Tablet Wars (3): Is Wi-Fi enough?

Despite doing research on 3G cellular service for the past five years, I’ve thus far held off on buying any 3G service (or a smartphone that requires 3G service). The use case really isn’t there: I spend almost my time at work or at home, both locations with good Wi-Fi. Throw in free Wi-Fi at friends, Starbucks and many bakeries, and there isn’t much time in any day when I’m not being irradiated with 2.4 GHz radio waves.

So do tablets need 3G? Apple has both WiFi and 3G+WiFi models, Amazon sells Kindle models with 3G (but only for books, not for free content), while Barnes & Noble eschewed a 3G model with its nookColor. Fresh off its initial iPad partnership with Verizon Wireless, Apple is rumored to be preparing a dual GSM/CDMA 3G iPad 2 for launch next year.

These sort of 3G-enabled devices have provided business for chipmakers for the past few years — and in particular, the dual-mode device is the bread & butter for the growth of Qualcomm’s chip division. Meanwhile, Verizon, AT&T and the smaller carriers hope to use these additional 3G devices to sell more 3G data plans — while at the same time hoping these plans won’t get used, or that users will offload into local WiFi hotspots.

So do tablets and netbooks and notebooks need their own data plans? Or conversely, how/why will user buy 3G data plans (or real 4G as it becomes available)?

One path is the one the industry has been on the last few years: more smartphones, bigger screens, more computer-like features. I think that’s great for certain apps — notably traffic maps — but not for editing a spreadsheet on Google Docs.

The network operators’ preferred option is to have cellphone users buy a second 3G plan for their laptop or whatever. So instead of having one data plan, you have two. Not a bad option if you have an expense account, but do you get 3 data plans if you have a cellphone, laptop and tablet?

A third option is the Wi-Fi hotspot — like the MiFi cards Verizon is bundling with the Wi-Fi iPad to pretend (for now) it’s a CDMA iPad. It’s a great option for a college student or young adult (since anyone under 26 is still a child) to have wireless data available for all his/her personal devices at all time.

The future I’d prefer to see — although the jury’s clearly still out — is widespread availability of tethering, as was introduced by the Palm Pre, now available on the Droid X and other Android phones, and technically feasible on the iPhone even if AT&T (or Apple) tries to block it..

A shift to tethering would have two major benefits for mobile phone consumers. First, cellphones could go back to being cellphones. Rather than creating ever larger (but still inferior) imitations of a PC, cellphone makers could focus on making small pocketable devices that make phone calls, send text messages and can be used for light internet browsing.

Secondly, the use of Wi-Fi for tethering a laptop of tablet would decouple these products from the carrier subsidies and contracts — allowing users to replace them as needed, and keep their computer when switching their phone between carriers.

It seems like we keep coming back over and over again to the same issue between 20th and 21st century telecommunications. Back in the 20th century, you had one (or maybe two) wireline phone, one cable TV account, one Internet connection. In the 21st century, the network operators are hoping that you’ll keep adding new service plans every time you buy a device.

Am I going to use twice as much data if I own an iPhone and an iPad? Of course not. Does AT&T have the chutzpah to increase my DSL (or U-verse) bill if I add another PC or PDA at home? Of course not.

So until we get back to the per-household (or forward to the per-gigabyte) pricing, the idea of buying a new account is going to deter 3G adoption for tablets or laptops, except for that small niche of relatively price-insensitive businesses or consumers.

Meanwhile, Wi-Fi as a substitute for 3G still needs considerable improvement. Walking across campus with an (unactivated) Palm Pre acting as a Wi-Fi PDA, it was clear that our network and access policies were not designed for smooth handover from hotspot to another. Plus tablets and other devices need to bring back that great 1990s Internet innovation: offline browsing. (Hint: ignore the META REFRESH tag if there’s no network connection.)

Wireless data fails through its own success

On Monday, Steve Jobs had his iPhone 4 demo fail due to Wi-Fi congestion problems at the WWDC conference. (Blogger Liz Gannes of GigaOM theorizes that ad hoc hotspots set up by attendees contributed to the problem.)

Also this week, while passing through O’Hare airport, I desperately tried to log onto the Boingo paid hotspot but could never get a reliable connection among the dozens (hundreds?) of travelers also trying to use Wi-Fi.

