Rep. Joe L. Barton (R-Texas).

A majority of Congress seems to think otherwise. Of course, this is the same Congress that sold the spectrum, mandated (and previously delayed) the switchover and decided how much funding to provide for converter boxes. Perhaps if an independent commission will at long last consider Congressional culpability for the financial meltdown, perhaps they could move on to the DTV debacle after that.

Just say no to smartphone monopolies!

Speaking at the Symbian Partner Event yesterday, I was asked a question about fragmentation of the smartphone OS space. The reporters were all gone by then, but a related issue came up in the talk by AT&T executive Roger Smith. Smith had a great talk overall, but a lot of the coverage focused on an inaccurate report of one sentence of his speech.

Here is the oft-cited passage in the Yahoo account:

[AT&T] believes smartphones will make up the largest portion of devices connecting to its network by about 2014, and it wants to avoid the fragmentation of platforms that has made it hard to develop mobile applications, said Roger Smith, director of next generation services, data product realization at AT&T. Speaking at the Symbian Partner Event in San Francisco, he said Symbian is "a very credible and likely candidate" to become that one operating system.

The account was quoted on Ars Technica, ZDNet, FierceWireless and elsewhere.

While the first sentence is accurate, Smith never said a single operating system. Here is what I typed as he was saying it: (the “” is a direct quote and the [bracketed] comments are added later for clarity)

[We] want to avoid the fragmentation problem of today. “We want to standardize on a very few – ideally one - open operating systems.” Symbian [is a] credible candidate.

In other words

• “very few” open operating systems, which might be one
• this doesn’t include non-“open” operating systems, so this doesn’t count Windows Mobile, iPhone or BlackBerry.

C’mon, folks, the original account doesn’t even pass the sniff test! Is AT&T going to drop the iPhone for which they have a US exclusive? Are they going to drop the BlackBerry, the most popular family of smartphones in the US for the past five years?

What AT&T might be saying is “we don’t need both Android and Symbian.” I think it’s certainly saying (as I imagine other carriers are saying) “we don’t need multiple versions of Linux like Android and LiMo.” Of course, if AT&T picked Symbian, T-Mobile might still stick with Android, and all would have BlackBerries.

Which brings us to my own small part of the morning session, where I spoke (in lieu of my friend Michael Mace) on a panel with Gregory Gorman about “Succeeding in the US: the key factors.” We were expected to bring an outsider’s perspective, invited by David Wood, Symbian EVP of Research, for whom I’ve worked as a consultant for the past two years.

During Q&A, I was asked about how we should eliminate fragmentation in mobile phone platforms. What I should have said (and have said previously) was

A single mobile phone OS would be bad for the industry. No matter how tempting the efficiency arguments, monopolies are bad and competition is good. Even if the technology is open source, if you want innovation then users and carriers and handset makers need to have a choice between competing platforms.

What I did say (paraphrasing) was

There’s nothing wrong with having 3-5 platforms in the industry. The problem is not having 5 platforms, but 400 — the number of different J2ME implementations. The videogame industry does quite well with 2½ - 3 platforms, and I certainly think the mobile phone industry could support three platforms.

In fact, the experts have been saying for months (if not years) is that some fragmentation (i.e. choice) will always remain for mobile phone platforms, even if the odds for LiMo are lower than those quoted six months ago.

Specifically, a single platform would not be good for AT&T (or Verizon Wireless or Vodafone or anyone else) and I think they know it. AT&T would not want a single OS supplier to have that sort of power over them, just as they have carefully made sure that no handset supplier has monopsony power over them.

Palm OS (the one I personally use every day) is essentially dead, but I don’t see Windows Mobile, iPhone or BlackBerry going away any time in the next 5-10 years. Where I see the opportunity is if we ever get an open source† mobile phone operating system, then there is no reason for firms to continue to maintain their own proprietary OS, but instead should shift all their feature phones over time to an OSS platform. In other words, open innovation — sourcing your OS outside — would be the norm for everyone outside RIM and Apple.

