Thursday, 23 June 2011

How to Shape the Mobile Data Market

(Part 3 of "Who Will Pay for Mobile Data?")

There's a big nasty dilemma hidden at the heart of mobile computing:  No one knows how we'll pay for all that mobile data we're supposed to use in the next few years.  The question doesn't get much publicity, but it drives some of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

This is the conclusion of a three-part series on the issue. In Part 1 (link), I talked about the tech industry's unlimited vision for the growth of mobile data, and why I think it won't come true because we'll run out of people willing to pay for data service

In Part 2 (link), I discussed the alternate scenario, in which everyone is willing to pay for mobile data and adoption of it continues to accelerate.  In this case, the mobile operators will need to invest urgently in increased capacity, and even with that investment we'll eventually run out of wireless bandwidth. 

The two scenarios leave mobile operators trapped between the need to expand their networks and the fear that they won't be able to pay for the expansion.  So the operators are trying to get other parties to help pay for the network.  I believe that's the real driver behind the net neutrality debate and the rhetoric about a wireless bandwidth "crisis."  Ultimately, government regulators will decide who will pay and how the mobile data network is structured, which will have a huge effect on which companies win and what we can do with the network.

In this part I'll give my take on what we should do about the situation, and I'll talk about the opportunities all of this change creates for operators, handset companies, and developers.

The look of mobile data in the future

If you only took away two messages from the first two posts in this series, these are the ones I'd want you to remember:

1. The only thing we can predict for sure about the future of mobile data is that it's unpredictable.  Maybe I'm right that it'll saturate soon; maybe Cisco's right that it'll go on growing explosively for years; maybe we'll average out to something in the middle.  The variables in play are so numerous, and so complicated, that absolutely no one can predict for sure what will happen.

In that sort of uncertain situation, I think our top priority should be to keep the mobile market as flexible as possible, so it can respond quickly and efficiently to whatever the customers decide to do.  That means we should ensure that market signals -- things like pricing and customer demand -- are as clear and unambiguous as possible, so we'll all know what the real level of demand is, and we can all respond to the same base of information.  The word "transparency" gets overused these days, but goodness gracious we need as much transparency as possible in mobile data.

2. We should plan wired and wireless data together.  We need to deal with the reality of the mobile network and market, not what we might want it to be.  And the reality is that we're not creating a separate wireless data network, we're creating a single integrated wired and wireless network.  A lot of the political rhetoric about mobile data talks about a completely cellular data future as some sort of public goal.  It's more like a public fantasy.  Every forecast I've seen from the wireless operators requires that they be able to offload a lot of traffic to the wired network.  Forget about wireless replacing wired; what we need to do is make sure they both work together well, with each focusing on what they do best.  That means wired is used whenever possible because in most cases it's cheaper and higher capacity, while wireless fills in the gaps.

We should set up a level playing field between wired and wireless so the market can sort out which traffic should go where.  Artificial political goals for the penetration of wireless, or favoring one network technology over another, are incredibly dangerous because they may lock in a market structure that turns out to be unaffordable.  In fact, because the market is so unpredictable, those sorts of goals are almost certain to be wrong.

So I get queasy when the US Federal Communications Commission, and even big companies like Google, argue that wireless data should have different regulations than wired data.  I think that increases the risk that we'll accidently bias the overall network in the wrong direction.

What we should do

As I've said before, I am not a big fan of government regulation in business, because it's usually inefficient and slow.  However, there are some situations in which you can't get the government out of the market, and I think cellular wireless is one of those cases because the public ultimately owns the airwaves in most countries.

So if we're going to have government regulation, let's do it right. 

The grand bargain.  The operators are asking for some mammoth benefits.  In the US, some of the biggest operators want to merge.  Okay, let's let them do it.  I don't think TMobile US is large enough to be viable in the long term anyway, so we need to merge it with either AT&T or Sprint.  If TMobile joins AT&T, which is the current proposal, the next merger in the US will be Verizon-Sprint; I think we have to accept that as well, for the same reason. 