There’s been a lot of publicity about AT&T cutting back on unlimited all-you-can eat bandwidth for its 3G service — thanks to heavy usage by a significant fraction of the iPhone customers — as well as the speculation that other 3G carriers will do likewise. The problem isn’t going to go away with LTE (or WiMax).

But this is also clearly a problem with Wi-Fi as well. Networks designed for people checking email or flipping 2 web pages a minute cannot handle the traffic generated by YouTube.

What the wireless industry seems to ignore — probably deliberately — is that this is an inherent (and perhaps insolvable) problem of wireless communications. Wired communications are scale free — you can add new wires and routers and switches indefinitely.

On the other hand, wireless spectrum cannot be extended indefinitely, and there’s only so much smaller you can make the cell sizes (from microcells to picocells). The past decade has benefitted from increasing spectral efficiency, but spectral efficiency in 4G is only slightly better than 3G.

So while Moore’s Law seems like it will have a 50 year run, the improvement in wireless data efficiency appears it will only run about 20 years before it hits the wall.

Has the industry overpromised? Is it ready for the consequences when it fails to get the additional spectrum it dreams of? Right now I see the problem, but not the complete implications or possible solutions.

Bundling and commoditizing hotspots

In his column Thursday, NYT columnist David Pogue expressed puzzlement at the sudden availability of free Wi-Fi from his local cable TV companies:

Starting now, any New York, New Jersey or Connecticut customer of Cablevision, Time Warner or Comcast can use any of those companies' hot spots.

In other words, I, a Cablevision customer, can now use all of Time Warner's and Comcast's hot spots in these three states.
…
Now, I think this development is fantastic. It hits me where I live. It's free. It's fast and reliable. I love it.

But I'll be frank: I can't understand why they're doing this.

David, I’ve loved your product reviews since the Macworld days. But as business strategies go, this is no mystery.

Wi-Fi hotspots are a commodity — something everyone wants, but nobody wants to pay for.

The phone and cellphone companies — AT&T, Verizon, T-Mobile — have been bundling hotspot access with their cellular or DSL accounts for years. For iPad and iPhone users, the hotspots are clearly more useful (in terms of bandwidth) than what they’re getting on the actual (congested) 3G networks.

Clearly cable has to respond to these efforts by telco rivals to create loyalty and switching costs. In a Geoff Moore sense, this is a clear neutralization expenditure — get rid of the rival’s advantage.

As a consumer, it’s a great deal when there are multiple equally plausible alternatives to choose from. By making their offerings more similar, the NYC cable companies are helping along the process of commoditization. More power to ’em.

Google commoditizes another layer

The news says that Google is offering “free Wi-Fi” at 47 airports through January 15. Google issued a press release Tuesday, posted it to their blog and created a new website FreeHolidayWiFi.com. (They’re also sponsoring Wi-Fi on Virgin America flights).

My wife was traveling through two airports Tuesday and got to try out the free Wi-Fi. She also saw the airport advertising displays giving Google credit for this “free gift.”

However, there’s a problem with this story. At least two of the 47 airports (SAN, SJC) are ones that I regularly frequent that already have free Wi-Fi. They both had it last month and last year. So what does it mean to give us free something we already had? Does that mean Google’s (or the airport) is going to take it away? Or does it mean the airport already had the costs real low and thus it was relatively cheap for Google to buy sponsorship?

At a broader level, Google favors anything that commoditizes Internet access. An early example was when it began giving away free Wi-Fi in its adopted home town of Mountain View — and helping to end the mirage of paid municipal Wi-Fi networks.

Google wants Internet access that’s fast, ubiquitous and cheap, because in simple economic terms Internet access is strongly complementary to wasting a lot of time feeding keywords into the Google money machine. And of course cheap Internet access also grows the market for all of Google’s Internet services — which will be helpful should it ever find another profitable revenue stream beyond search.

Update, 8:30am: In response to a comment (below) about whether Google’s sponsorship is bad, let me better articulate my late night concerns.

I'm frustrated by a lack of transparency — not the first time with Google.

1. What does it mean to "sponsor" Wi-Fi that is already free? How much is Google paying? Perhaps a newspaper reporter at the San Jose Mercury, San Diego Union or Las Vegas Sun will ask some pointed questions.
2. Why is it advertising in the airports that it’s doing us a favor without noting that it was previously free?
3. What happens when the sponsorship ends? I.e., does Google sponsoring it mean that our formerly free service is no longer free?