† Symbian says it will be gated source “during first half 2009,” and “ultimately” (perhaps 2010) moving to open source. Both Android and LiMo remain gated source today.

Yet more evidence of Cingular mediocrity

Regular readers know that I’ve been singularly unimpressed with Apple’s choice of Cingular (later AT&T) as the exclusive US carrier for the Jesus Phone. It’s not just the idea of a five-year exclusive (which made sense under the old business model but not the new one), but also the mediocre quality of the Cingular’s US mobile phone network.

The iPhone 3G was supposed to take advantage of AT&T’s wonderful new HSDPA network. Promoters of this UMTS (W-CDMA aka 3GSM) technology claimed it would deliver downloads at “8-10 Mbps”. AT&T invites prospective customers to “Download and surf on the nation’s fastest 3G network.”

At the same time, iPhone 3G user are unhappy with their network performance. Wired asked its readers around the world to run a test to report their actual download speed, to distinguish between iPhone performance problems and network performance problems. Here is what they found:

• Tests in Germany and the Netherlands achieved 2,000 Kbps.
• Tests in Canada delivered 1,330 Kbps
• AT&T provided an average speed of 990 Kbps
• The only carriers that were worse were two Australian carriers, with an average speed of 390 Kbps

It gets better:

In some major metropolitan areas that are supposedly 3G-rich, 3G performance can be very slow. For example, zooming in on San Francisco, you'll see that 10 out of 30 participants reported very slow 3G speeds — barely surpassing EDGE.

The hypothesis is that AT&T didn’t buy enough 3G radios in the cities where the iPhone is most popular, and thus the network is getting overloaded.

As skeptical as I am about WCDMA and “wireless broadband” in general, AT&T here may have a slight advantage over its US rivals. On the wireline side, they finally have a solution that beats all DSL (although not a cable modem or FiOS or uverse). On the wireless side, neither of their EVDO rivals (Verizon, Sprint) do much better, claiming only 600-700 Kbps — although a July review of a Sprint modem measured an actual speed of 966 Kbps for its EVDO service.

Final requiem for AT&T

Tuesday’s paper reported the final death of AT&T. It had been dying a slow and lingering death since the end of the dot-com bubble killed the demand for telecommunications equipment.

When I say AT&T, I don’t mean SBC, the San Antonio-based Baby Bell that bought a struggling long distance company in 2005, and with it, rights to call itself “AT&T.”

No, I meant the most innovative part of AT&T prior to the 1984 divestiture — the part that brought us the transistor, cellular phones, information theory, communications satellites, lasers, electronic switching, Unix, C, C++, and a host of other key technologies. In short, the part that housed Bell Telephone Laboratories aka Bell Labs.

After 1984, as AT&T kept getting reorganized, Bell Labs went with Western Electric which became Lucent in the 1996 trivestiture. In his 2003 book, Narain Gehani does a great job of capturing the spirit of Bell Labs during its last lingering days, a commendable spirit despite being obviously long after its 1950s-1960s peak.

In 2006, Lucent disappeared from the face of the earth, when it was acquired by the French company Alcatel, née Compagnie Générale d'Electricité. The new company was headquartered in Paris, and despite claims of a merger of equals, the French division was clearly dominant.

While a certain amount of power sharing between the two countries and cultures been maintained since the merger, that ended Tuesday when the company announced its new CEO and chairman. The Wall Street Journal noted that the two appointments are a clear indication that the Francophone culture has become dominant. As Heidi Moore noted:

The choices also signal that the combination wasn’t a merger in the first place: it was a takeover, by Alcatel, and future leaders ought not to forget it. It also shows the dangers of not working out such details when negotiating a cross-border deal in the first place.

Moore noted that former Lucent CEO Patricia Russo refused to learn French. Advice to company executives: if you don’t want to learn French, don’t sell your company to French owners.

