iPhone prediction department

Wrapping up my LA GMR coverage before heading off to my next conference.

A week ago I presented my paper with Mike Mace on the impact of the iPhone. The conclusions should be surprising for those who’ve read my previous thoughts (or Mike’s). And some of the predictions have been overtaken by events.

For the record, here are the slides as presented on the afternoon of June 2 in Marina Del Rey. A few highlights:

Our Premise
The iPhone could change the mobile phone industry:

• Nature of devices
• Vendor-consumer relationships
• Vendor-operator relationships
• Value and use of content

Of course, there are limits to drawing inferences based on vaporware

The first three relate to the power of Apple’s brand and consumer marketing, and how it’s tried to assert that power to bypass AT&T. The comment about content wasn’t there when I drove down to LA, but it was quite clear reflecting on the first day of the conference that ease of use is a big concern for getting people to use mobile phone content, and obviously the iPhone will have ease of use.

As the June 29 ship date approaches, it is clear that Apple will be creating the first-day hype that it has done with some of its other products (and others have done with videogame consoles) — fanatics camped out by stores, lines around the block, etc. etc. If Apple can get a line for a new retail store, then certainly they can get one for their first cellphone. For those not in the U.S., they’ve been ramping up the TV advertising, demonstrating the iPhone as what a mobile phone web browser was meant to be (I guess assuming it already has the iTunes customers in the bag).

I want to quote one other slide:

Help or Hurt Rivals?
Apple could take away sales

• Unique content ecosystem
• Systems competition vs. point products
• Marketing visibility
• “Sex appeal”

Or could create openings

• Exclusive carrier in US, Europe, ?
• Rival carriers will promote other phones
• Effectively grow the category?

Our point as technology strategists — without any inside information — is that Verizon & Sprint won’t standstill as Apple promotes the iPhone, but will sell their own competing products: I used the example of the LG Prada, the Samsung UpStage and the Samsung KE850.

Sure enough, on Thursday morning, the Wall Street Journal published an article (registration required) about rival US carriers’ plans to compete with the iPhone. They listed the the Prada, the UpStage and the HTC Touch (a Windows Mobile iPhone knock-off). They also implausible listed the Nokia N95 — Nokia’s top of the line smartphone, but clearly ignorant of Mike’s point that there are different mobile phone segments. (see our slide #14 for an updated diagram showing the iPhone and N95/9500 segmentation).

The one new tidbit is that at least Verizon is smart enough to swarm the iPhone in adjacent segments rather than competing directly:

Denny Strigl, president of Verizon Communications Inc., which co-owns Verizon Wireless with the United Kingdom's Vodafone Group PLC, says the carrier doesn't want to go head to head against iPhone with any single device. Instead, it plans to rely on a broader set of mobile services and phones to win over customers. "With what we have as an overall product line, I'm confident we won't lose [market] share to the iPhone," Mr. Strigl says.

However, the picture changed dramatically on Thursday afternoon with Qualcomm’s latest loss to Broadcom. While Qualcomm is mounting an aggressive appeal, as it sits Qualcomm’s chip customers can’t import new phones into the US. That will shut down innovation on the CDMA phone side (where Qualcomm holds 95+% share), including new LG or Samsung phones to Verizon and Sprint. So — in a break for AT&T and Apple — iPhone rivals could very well be delayed until Qualcomm comes up with a solution (work around, court victory, or a settlement).

Technorati Tags: iPhone, LA GMR

French praise for Apple’s closed music strategy

As noted earlier, Apple uses its closed DRM and iTunes Music Store (now iTunes Store) strategy to cross-subsidize low download prices with profits from its iPods.

By creating switching costs for buyers — making it difficult to take the content to other players — strategy has come under criticism from European regulators. Apple blamed record labels for the copy protection and even offered non-DRM content with one label that would go along.