The operators in the US and Europe want more spectrum allocated to them.  Again, I'd go ahead with it.  In the US, the television networks aren't using the extra spectrum, so it ought to go somewhere useful.

But in return, we should demand serious changes in the cellular data market.  I'm not talking about tweaks at the edges, I mean permanent changes in the rules of the game, designed to ensure lasting competition and a more flexible market that responds better to customer needs.

Here's what I propose:

Stop whining about the wireless "crisis" 

The first step is to change our rhetoric.  The bandwidth "crisis" is the tech industry's equivalent of the War on Terror: it's based on a genuine problem, it can never be completely solved, and it can be used to justify many actions that people might not otherwise consider.

The idea of a wireless crisis is an incredibly convenient tool for motivating government regulators.  Elected officials assume they are responsible for solving a wireless spectrum crisis, since they allocate wireless spectrum.  If it were called a "Verizon and AT&T don't want to pay for a bunch more cell towers crisis," I don't think President Obama would propose spending $50 billion on it.

This isn't just a US issue.  Anything one government does in mobile data is played back in other countries as a justification for equivalent actions there.  On a recent trip to Australia, I was surprised to hear a radio commentator complaining at length about the government's plan to supply broadband service to many Australians through landlines rather than wireless.  You can make a good argument for using landlines, since (as we discussed in part 2) they can carry a lot more data than wireless.  But the commentator was upset that Australia was failing to do "what Barack Obama is doing in the United States."

It's reasonable to ask what's so wrong with a little crisis hype and international competition.  After all, governments move far too slowly in most cases, so if a bit of alarming rhetoric makes them respond faster, isn't that a good thing?  The trouble is that we'll all have to live with the results after the "crisis" is "solved."  In that world, no matter how much spectrum we allocate to wireless data, service will continue to have slowdowns, outages and service gaps, especially in the United States, because it's more profitable for the operators to run their networks right at the edge of overload (in this sense they have the same financial incentives as airlines). 

We're lying when we tell people that the whole wireless data network could collapse.  Although service problems are a certainty, there is virtually zero risk of a full network collapse, unless the operators cause it themselves by underpricing data plans and selling more smartphones than they can support.  And we're misleading people when we say that prices will go up unless we allocate more spectrum.  Prices will eventually go up no matter how much spectrum we allocate to data, because demand for cellular data is growing faster than supply.

By overstating the risks and talking about the "crisis" as a temporary, fixable thing, we create an unrealistic public expectation for the quality and price of cellular data in the future.  That may well be advantageous for a couple of quarters or even a year, but in the long run it will erode public trust when we don't deliver the benefits we promised.  The wireless operators, especially AT&T in the US, already have big image problems.  Overpromising will make the problems worse.  To the extent that government agencies, and mobile tech companies like Apple and Google, participate in the crisis rhetoric, they risk their credibility as well.

We need to ask ourselves as an industry if we want to have the same sort of public image in five years as the airlines have today.  If not, we should be honest with people now.  For example, I think there is a convincing, legitimate case for reallocating old TV spectrum for data services.  Without it, mobile data prices will go up faster, and a lot of the features many of us want from mobile data may not be affordable.  But we should also be honest with people that cellular bandwidth overload is a chronic disease rather than a crisis, the network is not going to collapse unless we're incompetent, cellular service will not be as fast or cheap per bit as a wired, and cellular data will generally be a supplement to our wired broadband, not a replacement.

Make the cellular data market transparent

The problem with the cellular data market as it's structured today is that it often hides from users the real cost of the network they use, so they can't make well informed choices, and it's hard for us to tell which buying patterns are genuine and which ones have been created artificially.  For example, the cost of your smart phone is subsidized, so you don't realize what an expensive piece of hardware you're carrying in your pocket.  You're told that you have unlimited data, but actually if you use it too much your operator will probably reduce your data speed without telling you. 

By making cellular data seem cheaper than it is, we encourage people to use the network more, increasing the very overload that we're supposed to be fixing.  Some of the proposals for the future of mobile data would further increase the overuse of cellular data by making it seem even cheaper to users.