Sure, the AP story Tuesday about Google’s free airport Wi-Fi (and smaller efforts by Microsoft and Yahoo) said

The 47 airports include some, such as Mineta San Jose International Airport and McCarran International in Las Vegas, that already provide free Wi-Fi. Sponsorships help the airport keep the service free.

but “help” doesn’t explain whether this is defraying part of the cost, paying the entire cost, or helping airports make a profit — nor does it say what will happen when Google stops “helping.” Airports are almost entirely public entities, so more transparency here is certainly a legal requirement.

This is obviously a trial balloon. If Google pulls out and the service at these airports goes from free to free to paid, there will be a huge backlash — against the airports and against Google.

If I had to guess, I’d say Google is laying the groundwork for running ad-supported free Wi-Fi at all US airports, with these as pilot projects. Such free Wi-Fi would improve Google’s image and political standing with an influential segment of the public (frequent travelers), at a time when it faces increasingly pointed questions (e.g. in antitrust, Google Books) in its march to Total World Domination.

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.

AT&T gets (slightly) bigger

AT&T Inc. today agreed to a $944 million purchase of rural cell phone carrier Centennial Communications. The purchase would add 1.1 million subscribers to the 74.9 million already on AT&T Wireless. By comparison, AT&T Wireless added 2 million net new subscribers in its 3rd quarter, half of them iPhone users new to AT&T.

However, as RCR Wireless reported

The deal will not, by itself, help AT&T regain the top spot in the U.S. market. Although the carrier currently holds the position, it will soon to lose it to the combination of Verizon Wireless (70.8 million customers) and Alltel Communications L.L.C. (13 million customers).

And that’s about it for adding a large number of US cellphone customers. According to Wikipedia, there aren’t a lot of compatible (i.e. GSM) carriers left for AT&T to buy. Since a purchase of #4 T-Mobile would not pass antitrust muster (even if it were for sale), the three network owners with more than 1 million subscribers — US Cellular (6.2m), MetroPCS (4.8m) and Cricket/Leap (3.5m) — all use CDMA.

This is AT&T’s second effort to expand its exposure to wireless. Earlier in the week, AT&T spent $275m to buy Wi-Fi hotspot provider Wayport. The timing by AT&T seems curious since the hotspot business is so thoroughly commoditized, even though the recent financial meltdown means the price was lower than it would have been in July.

Given the state of the industry, it seems like a merciful exit for Wayport investors. They earned a 73% gain on money that was invested 4-12 years ago, which is not a smart investment but a great way to get out of a business that’s about to lose what remains of its pricing power (except maybe in controlled locations like airports).

Starbucks helps commoditize mobile Internet

One of the topics that I have to cover with my MBA tech strategy students is about related diversification, vertical integration and cross-subsidization. Thirty years ago, SV startups made money selling a product, but clearly over the past decade synergies and economies of scope have brought a major change to all aspects of SV life: exit strategies, monetization opportunities, and (alas) the prevalence of competitors.

I made my post this morning about the challenges of getting 3G mobile Internet in competition with wired Internet, and then ran off to a few meetings with two friends who are running mobile startups. Since the majority of the party are coffee addicts, when the tiny sushi-ya wanted their table back we ended up at the Starbucks down the road. (Since I don’t drink coffee, I only end up at Starbucks to do a meeting.)

One thing led to another, and my compatriots explained to me what the Starbucks free Wi-Fi (announced in February) really means. Sure enough, I went to the website, which explains:

Complimentary Wi-Fi for Starbucks customers When you register your Starbucks Card and use it at least once a month, you'll receive two consecutive hours a day of complimentary Wi-Fi, courtesy of AT&T.

This is the ideal division of labor for our household. My wife drinks one or two $3 cups of coffee a month that she was going to drink anyway, and I get free Wi-Fi without having to go to a library (as I am right now).

The network connectivity is provided by SBC (which then provides free access to SBC DSL customers). SBC replaced T-Mobile, which this week sued the-company-that-pretends-to-be-AT&T for advertising the affinity card deal (begun June 3) before T-Mobile is completely gone from Starbucks (but they settled the suit yesterday).

So not only do the 3G carriers have to compete with people’s home, work and school Internet, they also have to compete with free Wi-Fi at 6,800 US Starbucks locations — subsidized by sales of double-mocha nonfat lattes, coffee mugs, and music by Dylan Filsand has-been boomer stars (to pick two examples from today’s coffee shop branch). And, in at least one town, by companies subsidizing citywide Wi-Fi for its own purposes.