Philosophically, I still don’t buy that Apple’s plan is anti-consumer: they openly say that their system is locked, so that people who sign up do so knowing full well that their music only works with their iPods (or iPhone). But then, I’m somewhere in the middle in the US competition policy spectrum, which makes me very laissez faire by French EU standards. French competition policy (dirigisme) is pretty simple: use regulation to prop up French companies (Cie. des Machines Bull, Alcatel, Thomson, Sanofi-Aventis) that can’t complete in the market, by protecting them and keeping them French, while at the same time hobbling or blocking companies (particularly American) that succeed in the marketplace.

So it was fitting that the pro-consumer effects of Apple’s music strategy got a strong (albeit left-handed) endorsement Saturday by an executive of Orange, France’s largest (and Europe’s second largest) music service. François Thénoz — its director of strategic marketing — is a France Télécom veteran and UCLA MBA who spoke on a panel at the USC-hosted Global Mobility Roundtable conference.

I didn’t have a tape recorder — and didn’t see the tidbit coming — but here is the paraphrase typed by this formerly ink-stained wretch:

One company, Apple, decides level of prices will be less than $1. It is very difficult for [other] players to monetize the services. Except for ringtones, we don’t see enough margin [in music]. “In terms of margin, it’s [music] not as interesting as some other content.”

Translation: we’re mad at Apple for setting such a low ceiling on consumer expectations for download prices, and so we’ve decided to take our records and stay home. If low prices are pro-consumer, it doesn’t get much more pro-consumer than that.

[NB: The tone of the comment suggests there is no chance that Orange would partner with Apple — which would leave Apple without a credible European alternative to negotiated better terms with Vodafone.]

Of course, there are other business models for music than the buy-one-track-and-own-it model. There is the monthly subscription model of Live365 or Progressive Real Networks; Verizon Wireless has tried it, albeit to mixed reviews. There is offering free downloads of artists who want the publicity model, used by MP3.com, Download.com and also Live365.

This week, Lala is getting a lot of publicity for its website relaunch interesting wrinkle. They have offered CD trading, and now are offering free monthly subscriptions — subsidized by the albums (not tracks) you buy to download. Since Lala has to pay the record labels for the free content (estimated wholesale price: $6-8/user/month), they are expected to lose $40 million in VC in the next two years trying to build a viable competitor to Apple.

Even by Silicon Valley standards, the hubris is impressive:

Mr. [Bill] Nguyen — the company doesn't use titles but he is effectively chief executive — says he aims to be as big as the iTunes store in 18 months to two years.

Still, this is what we need at an early stage of a major industry transition: new entry and business model experimentation by a broad range of competitors. Despite its early lead, there’s no guarantee that Apple’s model will be the one left standing.

Technorati Tags: Apple, business models, LA GMR, mobile phones, MP3, music industry

Prize-winning smartphone research

I’m still trying to catch up explaining all I learned at the LA Global Mobility Roundtable conference.

However, I want to mention Friday’s surprise announcement. The “best industry paper” award went to my co-author Michael Mace. (Mike & I presented a paper on the iPhone, but this was a separate paper).

The paper was entitled “Segmenting Mobile Data: The myth of the smartphone.” Mace is currently with Rubicon Consulting in Los Gatos, but first immersed himself in the smartphone market as chief competitive officer for PalmSource.

I heard a number of positive comments after his presentation Friday — people found both the ideas and the data provocative. However, neither Mike nor I knew that there was an award, let alone that he was in the running.

I can’t claim any credit (I didn’t even see the article before it went in), but I thought some of my readers might be interested in the article since it’s available free online.

Technorati Tags: LA GMR, smartphones

Municipal Wi-Fi: what’s the point?

There were a lot of interesting sessions at the LA GMR. As with most conferences, I learn the most when the knowledge gradient is greatest (as long as I understand the subject well enough to know what’s going on).

So the first aha! moment at the conference was at the session entitled “WIMAX/Muni-WiFi Experiences: LA, Philadelphia.” Moderator Richard Grimes (of Wireless Capital Partners) introduced some of the common issues: the use of municipal Wi-Fi to provide universal access (to address the so-called “digital divide”), the ownership of the system (public, private, hybrid), and the expected impact of WiMax. (Here I focus on systems being built, and will consider the WiMax vaporware in another blog entry).