Moore continued on:

We have seen this movie before, most famously in the 1998 combination of Daimler and Chrysler. From the beginning there was an uneasy fit between Mercedes’ upscale, expensive parts and processes and Chrysler’s more workaday functions. There also was the cultural rift: in the weeks before the combined company took on its new NYSE listing, executives bickered over whether to use business cards in American sizes or European sizes. (The European sizes won).

The deal, initially billed as a merger of equals, clearly came to be seen as a takeover by the company that had the stronger will and the more-forceful culture: Daimler.

In her list of acquisitions, Moore forgot to mention the 2002 HP-Compaq “merger of equals,” now run by HP with the HP brand and HP headquarters.

I don’t know why any reporter or analyst ever ever buys into the fiction of a “merger of equals.” They don’t exist: one side wins and the other loses. Occasionally the surviving company is not the one that put up the money, as with the 1996 reverse acquisition of Apple by NeXT that brought Steve Jobs and his management team to turn around the company.

When people are pretending to merge, then the battle may be resolved over years rather than up front. However, in any acquisition one set of values, systems, culture and executive will be left standing when the integration is finally resolved. The only exception would be when the alien body is spit out, as with Daimler’s 2007 de-acquisition of Chrysler.

This is why small acquisitions seem to me to be the least troubling: everyone knows which culture and leaders will survive, so no time is wasted on pretending that the acquiree will play a meaningfull role in defining the overall corporate strategy or culture.

iBrick fiasco

Still badly behind on grading, but wanted to quote a few quick articles.

The successful efforts to unlock the iPhone (by George Hotz and others) did not go over well with those that did the locking.

On Sept. 27, Apple released its innocuously-named iPhone 1.1.1 update. I don’t have an iPhone, but as I understand it, iTunes (on the Mac or PC) reports the availability of the update and recommends that users install it. It was nominally a security update with some small feature enhancements, but it also broke all the hacks that allowed the iPhone to work on networks other than AT&T.

I’m of two minds here. That Apple would respond should not be surprising, so it seems silly that people are shocked! SHOCKED! that Apple would try to disable these hacks. (Some are already trying to reverse the update, while others will eventually find ways to unlock the updated phones). It’s also unclear whether Apple is passionate about locking people in (not implausible) or if they have a contractual obligation to Cingular (now AT&T) to use all possible technical means to enforce such locking.

On the other hand, this is terrible PR for a company and a product that has enjoyed a charmed existence this year, earning the nickname “JesusPhone.” This includes:

• an online video mocking Apple’s image campaigns
• a new reluctance by iPhone owners to take security updates
• a new nickname — iBrick — that is being attached to Apple and the iPhone, potentially nullifying the 9 months of fawning PR.

Apple has been here before — they’ve overreached in their efforts to exploit their lock-in of loyal customers. Will they pull back from the brink? Can they? Or will they become even more aggressive (and even more Microsoft-like) in pushing around their customers?

The price of Apple’s closed iPhone strategies

Apple’s been showing its true colors this year with the iPhone and iPod Touch. While most of the songs on a typical iPod are using the (patent encumbered) “open” MP3 format, the new Apple products derive more of their value from closed, proprietary choices made by Apple.

Probably the most controversial choice is Apple’s decision to give Cingular (now AT&T) a reported five year exclusive in exchange for control of the experience and a share of the ongoing service revenues. This week, the WSJ interviewed a number of Mac fanatics (like me) about why they won’t buy an iPhone, and top of the list was unwillingness to switch carriers. In some cases, people are enduring terrible phones rather than incur the switching costs.

In the same article, AT&T bragged that 40% of its iPhone buyers switched from other carriers. OK, so let’s do the math:

• 600,000 customers from AT&T (which has 27% share overall)
• 400,000 customers from everyone else (which have 73% share)

That’s a high school algebra problem: 600,000 is to 0.27 as X is to 0.73.