Add to that, the increasing number of midsize airports are providing free Wi-Fi. So far this year, I’ve seen it in San Diego, Las Vegas, Denver and now San Jose.

With competitors (or substitutes) like these, no wonder municipal Wi-Fi and WiMax never stood a chance. Among the wreckage is MetroFi, once the Bay Area’s great Wi-Fi hope that is a week a way from going dark.

Free Public WiFi

I’m here at McCarran International in Sin City, en route home. Unlike some airports, they are nice enough to provide free Wi-Fi, with the logical SSID “McCarran WiFi”.

However, when looking around for a hotspot, I saw the ubiquitous “Free Public WiFi” node. From the OS X menu bar, it’s obviously another computer (turns out it’s Windoze) and not a real hotspot. A quick Google (on the McCarran Wi-Fi) showed this explanation from TechBlog which sees it as more benign than a ZDNet posting).

To be on the safe side, I never connect to these peer networks, which points out a security hole in OS X 10.5 (Leopard). When you go to a new location, OS X puts up a window showing all available Wi-Fi connection options, and does not indicate (or give a warning message) for those that are peer-to-peer rather than legitimate base stations. So at the menu bar, the risky connection options are segregated, but not in the screen that everyone sees first.

Municipal Wi-Fi: stick a fork in it!

Last month Earthlink admitted that its municipal Wi-Fi business was a mistake and it was bailing out. As I noted in my posting “End to the Wi-Fi mirage”:

This is probably the beginning of the end of attempts to build self-supporting municipal Wi-Fi systems (as opposed to those subsidized like parks and libraries as a “public good”).

This weekend, even the NYT has noticed (wistfully) that the city-subsidized plans are also on their way to oblivion. Not surprisingly, the system design overestimated the hotspot range and thus underestimated the number of base stations required. (WiMax partisans: take note.)

The obvious lesson is if public-private partnerships seemed like a risk-free way for government to get something for nothing, in fact if the private entity can’t make a profitable business, the partnership is doomed.

The municipal Wi-Fi fanatics are hoping to deny economic realities and have someone subsidize their pt approach to social action, urban renewal, etc. etc. But it’s time to stick a fork in the whole movement — it’s done for good. If people really care about making Internet accessible — rather than spending lots of money or building cool toys — then libraries and community centers with free Internet access are a lot less expensive way to (mostly) accomplish the same goal.

Limits to all you can eat

At my favorite Panera bakery location, I get nice atmosphere, good (if slightly premium priced) baked goods, and unlimited free Wi-Fi. For the past two years, my co-author and I have been writing our book here (which is why I got up before sunrise today).

The only limit on the Wi-Fi is the length of my battery (about 90 minutes on my 6-year-old TiBook). Today I may be heading from Cupertino to Stanford for a lunchtime talk, so I packed my power adaptor. (Update 1:30pm: never made it).

However, Panera has covered all the power plugs near where I normally sit. Closer inspection shows that half (but not all) of the plugs in the store are covered.

Sure enough, talking to the clerk, this is part of a deliberate strategy to keep people moving in at least part of the restaurant. One Panera I tried in Encinitas had wall-to-wall road warriors who made it their home office, so I can see why it’s needed.

Salad bars excepted, you-can-eat restaurants usually aren’t very good. Panera doesn’t offer all-you-can-eat food, so I'm hoping that their all-you-can-surf Wi-Fi and atmosphere will remain good, even if I’m on my own for power.

End to the Wi-Fi mirage

Earthlink is now trying to sell or close its municipal Wi-Fi operations — perhaps because it lost $80 million on municipal Wi-Fi last year (versus $20 million in 2006). Apparently some of the failed services are getting turned off. Earthlink also pulled back from the ill-fated Helio MVNO venture with SK Telecom.

This is probably the beginning of the end of attempts to build self-supporting municipal Wi-Fi systems (as opposed to those subsidized like parks and libraries as a “public good”).

The cause is not that different than Ricochet’s failure in the 1990s. Yes, Ricochet had slow nonstandard modems while Wi-Fi is ubiquitous and cheap. However, the economics of building infrastructure coverage are the same, and today the desirability and adoption of substitutes (other access methods) are probably worse.