The first paper was by a friend of a friend (previous acquaintance) who by the end of the conference had become a good friend. Youngjin Yoo of Temple U. described his fascinating Philadelphia story. (The effect was accentuated by his use of Larry Lessig-style slides: 2-5 words per slide, black & white.)

Yoo briefly reviewed the history. In 2003, the CIO for Philadelphia convinced his political masters that it should be “the first major city in the US to declare we have a 21st century infrastructure.” (That they believed this suggests that the politicians are pretty dumb, but more on that later).

So in 2004, the city announces its plans, and forms the Wireless Philadelphia public-private consortium. The next year, the city plans to spend $15-18 million to build the network, until Earthlink proposes to run it as a business. Due to city delays, the pilot test doesn’t begin until the end of 2006. Today, there is limited coverage (which I’ll test in August) but the whole system is supposed to be done at the end of 2007.

The consortium used four “pillars” to justify its involvement:

• digital inclusion for four key political constituencies: low income families, single parents, senior citizens and HIV/AIDS victims. Yoo said that Philadelphia is one of the poorest cities in the US (next to the poorest place in the US: Camden, NJ), but the inclusion of the other groups suggested that some served in those groups would be non-poor (middle class or even affluent).
• tourism.
• small business development.
• e-government (although it was not clear what this meant).

The plan took off because of the combination of the socio-political (politicians trying to look good) with the techno-economic forces (Intel, Motorola trying to sell hardware), in what Yoo called “a perfect storm.” He and his co-authors mapped out the relationship of the different actors, as shown below:

At the end of the day, the plan had two major flaws. First, the purported beneficiaries were really stick figures to justify what people wanted to do. When asked, they gave many reasons why they wouldn’t use or benefit from the plan, as in this quote: “Why wasn’t the [budget for the initiative] spent on schools, or flue shots? Wireless is still a luxury and there are still many unmet basic needs.” Yoo said that for some non-profits, half of their constituents can’t even read but won’t admit it out of shame.

Second, Philadelphia is emblematic of the dubious technical and economic viability of muni Wi-Fi. The cost structure is pretty clear: one base station on a city lamp post every 1,000', or a 5x5 grid per square mile. Earthlink’s pricing plan was set early: $10/month for the underprivileged, $22 for everyone else. The presumed use of the network seemed to be residential and small business, rather than anything involving mobility (college students sitting in the park with their laptops).

But, as the entire session made clear, there is a very narrow window of demand for municipal Wi-Fi. If people are too poor, they don’t have the computers and computer skills to access a network (a related problem that all muni Wi-Fi advocates hope to solve someday). If people are too rich, they are also using other, possibly technically superior solutions. In Philadelphia, that’s Comcast cable modems and Verizon fiber optics (50 megabit) at $45/month. Even if promoters justify Wi-Fi expenditures based on a “public good” claim, they are obliged to give the honest cost, including any government operating subsidies.

Back to this “21st century” claim. 802.11b first caught on when Apple started including it in its laptops in 1999, 18 months (yes, 18 months) before the new millennium. 802.11g started shipping in December 2002. So is it worth spending $15 million to build an infrastructure that will be obsolete before 2010? And if it’s obsolete, where will you get the revenues to keep it operating? Still, the city of Los Angeles and many other cities keep marching forward with their plans.

All this prompted me to ask at the end of the session: If it’s not economically viable, why are we talking about municipal wireless at all? (Another academic said she plans to use this question to provoke discussion in one of her own studies).

One speaker mentioned the experiment of Lompoc, a small California military town. I looked up the numbers, and they would be laughable if not for the waste of taxpayer money. Here’s how the AP reported it in the Los Angeles Times:

A $3-million plan to blanket Lompoc, Calif., with a wireless Internet system promised a quantum leap for economic development: The remote community hit hard by cutbacks at nearby Vandenberg Air Force Base would join the 21st century with cheap and plentiful high-speed access.

