Why does my mobile phone suck so much? (Part 2)

posted 03 March 2008

So, we've covered why cellphones blow in the USA. But even in Europe, mobile phones are still pretty lame in terms of cost and capability. Given greater competition and lower overheads per customer, surely European mobile services should be much cheaper? And to a certain extent, they are. But even at the lower prices, the incentives are all the same: return on investment on older technology for networks, driven forward only by the relentless pace of competition. In the case of the European carriers, the bigger problem is fear.

European carriers -- like all the other ones -- abandoned voice as a revenue generator a long time ago and have bet the farm on other services: initially SMS, but now data.

But the problem with becoming a data carrier is that you risk the fate of the ISPs: back in the early to mid 90s being an ISP was an awesomely profitable business, but by the turn of the century ISPs had become commoditized, interchangeable entities, bundled in with other services. If all you are is a data pipe, and data is the same no matter who is doing the piping, then your ability to differentiate and compete vanishes to a pure price war of bandwidth per penny, and as far as companies are concerned, in a price war nobody wins.

Becoming big, fat, undifferentiated wireless data pipes is in fact the inevitable fate of mobile carriers. Why should voice be special? SMS is an even more ridiculously specific service. All of these things are just data packets being sent back and forth; you should be getting charged (as the carriers do, at the wholesale level) by the volume of data you send and receive, with the actual applications and devices sending that data entirely up to you -- you can have a fancy handset if you want, or you can have a basic email checker if you want, with as much compression as you like on either of those.

This inevitable reality scares the shit out of wireless carriers, and they are doing everything in their power to avoid commoditization. Hence their huge enthusiasm for "exclusive" devices, their massive subsidies on extravagantly complex phones, and their crazy, crazy attitude to data. Wireless carriers have either adopted crazily expensive data plans, or even worse "walled garden" solutions, where you can have as much data as you want, as long as it's coming from their server -- and their server is set up to provide you with as many hugely overpriced ringtones and shockingly poor mobile games as you want. Oh, plus news and weather. This is the AOL stage of the mobile internet -- you know, the same internet that you make phone calls and watch TV on today? Soon you'll be doing that on your mobile device as well, and the stock of the carriers will be worth as much as AOL is today, i.e. zilch.

So, you ask, if it's so obvious that cheap data services from arbitrary devices are the way forward, why isn't anybody doing it? And the answer is that soon, somebody will: but it's not going to be an existing mobile carrier. They have gigantic infrastructure investments in gigantic nationwide forests of cellphone towers, which they know they won't get a return on for several years. It is in their interests to move as slowly as possible, to eke out the existing technology until competition forces them to upgrade.

The problem for the upstart, disruptive competitor is the same, but from the other angle: they don't have a nationwide network of towers. And building one would be very expensive -- plus, then they'd be in the same bind that the mobile carriers are now.

So the eventual solution, which I think is almost here, is going to be a textbook disruptive solution: radically cheaper, initially with fewer features, but just enough to make it practical (think Linux vs. Unix, mySQL vs. Oracle). In the case of mobile telephony, it's going to be a "Skype phone": a phone that you buy outright, or maybe software that runs on your existing phone, that uses local wireless networks to make calls. It will launch initially in a densely-populated urban area: my best bet is New York, with San Francisco a close second since that's where startups live.

As a telephony solution, this has tons of problems: wi-fi hardly has universal coverage. Even in compact, densely-populated metro areas, wi-fi isn't everywhere. But here's the disruptive part: once you buy the phone, you're done. It's just using wi-fi. All your calls are free, all your data is as free as the wi-fi, and your phone has a kick-ass web browser because it needs such a fast internet connection to handle the VoIP. If you want to, you can pay the company responsible for access to a city-wide wireless network (that they're probably buying wholesale from somebody else). They make some money there, but mainly they are making money just selling the hardware itself.

Because they don't own a network, they don't have any ongoing overheads, so they don't need you to stay a customer, so they can sell their phones without contracts and still have better margins than the carriers do. And because they are selling hardware, it is in their interests to make that hardware as great as they possibly can. Suddenly, the interests of the consumer and the supplier are aligned again, and it's no longer a struggle to squeeze value out of your phone company: they love you, and you love them. Of course, as a single-purchase rather than a subscription model, they are making orders less money than mobile carriers are, but better some than none, right? In the price war for mobile services, they have suddenly brought out the laser cannon marked "free".

Your phone won't work outside your metro area, of course. But if you live in Manhattan, exactly how often do you leave? Your new VoIP phone is so cheap that you can afford a second phone, a cheap pay-as-you-go job from one of the dinosaur carriers, and still be saving money because you only use it a couple of times a month.

That's how it will begin. It will spread from metro to metro, and soon the only time your VoIP phone won't work is when it's out in the middle of nowhere. And by that point, the mobile carriers will have been forced to adapt to provide coverage to customers like you. They will become a utility, available to you no matter what hardware you're using. But until that happens, your phone will continue to suck.