Most seriously of all, it seems like the era of paid Wi-Fi is heading towards extinction — because free Wi-Fi at restaurants and coffee shops is becoming more the norm. I had lunch in Mountain View on Sunday and it seemed every bar on Murphy Street had free Wi-Fi. Starbucks announced Monday that it’s offering (limited) free Wi-Fi — to match all the other free sites — further fueling the commoditization of Wi-Fi hotspots. About the only place that people will pay for Wi-Fi is in an airport, because you can’t easily go down the street to find a better alternatives.

Without crunching the numbers, my intuition is that WiMax is going to face the same problem. Yes, the radios have longer range, but you still have to build more cells (and negotiate access and install backhaul) for lots of cells. If WiMax fails, then Sprint's 4G strategy will fail with it.

Expensive commodities

Today I’ve had the privilege of spending 8 hours at Washington Dulles Airport, instead of the scheduled 2 hours. The various causes were a snowstorm, airline snafus and general bad luck. At some point I was itching for Wi-Fi service, so I checked it out. Three different carriers — all expensive and some (maybe all) lousy:

• AT&T (WayPort). (SSID: ATTWIFI) The price seems right: $6 for a 2-hour session. However, last time I was in Dulles, I made the mistake of paying AT&T: they had a severely messed up SMTP policy that prevented even authenticated SMTP. No thanks.


• T-Mobile: (SSID: tmobile) They list a $6/hour plan (which I used to use) but give you no way to use it, instead pushing $10/day. And, in fact, try to upsell you to a monthly plan that most people won't use.


• Sprint (NNU): (SSID: pcswifi) I have no experience, but didn't want to pay them $10 for 30 minutes either. They claim to give you free airport and flight status info, but it doesn’t work.

I suspect this says something about the hotspot business, but I’m not sure what. Is it because there’s a small niche of price insensitive customers, and then almost nobody else who will add it if it’s cheaper? Sounds identical to AirFone®, the capacity limited, overpriced airline satellite phone that eventually went out of business.

Almost makes the iPhone mandatory data plan look cheap by comparison.

Patents and commodities

Today's paper has the (not widely published) report that Netgear is being sued for patent infringement over its Wi-Fi gear. Netgear (along with Cisco-owned Linksys) is one of the decade-old commodity producers of network equipment, but is more recently facing competition from Chinese brands.

The lawsuit was filed Wednesday, according to Bloomberg:

Dec. 19 (Bloomberg) -- Netgear Inc., the maker of networking equipment for homes and small businesses, was sued by Fujitsu Ltd., LG Electronics Inc. and Royal Philips Electronics NV over patents covering wireless computer networks.

Fujitsu, LG and Philips are part of a patent-licensing pool created in 2004. Participants share inventions covering the so- called 802.11 standard, a protocol for wireless local area networks that lets computers talk to each other at high speeds.

While Netgear refuses to pay royalties to patent holders in the pool, it claims in advertisements that its products comply with the standard, Fujitsu, LG and Philips said Dec. 17 in a complaint in federal court in Madison, Wisconsin. Netgear products targeted in the suit include wireless routers, personal- computer cards and adapters.

This is really interesting for several reasons:

• With the notable exception of MPEG4, patent pools have been rarely successful for coordinating patent holder interests.
• Thus far, IEEE standards such as Wi-Fi seem to have had fewer patent suits than most other standard (although Buffalo Technology lost a case last year).
• Fujitsu, LG and Philips are not major producers of this gear except in their respective home markets.

Wi-Fi and its parent Ethernet have been one of the most successful (and most commoditized) multivendor standards of all time. Does this presage a new flurry of patent filing (or litigation) for Wi-Fi users? (Of course, the patent thickets around WiMax and 802.16 constitute an IP Lawyer Full Employment Act). Will it push up the price of gear? Will it form an entry barrier in this commodity business, with big electronics companies pushing out smaller companies the way that Telcos have taken on Vonage?

A little competition goes a long way

Today the Wall Street Journal had a flurry of pieces about the potential for “wireless net neutrality” for at least some of the next round of the FCC's spectrum auction. The planned auction will parcel out the UHF channels 52-59, analog channels being surrendered by broadcasters (nominally in February 2009) with the conversion to HDTV.

Of course, “net neutrality” is anathema to the Journal. (For those who slept through religion class, anathema is a Greek word adopted by the early Christian church to cut off heresies such as Arianism).

