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Can you hear me now? The operator-centric mobile model is over

Last week, T-Mobile Germany made some waves by banning Skype for the iPhone. Some might read this as a long overdue reassertion of operator power, but I disagree. A few months ago, I learned from a reliable source that a major operator was deliberately not shipping a very popular mobile phone model that they knew their customers wanted because the phone didn’t give them enough control over what the customer does. The phone was too open. This is exactly what Google was talking about back in 2007 when it insisted on openness as a condition to bidding in the FCC’s spectrum auction.

Ten years ago, when I covered mobile operators on Wall Street, they used to cite their vast capital expenditure on building on their cellular networks as their core differentiator. This was the reality behind Verizon’s amusing “can you hear me now?” campaign.


Today, operators have recognized that, for the most part, coverage is not a differentiator. It’s a “must have,” but it’s not really enough to keep a customer from switching providers if the new cool phone is being offered somewhere else. What do you call a business with massive capital expenditures, an entirely commoditized service, high customer support costs, even higher customer acquisition costs, and no customer loyalty? I don’t know, but that’s not a business I want to be in.

Neither do the operators, it seems – and for years they have been doing everything in their power to ensure that Wall Street doesn’t figure out that their business model has run out of juice. The operators have invested untold sums of money in acquiring content, services, and software in an effort to “leverage” their relationship with their customers. The examples are endless. Verizon’s VCast music service. Vodafone’s acquisition of ZYB’s social network. Orange France’s acquisition of Cityvox. The list goes on. There are literally hundreds of start-ups today that share the same essential vision: “I will sell the operators on my ability to help them avoid their fate as a dumb pipe.” I have no doubt that this vision is an appealing one for operators – and I am rarely skeptical or surprised when such start-ups demonstrate “significant interest” or even deployment deals from operators. In some cases, these “value added services” can make money and drive value – but they rarely do. I don’t want VodaFone’s social network, I want Facebook. I don’t want Verizon’s music service, I want Pandora. History is inexorably moving in this direction – towards increased openness and away from the operator-centric models.

T-Mobile’s decision to ban Skype is not a sign of power – it’s a sign of weakness. We are witnessing the last gasp (or one of the last gasps) of a dying model. Like it or not, mobile operators are going to increasingly find themselves relegated to “dumb pipe” status. They fought number portability. They’ve tightly controlled the type and capability of devices sold to their customers. They’ve blocked access to software that users clearly want. I can’t think of any examples of industries surviving by banning law-abiding customers from doing things that they clearly want to do and should be able to do.

The more interesting question is not whether or not this shift will take place – but how fast? A few days ago, a poorly-titled but outstanding talk by David Pogue at TED came across my iPod. David Pogue is a technology columnist at the New York Times with a background in musical theater, which sometimes causes him to break into song. Pogue’s talk was titled “cool new things you can do with your mobile phone,” but it could have been titled something much more interesting because in it, he lays the groundwork for the end of the age of the mobile operator.

Pogue demonstrates four things that should have the operators either running for cover or dusting off their promotional material for “unlimited data plans:”

