Wireless Walks in Wirelines Shoes

Those of you that were in the long-distance business for a while probably recall the pricing evolution from metered (distance-sensitive) to per-minute to free nights and weekends to friends & family to flat-rate minute buckets to flat-rate unlimited.

I find it amusing that the wireless industry is now following a similar trajectory. Low-cost nights and weekends and flat-rated minute buckets are the defacto standard. In the last 12-18 months, the big thing has been the calling circle. Alltel Corp. has My Circle and T-Mobile USA Inc. has My Faves, for example.

The difference with these plans compared to the long-distance ones is that they include users on other networks. This is because in long-distance, there were so many competitors that you would do what you could to acquire more customers. With wireless, there are fewer competitors, but the competition is no less steep. Here the goal is to reduce churn as much as it is to acquire new customers. You wouldnt think that this would be too big of a problem since users are tied to a network with a subsidized device and huge cancellation penalties. The reasons for defection primarily are twofold economic and emotional. Who do I call the most and how can I spend less calling them? If I have to be in network, then I might be persuaded to jump ship. Only a handful of people have the power to compel us to move, and some wireless companies have hit upon a way to stop even that temptation.

This dynamic may change. Companies like Google Inc. are pushing to separate network and device. Theres nothing unique about that. It happened in the wireline industry nearly 30 years ago. Its Carterfone Decision again.

In 1968, the FCC allowed the Carterfone a device invented by Thomas Carter that connected a two-way mobile radio system to the PSTN and other devices to be connected to the AT&T network as long as they did not cause damage to the system. This ruling opened up the device market to answering machines, fax machines, cordless phones, computer modems in all shapes, sizes and prices.

In March 2007, a petition was filed by Skype requesting that the FCC to apply the Carterfone regulations to the wireless industry. If history is any guide, it will happen, but I wouldnt expect it to be soon. The mobile operators are banding together to prevent or stave it off. However, the FCC has sided with Google in its proposal that part of the new 700MHz spectrum be reserved for open device access networks (see story).

Even though, in this case, it wouldnt help that many current users, it would open the doors to a future with greater innovation in devices and applications that are not tied to the mobile network operator. It would change drastically the economics for mobile operators as well. It certainly did for the wireline carriers.

If that wasnt enough, wireless operators are facing yet another demon that wireline carriers have faced attrition from VoIP. They are whistling past the graveyard, analyst James Heath, research director for broadband at Dittberner Associates Inc., told me. If you create a broadband network for wireless, which is what they want to do, whats going to stop someone from setting up a wireless Vonage. Indeed. Travelers do this all the time by making calls using their softphones over a laptop data card.

In other words, the cannibalization of the fixed line telephone by the broadband technology will happen for the wireless guys, too, Heath says.

The dilemma then is mobile operators need to create new features using broadband capabilities that customers are willing to pay for to make up for the loss of revenue of wireless voice. But that may not be as easy as it sounds, says Heath. Operators may not be able to create bandwidth enough fast enough to make applications interesting enough to replace the revenue lost to VoIP.

Welcome to the wireline world

KHALI HENDERSON
Group Editor

IN BOX : Letter to the Editor

Dear Khali,

You did an excellent distillation of the wireline carriers pricing history and are right on target with your forecast of what is to come for the wireless industry. The wireless carriers should pay attention to your editorial and welcome and take advantage of, rather than fight the winds of change.

The business model where the cellular carrier controls the end-user devices and network interconnection while maintaining artificially high the usage prices is not sustainable. Already, I have seen the excellent results by small cellular carriers that have introduced a low $35/month unlimited on-net and off-net (all of the USA and Puerto Rico included), no contracts, no deposit plan.  They can do that due to the fact that the exchange of traffic between wireless carriers is done on a bill and keep basis and the cellular carries team up with inter-exchange carriers that are offering them low priced long-distance service via the Internet. At the end of the day, everyone concentrates in what they do better.

A Carterphone rule for the wireless industry will be better for the wireless industry, just as it was for the wireline monopolies 30 years ago (although at that time they fought it). The change will lead to innovation, additional investment, and economic growth as the wireless and wireline services converge with broadband Internet services fostered by novel social networking applications. The wireless carriers should open up to end-user device interconnection instead of trying to use exclusive handsets together with multi-year contracts in a futile attempt to reduce churn. They should let the innovation flourish at the end user side and make alliances with companies that will bring new services to their mutual customers.  The wireless carriers, just like the wireline carriers have learned, own the network and the licenses.  They can own the customers only if they offer the costumers what they want, not what the wireless carrier decides they need. Otherwise the customers will find alternate ways to get what they want.  And there lies the challenge. Who will learn from history and who will be doomed to repeat it?

Best regards,
Luis G. Romero Font
President
Optivon
Tampa, Fla.