This all was stirred up by an interview with FCC chairman Kevin Martin that ran in Tuesday’s USA Today, in which he said:

“Whoever wins this spectrum has to provide … truly open broadband network — one that will open the door to a lot of innovative services for consumers,” Martin said in an interview Monday.

What this would mean in practice: “You can use any wireless device and download any mobile broadband application, with no restrictions,” Martin explained. The only exceptions would be software that is illegal or could harm a network.

In response, the Journal had not one! not two! but three! articles on the subject — a news piece on page A2, an op-ed column and an official editorial. The editorial blamed the plan on former Clinton FCC micromanager (now lobbyist and regulatory arbitrageur) Reed Hundt.

In Tuesday’s article, Martin had use locked iPhone was held up as a representative example. The every same day, Hundt’s company, Frontline Wireless, took a full page ad in the Capitol Hill newspaper which seems to imply that a lack of net neutrality (locking the iPhone to AT&T) is depriving voters in 13 states of their Darwin-given right to use an iPhone.
The op-ed column, by respected Brookings economist Robert Crandall, was a little more measured and rational in its criticism of the Martin plan. However, his defense of vertical integration (and thus attacking measures helping VoIP providers) seems early 1960s, i.e., pre-MCI, pre-Carterfone, pre-Execunet.

Martin’s plan is consistent with the use of regulation to promote competition. This apparent paradox captured by the book published on 1990s financial and telecom liberalization by my friend and mentor, Steve Vogel; he called the book Freer Markets, More Rules.

Net neutrality — like earlier decisions such as Carterfone and Execunet — means that restrictions are levied on one part of the value chain (PSTN, wireless access) in hopes of increasing competition on another level (handsets, value-added services). In this case, the goal is to prevent use of vertical integration as a barrier to entry and comeptition. In free markets, such regulation is only justified by a presumed market failure, such as the “last mile” monopoly of wireline telecom, or the oligopoly (three national carriers with 77% market share).

It remains a question of fact (not of economic theory) whether the potential benefits of one outweighs the potential risk of the other. However, there are plenty of complaints by startup entrepreneurs that it’s impossible to offer new applications (particularly on Verizon) without getting the carriers’ cooperation; this certainly seems to be stifling the rate of innovation, even if Crandall were right that a lack of regulation would lead to the optimal economic efficiency.

Meanwhile, the WSJ news article, like the hundreds of other articles this week (as in Information Week), note that Internet services like Google and Skype would benefit from FCC rules guaranteeing access to wireless data networks. Of course, Skype stirred up the whole idea of wireless net neutrality with its FCC filing in February.

The carriers’ lobby group, CTIA, claimed the plan was tailored to benefit Google and called it “Silicon-Valley Welfare”: CTIA president Steve Largent clamed:

Crafting special rules for a company with a market cap of $170 billion to address problems that don’t exist in our competitive market makes absolutely no sense whatsoever.

Of course, the claim of "Silicon Valley welfare” is drek. Of course, imposing restrictions on some spectrum would reduce the value of that spectrum to operators that don’t want “net neutrality” — such as those using “walled gardens” — potentially reducing the number of bidders and certainly the amount paid for the spectrum. If the FCC goes ahead, it means that it believes the benefits of competition at one level outweigh the reduced auction price (and potentially reduced investment) by the carriers. Given last year’s legislators are more politically like Hundt than ex-Rep. Largent, Martin is likely to get enthusiastic support from a less-than-free-market Congress.

Beyond that, the CTIA’s Chicken Little claims are completely implausible. Hundt makes it clear that he thinks only one of the six bands should be auctioned with the open access mandate. That means three national carriers (five if you buy the CTIA math) plus five new spectrum owners would be without net neutrality, but an 11th owner would be so restricted.

Such apocalyptic rhetoric seems like a really stupid strategy by the carriers and CTIA, on two fronts. First, if net neutrality is limited to just this one new band, that would likely reduce the pressure for the existing carriers to open up their networks. Carriers would be free to offer better (albeit non-neutral) solutions and customers would decide whether (or if) neutrality was something that they valued. Hey, Steve, what’s more free market than that?