Solving for X gives 1.6 million — so Apple would potentially have sold another 1.2 million phones if it weren’t exclusive, or more than twice as many as it actually sold. Would such openness have been more profitable? Right now we don’t know what % of Apple’s iPhone profits come from the undisclosed share of AT&T’s service revenues.

The other openness complaint this week comes with the release of the iPod Touch (the iPhone Lite). Beyond earlier complaints, there are additional complaints that Apple deliberately crippled the product to avoid cannibalization.

For example, the iPhone syncs calendar and contact information in both directions, but the iPT won’t allow you to create a calendar item on the device. A decade ago, a Palm Pilot would do this, and obviously this feature was in the iPhone. So what’s the point of taking it out of this PDA-MP3 player combo device? (Of course, since AT&T isn’t dictating terms for the iPT, it should be more open than the iPhone, not less.)

It’s not clear that potential buyers will notice these restrictions, or if they will hurt sales of the iPT. (Or if the people who care will find hacks to work around these restrictions). Apple has had some flops in the past, notable the Newton and the Cube. Usually these happen because it has overestimated either the market size or its ability to price gouge its loyal customers.

Apple gets one tiny bit of praise for openness from NYT columnist and Mac loyalist David Pogue. Pogue reports that Apple’s policy of $2 per cellphone ringtone is less exorbitant than other alternatives, and the prices seem to be set by the record companies. Like Pogue, I don’t see the reason to buy ringtones but obviously we’re both outside the target demographic.

Technorati Tags: AT&T, business models, iPhone, switching costs

Cingular is terrible, but …

David Pogue is a onetime Mac trade journalist who made it to the big time with a NYT column. I don’t read the NYT anymore because (among other reasons) they now charge for opinion columns — presumably arguing that (Walter Isaacson’s latest complaints notwithstanding) ranting is more more expensive to generate than hard news.

However, the NYT is quite happy to e-mail me the Pogue e-newsletter for free. After remarking how great the pocket digicam has become, in today’s column Pogue then lists several product categories that are not there yet. #2 on the list is

The great cellphone carrier. When the iPhone came out, everybody grumbled and moaned about how Apple had chosen AT&T as its exclusive carrier. I grumbled along with them—and then it hit me: Whom wouldn’t people have grumbled about? People also hate Verizon, and T-Mobile, and Sprint. Everybody feels oppressed by the contracts, mistreated by customer service and victimized by billing gaffes.

I don’t know why one of these cell executives doesn’t just wake up one morning and realize that the way to dominate the cellphone industry isn’t taking out more ads on billboards and newspapers. It’s creating a service that’s so good, the customers love you, recommend you and (here’s the big one) don’t leave you at the first opportunity.

I think that’s fair — if Cingular (aka AT&T) is terrible, the others aren’t much better. My sense is that each is terrible on at least one thing, each creating a legion of anti-fans. (Although perhaps Mr. Pogue didn’t read this morning’s NYT article about AT&T’s 300-page phone bills for iPhone owners).

I’ve stayed with Sprint because they’re cheap (regular readers know I like cheap), because when I signed up they had excellent San Diego coverage, and now their Bay Area coverage has gotten better. They built up enough loyalty that I stuck with them after they fouled up my bill last fall, which took several hours on the phone (in 5 phone calls across 3 months) to straighten out. But this sort of billing snafu — particularly for a brand new customer — would often make an enemy for life.

That raises the question: is this an inherent problem of telecom oligopolists? Do the carriers that have good networks get hated for arrogant customer service, contract or pricing policies? (With the remaining carriers offering lousy coverage and lousy networks?) Or is there a cell phone carrier somewhere in the world that is generally loved? (Please let me know)

I would not be surprised if Metro PCS or Leap Wireless have devoted customers, if for no other reason that their flat-rate pricing model avoids the huge surprise overages that piss people off, and probably avoids most potential billing hassles too. (IIRC, they also don’t require contracts). However, neither has a national license so they’d only be suitable for customers who plan to stay within a specific metro region — clearly making enemies of people who bought the service not understanding this major limitation.