  1. VOIP on a mobile phone. David demonstrates how easy it is to make a call with a Skype client on a mobile phone. Anyone under 30 knows what Skype is and has no appetite for expensive cell-phone bills just for a basic services such as “voice calling.” The under-30 crowd is the first “post dial tone generation.” They rarely pay an operator for landline dial-tone and have no real need to pay for cellular dial-tone either. What they want (and all they need) is Internet access and an open device. One of the most exciting Israeli start-ups, Fring, is playing exactly to this trend – and has signed up several million users already. The good news is that with mobile platform convergence around 3-4 major platforms, its getting easier and cheaper for software developers such as Skype and Fring to develop and deliver their software to users. The emergence of off-deck “appstores” is only going to accelerate this.
  2. “Mobile” calling over wifi. Wifi is the dark horse that seems to have already upset this race. We all have little tiny wireless base-stations in our homes. Many of them are open. Even my grandmother has one. They don’t belong to any operator’s network, but they provide us with effective wireless coverage in the places we spend most of our time: our homes, offices, and favorite cafes. Do I need the cellular network when I’m driving or walking around? Absolutely. And will I be willing to pay for that? You bet. But does my mobile operator see even a penny of revenue when I’m sitting at a cafe downloading songs onto my iPhone via WiFi? Nope. Recently, operators have been touting the idea of femtocells – small base-stations owned by them that users will install in their homes. It’s a great idea in theory and certainly makes sense in terms of the operators’ own network topology, but it’s hard to believe that expensive, dedicated, and tightly controlled hardware is going to be widely deployed to do something that an entirely homegrown, low-cost, and unmanaged wifi network seems to have already achieved. I’m already covered by free (wifi) wireless access at least 75% of the time. I’m already using it for data – and I think voice will happen sooner than the operators would like. Ironically, the service Pogue demonstrates is offered by T-Mobile.
  3. Wifi to cellular handoff. I don’t know how widespread or realistic this capability is, but Pogue clearly demonstrates it in all its glory. It is truly a game-changer because, once widespread, wifi will gain real credibility as an infrastructure for voice calling.
  4. Unstoppable off-deck services. Throughout his talk, Pogue demonstrates a series of off-deck mobile services that would be pretty difficult for operators to block (at least politically if not technically). These include services that bring voicemail into the Internet age, replace traditional 411 directory services, and place a world of information in the palm of your hand via voice or SMS. Beyond being incredibly useful, these services demonstrate two critical points. First, consumers will increasingly look beyond the operator to provide core voice-calling related services such as director services and voicemail. Secondly, consumers will become increasingly comfortable accessing traditional internet search directly from their mobile phone either by voice, sms, wap, dedicated search apps, or traditional browsing. Just like on the wired internet, search will be the key to breaking the grip of the operator portal. Once we learned how to search the web, we relied on AOL and Yahoo “portal” pages much less. And once we learn to search the Internet from our mobile, we won’t need or want the operators’ portals either.

There is no such thing as the mobile Internet. There is just the Internet. In his talk, Pogue refers to the “completed marriage of the Internet and the mobile.” That is, in fact, exactly what we are witnessing. The mobile device is rapidly evolving into just another window onto the web. Whether we are talking about the iPhone, the rumored CrunchPad, the Kindle, or a netbook, it’s all pretty much the same. What we want is a window to the web that we carry around in our pocket, our briefcase, or our backpack. Voice communication is one type of service that we’ll expect from all of these devices. Browsing is another. What we don’t want is anyone or anything standing between us and the Internet, between us and great third-party applications, or between us and reasonably-priced access fees. If operators don’t proactively unlock their phones, users will (and already are) – and I expect this will start happening faster than the operators would want us to believe.

David Pogue’s talk is below:


{ 2 } Comments

  1. levshapiro | April 11, 2009 at 11:30 pm | Permalink

    gil, i agree with the thesis of your piece. Given my exposure to the carrier-dominant US mobile ecosystem, I am a bit cynical about the likelihood that Fring or some other start-up is about to topple the status quo. Historically, the carriers have proven extremely adept at extracting the lion’s share of industry value…even if that stifles innovation and customer adoption.

    At the moment, AT&T has churn of 1.3% across the universe of subscribers but iPhone churn is only .7%.Therefore, despite the various “make my life easier” applications that are now available on the different app stores, AT&T is seeing improved ARPU and lower Churn by becoming a dumb pipe.

    Your point about WiFi is valid. The main threat to carriers may be the degradation of their networks as consumers use more and more data rich applications like video. DoCoMo will actually phase out entirely its 2G network next year. WiFi solves a problem that 3G does not…the carriers need to address the quality of their networks to maintain their dominant positions.

    Anyone disagree?

  2. Aner Ravon | April 13, 2009 at 3:39 am | Permalink

    I wish I agreed about Skype and T-Mobile, unfortunately the operator reign is long way from being over.

    People dont really need Skype on their mobile phones. Skype is trying to compete with operators using their own network which is a problem. Skype offers no real advantage except for price. And we know price is not a real advantage as operators will offer all you can eat packages which users will accept. I doubt T-Mobile’s action will stir any churn at all and I definitely see other operators following their footsteps. The only reason they haven’t done so in the past was that mobile skype was nothing but a minor nuisance.

    The real opportunity is with off deck apps as you well noted. This is where it all makes sense – the internet offers a real advantage and the operator still gets paid. When it comes to voice, we are talking 10 years, at least, before operator dominance will be really challenged.

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