Second, the US carriers — unlike those in Europe — have been shooting themselves in the foot by blocking Wi-Fi enabled handsets, as when Cingular requested Nokia drop Wi-Fi from the E61 so they could sell it as the E62. Wi-Fi calling is inevitable, but for a long while it will be difficult to use, so the carriers should let it happen and spend some time figuring out (as the European carriers seem to think) there’s a way to make money off of it. Last week, David Pogue reviewed a cool home Wi-Fi hotspot for your cell phone which (not surprisingly) is being offered by the #4 US carrier, Germany’s T-Mobile; they even get an extra $10/month for all the resulting “free” calling.

If the wireless carriers really can’t cope with this limited competition, then their anguished wails mark the death cries of soon-to-be-extinct dinosaurs. If it’s not that serious, they’ve shot their credibility by crying “wolf” one time too many, undercutting their influence on other issues of importance.

Technorati Tags: 3G, Google, mobile phones, spectrum, VoIP, Wi-Fi

Da Nile Runs Through Barcelona

To read this week’s accounts of the 3GSM speech by the CEO of T-Mobile, da Nile is no longer just a river in Egypt. Hamid Akhavan said that while VoIP may be cannbializing the wireline voice business, it will have “far less impact” on the mobile phone business.

Translation: we have a closed and locked business model, we control the handset, and we will refuse to let our customers use VoIP.

Some choice quotes:

"When people talk about VOIP, they think free," Akhavan said. "With any mobile service provided over the Internet, you're going to need to buy a data package."

Translation: we will charge them so much that VoIP is uneconomical.

“There are all sorts of technical issues that make mobile VOIP services difficult to implement,” he said. Technical issues related to how networks pass on IP addresses of mobile users have not been completely resolved, he noted. “Take reachability, for example: How can the call come to me?”

While SkyPE is certainly aware of mobile phone issues, I guess Akhavan hasn’t noticed that problems such as routing incoming calls and emergency phone location have been solved with cell phones and are being solved with landline VoIP.

Certainly all these things may happen. But I have a two word retort: Wi-Fi hotspot. Even ignoring VoIP-over-3G deals, who’s going to buy a smartphone that doesn’t work with free (or more reasonably priced) Wi-Fi hotspots? The operators who cripple their handsets (like Cingular does with the Nokia E62) will find that people will go to other vendors (or buy uncrippled phones like the E61 on the open market).

All this tells me is that T-Mobile does not see business users as important to their US market share. T-Mobile has spent more than $100 million to wire every Starbuck’s in sight, but apparently they’re not serious about leveraging the possible synergies to drive cellphone subscriptions.

Meanwhile, Hamid Akhavan argues that the impact of mobile data services will be greater than that of the (fixed line) Internet. Apparently he hasn’t listened to Mike Mace. (Big mistake).

As the cartoon says, he must be on something.

Graphic credit: “Pepper … and Salt,” Wall Street Journal, Feb. 14, 2007

Technorati Tags: business models, mobile phones, T-Mobile, VoIP, Wi-Fi

WiFi trapped by its own success?

WiFi (aka 802.11a, b, g) has been a tremendous success. In fact, given its modest goals as a way to connect handheld computers in a warehouse, it widespread adoption in every laptop and an increasing number of PDAs an cell phones is remarkable.

If anything, it’s been too successful. Too successful, you say? Isn't that like being too rich or too thin?

The problem is that a large installed base creates an upward compatibility constraint that can be irresistible. Inertia for an existing standard is the cumulative effect of the number of customers times the individual switching costs (plus producer-related switching costs — in this case the base station and chip makers). As Brian Dipert of EDN reports, the committee took its time in standardizing, and meanwhile various greedy and impatient vendors shipped so many “draft 802.11n” products, that no one would vote for a final standard that was incompatible with all the nonstandard product in the field.

Meanwhile, George Ou has a provocative post where he argues that the 802.11n standardization committee wimped out, deciding to create something that's not really all that much better than 802.11g. As Ou tells it, the problem was that rather than spend a few extra bucks (initially) on a chip that also supported 5 GHz, they stuck with the crowed 2.4 GHz band. The existing 2.4 GHz spectrum only supports 3 (or 4) simultaneous channels and are already crowded, so (my reading of it is) unless you’re on a deserted mountaintop you’ll never see the claimed 100 Mbps throughput.

If I were the Enhanced Wireless Consortium, when the final standard gets blessed I’d get the press some sample units to demonstrate actual performance.

Technorati Tags: IEEE, infrastructure, standards, switching costs, Wi-Fi