Technorati Tags: AT&T, Cingular, mobile phones, Sprint, T-Mobile, Verizon

Apple loses $7b on 2 day’s work

With its Q2 results, AT&T reported that it activated 146,000 new iPhones in Q2 (i.e. on June 29 and 30). Since some had guessed Apple sold 500,000 iPhones in the opening weekend, this is much less than analysts were expecting. This burst the bubble in Apple stock, and it fell $8.81 (6%) on Tuesday — killing $7 billion of market cap.

There are problems using these numbers — either way. Retailers don’t have their FY end on Dec. 31 but on Jan. 15 or 31 because it’s misleading (to everyone) to have a reporting period break in the middle of a busy selling season (i.e. Christmas). Also, some Macfanatics have noted that Apple/AT&T had activation problems which might have delayed users from activating phones that bought on iPhone day.

The other news that hurt stock prices is that a Canadian stock analyst said sales had fallen off since opening weekend due to lousy performance on AT&T’s EDGE network.

We’ll find out in the next few months what the actual sales were. In the meantime, speculation is rampant that a 3G phone is coming in 2007 — which is sure to Osborne the original iPhone.

What I find scarier is Apple’s patent application for a charger that is locked to a particular phone or iPod. New Scientist calls it DRM for AC adaptors. But most others see it as a way to kill third party adaptor sales.

If Apple is going to try that hard to shut down the (relatively small) third party accessory market, it seems to me that they’re reverting to the old Apple of the mid-80s which tried to prevent or discourage any third party hardware sales — printers, hard disks, monitors. Companies thrive by nurturing their business ecosystems, not by killing them. Sometimes I’ve praised Apple for being open, or defended them for legitimately being closed: this is neither, and (if implemented in a product) sure to piss off loyal customers.

Technorati Tags: Apple, AT&T, iPhone

iPhoneChat?

While much of OS X is unchanged since 2002 or 2003, one of the main areas of improvement for Apple has been iChat: first an IM client, then a VoIP system, then video, now (with iChat AV 3) support for 10-way H.264 videoconference calls.

What I found striking about the iPhone was that by excluding iChat from the iPhone, Apple was not only limiting Mac/iPhone interoperability, but forfeiting the right to use the iPhone to build positive network effects for the OS X platform. This is what the iPhone should be about — use network effects to both launch the new platform and also make the other platforms (Mac, iPod) more valuable. All without (as with the 1985 LaserWriter) making the product less attractive for the vast majority of Windoze users out there.

Now endgadget thinks it’s found evidence that AT&T may soon allow iChat, as part of a survey of iPhone users about poor EDGE performance. The original report by iPhone owner Ben Goetting certainly sounds like he is keen to get is AI back.

Like engadget, I’m not sure what the survey mention means, but if I were the iPhone platform manager for Apple it would be one of my top priorities to win AT&T’s cooperation. I suspect AT&T would be concerned about selling a phone that can IM and videoconference with Apple computers but not with other AT&T phones.

I do have one guess: perhaps the performance of iChat AV would be so abysmal with EDGE that Apple is waiting for better bandwidth to be able to fully interoperate with Macs.

Technorati Tags: AT&T, iPhone, VoIP

Another reason to hate EDGE

Monday there were widespread reports that AT&T’s EDGE network crashed. AT&T claims it’s not because of the iPhone (and the estimated 500,000 new data users that suddenly showed up on the network in a 24 hour period). Perhaps it’s because of the “Fine Edge” network improvement.

AT&T snared the iPhone in hopes of improving its reputation and winning high-margin customers. So far it doesn’t appear to be holding up its end of the bargain. One estimate said only 1/3 of prospective iPhone users were already on AT&T, which means the other 2/3 must be really p-o’d.

iPhone users also had trouble activating their phones, but since AT&T and Apple aren’t being candid about their customer support nightmare, getting an accurate overall picture has been difficult. One report I heard (e.g. this WSJ story) is that AT&T had particular problems (could just be routine LNP delays) moving people from other service providers — again aggravating exactly the sort of new customers AT&T most wanted.