Instead, nearly a year after its launch, Lompoc Net is limping along. The Central California city of 42,000, surrounded by rolling hills, wineries and flower fields located more than 17 miles from the nearest major highway, has only a few hundred subscribers.

That's far fewer than the 4,000 needed to start repaying loans from the city's utility coffers, potentially leaving smaller reserves to guard against electric rate increases.

Other cities (including Los Angeles) are proceeding ahead, with total spending by US cities in 2007 expected to exceed $400 million. A the AP noted, the consequences of failure carry a real price:

Without revenues they had counted on to offset that spending, elected officials might have to break promises or find money in already-tight budgets to subsidize the systems for the low-income families and city workers who depend on the access. Cities might end up running the systems if companies abandon networks they had built.

I love technology — and always want more — but sometimes the numbers just don’t work. Firms can make dumb bets and their investors pay the price — and thus investors reign in the most foolish ideas. However, when politicians do something stupid, they don’t pay the price — the public does.

I guess a public/private partnership can work out OK. The city cannot guarantee any shortfall, and should recover its out-of-pocket costs through a floor on the revenue sharing. Under these conditions, the firms face all the risks (and almost all of the upside) and so need to go into the deal with their eyes wide open.

Technorati Tags: LA GMR, Municipal Wi-Fi

Trends in mobile business models

I spent the past two days at the LA Global Mobility Roundtable conference, hosted by the University of Southern California (in downtown LA) but held near LAX. This is the 6th annual conference but the first one that I attended. Compared to any other conference that I’ve attended (with the possible exception of the PDMA conference) it has a lot of more serious industry participation, both in terms of bodies but also in terms of the orientation of the sessions and the discussion.

By eyeball, the attendees seem 60% academic and 40% industry. While most of the papers are academic, the plenaries are all industry people. On a show of hands, the attendees are about 3:1 business vs. technical.


This year’s conference was focused mainly on wireless data. Within mobile data, there were three major themes:

1. Network access. Several years ago the carriers were seeking to push their new 3G networks (which did not yet deliver broadband speed). Today, a major theme (at least among the Europeans) was about roaming between cellular networks and Wi-Fi hotspots. There was also a discussion of US municipal Wi-Fi/WiMax networks.
2. Content, with a particular focus on video. There’s licensed content (with the Hollywood crowd prominently featured), custom content, and user-generated content. As the Hollywood panel made clear, having good (affordable) network access is a prerequisite to moving any significant amount of video content.
3. Revenue models. People talked about “business models,” but (to someone who researches business models) that has a very specific meaning that includes making a profit. At LA GMR, people only talked about different revenue models. For video, that was subscription, per-download, embedded ads (pre-roll, post-roll) or product placement. Of course, there was an undercurrent (often right on the surface) over who gets how much of this revenue.

My own iPhone paper with Mike Mace fits into the content area — but the role of devices in providing content access.

Of course, voice is still the largest source of mobile phone demand and revenues for most countries. The number I heard for the US is a monthly ARPU of $62 for voice and $6-7 for data. If you count SMS with voice (it is a 2G technology), it seems that the only places where data is the major revenue source is in Japan and Korea.

Also at the conference, a number of researchers are looking at initial adoption of mobile phones in less developed countries (LDCs). This is where the growth is: developed countries have 80-120% per capita penetration, compared to less than 50% for most of Latin America, 35% for China and 13% for India. I gather Africa is in single digits.

Kas Kalba (a consultant from New Haven) estimated that penetration in Africa is going to take a handset cost of $10 - versus the $100-700 (pre-subsidy) cost of US phones today. (The LG phone chosen for the “3G for All” competition is a step in this direction). Along with that, Kalba said that LDC penetration also needs a carrier that can get by on a ARPU of $1-2 per month (all of that prepaid since the poorest have unreliable income streams). While this number seemed mind-boggling, Pakistan is already within an order of magnitude ($3-4/month).

I'll add links to specific posts as I have them.

Technorati Tags: business models, LA GMR, mobile phones, video