I would sure love to see a survey of iPhone user satisfaction with their device, Apple’s service and AT&T’s service. Also with a breakdown of their former carrier and phone maker.

Overall, this suggests that Apple is paying a price for its immaturity in the mobile phone industry. Running a mobile phone network is a complex operation where some firms are better than others. As Apple has found out, network services can’t be bought and sold the same way as plastic cases or power supplies.

Technorati Tags: AT&T, iPhone, mobile phones

iPhone tire kicking

So today I played with a real live iPhone, after visiting my 4th San José Cingular (AT&T) store in two days. I think the reviewers were pretty prescient but then I guess that’s their job.

Friday, people were walking out of the AT&T store with iPhones, but not today. Yes, one reason is that the store had sold out. But another reason is that the people who must have an iPhone — sleeping outside the door and all — went Friday and today it was idle tire-kickers like me. So if speculation is that they sold 250,000 phones yesterday, it’s less than 10% of that today.

My local store had an iPhone-specific kiosk with a couple of college students who seemed (by cell phone store norms) pretty knowledgeable about the new toy. One guy did most of the demo had been trained for two weeks, but got his first real phone on Thursday.

The biggest surprise was CoverFlow, the software by Jonathan del Strother that was bought by Apple last September for iTunes. With a touch screen, it’s really easy to flip through all the albums on your hard disk — like the old K-Tel style LP racks (except those were front to back and this is left to right). I couldn’t imagine a more natural way to browse through music, although it doesn’t seem like it would scale beyond 50 or 100 albums (i.e., I’d like to browse within a genre rather than the whole set).

The GUI for zooming/scrolling — with fingertip controls — was very natural. The virtual keyboard was not — supposedly it gets better with practice, but I certainly couldn’t get it to work in the 5 minutes I had to play with it; my experience is more like Steve Levy than Walt Mossberg. The portrait/landscape rotation was cool, but it seemed braindead (and un-Apple like) that it only works in some applications.

Overall, the phone seemed pretty much like Mike & I were predicting: it’s a web browser with an iPod in it (that can be used to make phone calls). In fact, if you clue off of the main menu, Apple believes that the iPhone is a phone, e-mail device, web browser and iPod. (I’d need a better keyboard for an e-mail device).

However, the visit seemed to support one of the worst criticisms: slow data speed. The demo was done on the store’s Wi-Fi rather than AT&T’s EDGE network. People have been complaining about using the iPhone on EDGE since the day it was announced. There was a rumor that this month AT&T even accelerated its network with the “Fine Edge” program in anticipation of iPhone Day.

So the data service is slow, but they require everyone to sign up for data plans for $60-120/month? No matter how much spin you put on it, if a cell phone company doesn’t want to demo their cell phone network, that seems like a negative sign. It seems to support the criticisms of both neutral analysts and CDMA partisans that Apple chose the wrong network for the wrong reasons.

Clearly, the iPhone will raise the data ARPU for (what today is) one of the slowest data networks in the country. But how many net new additions will the iPhone bring: how many people will say (as I do) I’m only interested in the iPhone if I’m already a Cingular customer? Apparently I’m not the only one down on Cingular; as Bloomberg reported yesterday:

Cingular, which merged into San Antonio-based AT&T last year when AT&T bought BellSouth, rated below average in New York in a 2006 Consumer Reports survey of online subscribers' experiences with service gaps, busy circuits and static. It was last or next to last in overall customer satisfaction in 18 major cities; it tied for second out of four carriers in New York. …

AT&T is “kind of average,” says Richard Ellrodt, senior director for telecommunications and technology research at J.D. Power, a unit of New York-based McGraw-Hill Cos. “It doesn't have the worst score, but it doesn't have the best score.”

Technorati Tags: Apple, AT&T, iPhone