The structure of the mobile market also limits competition among mobile operators (especially in the US), and reduces competition between mobile phone manufacturers.

I think this systematic distortion of the market must stop.  If people could see the real cost of cellular data, they would make better-informed decisions about when and how to use it, and we wouldn't need secret back-end controls on traffic.  Meanwhile, more competition in services and phones would mean faster innovation, more consumer choice, and more efficient prices.

Here are some specific steps I think we should take:

1.  Ban covert traffic limits. 
Today some wireless operators (and some wired ones as well) are quietly reducing the quality of service they deliver to some users, without telling them.  This is done through various techniques including "traffic shaping" (prioritizing or delaying certain types of data packets) and "throttling" (reducing the throughput of the network, or the speed of certain transactions).  In effect it usually means reducing the connection speed of people or apps that use the network the most.  For example, Dean Bubley recently wrote about an ISP who consistently reduced data throughput at particular times of the day (link).

There are some types of traffic management that make sense.  E-mail spam can be reduced through throttling that limits the number of e-mails that can be sent by a single account per second.  Throttling can also be used to limit malware attacks, by reducing the ability of a rogue app to flood the network with traffic.  And I think it's fine to enforce the speed you paid for in your Internet connection.  For instance, if you've paid for a 10 MBPS connection and the operator limits your throughput to 10 MBPS, I do not have a problem with that.

But in some cases the operators are limiting network performance to covertly restrict users, either by interfering with certain types of traffic, or by limiting the speeds of some users without telling them.  For example, the current Verizon Wireless terms of service give them the right to reduce the throughput in your "unlimited" data plan if you're in the top 5% of data users (link).  They can do this without notifying you.

This sort of hidden restriction is damaging to the market because people may sign up for a wireless plan believing they will get more service than they actually will.  They can't make a fully informed decision between wired and wireless service because they don't know how much wireless data they're really going to get.  This may misallocate resources and make the wireless network even more overloaded than it would be otherwise.

The answer to this is simple: Require operators to notify a customer when they have throttled or shaped his or her service (other than enforcing the promised speed of the connection).  I am not against throttling in general, but it should not be done without notification.  A text message would be fine.  The Internet speedometer, which I discuss below, will also help with this problem.

2. Require a data gas gauge and speedometer in smartphones.  Can you imagine buying a car that didn't have a gas gauge and speedometer?  That's essentially what we do today with smartphones.  For most smartphone users today, there is no easy way to tell how much data throughput you're getting from the network, and how close you are to any limits on your data usage.  Some operators bundle apps to do this, some have more arcane ways to check, and some send you a text if you get close to the limit.  But I think it's fair to say that most people are in the dark about their usage until they get their monthly bill, and if they do go over a limit they will have trouble figuring out why.

This is an easy problem to fix.  We should require that every smartphone have an app, accessible at the same level as the Settings app, that tells the user how close he or she is to hitting any data caps in the service plan (for example, if you are a Verizon user, how close are you to getting throttled?).  The app should also show how much data you're using at any particular time, so you can see how much throughput the network is really giving you. 

We also should modify the signal strength bars to change color depending on how much data you're consuming at any moment.  This would show you when you're using a website or app that uses huge chunks of data.  When customers see that video or Flash makes their signal bars turn red, they'll be much more cautious about using those sites on the wireless network.

3.  Decouple the phone purchase from the network.  Currently in the US and much of Europe, if you sign a contract for a data plan, you get a discount of several hundred dollars on a new phone purchased at the same time. But you have to buy the phone through the mobile operator, giving them huge control over the selection and features of the phones they sell.  Basically, users are not free to pick the phones they want; they have to take the phones their operator chooses to sell.

This operator lock-in is subject to all sorts of backroom manipulation.  Weak phone vendors are forced to comply with a huge list of tests and requirements, while for stronger vendors the rules are often waived.  I've also been told privately by some operators that they deliberately discriminate against some handset vendors because they just don't like them.

The handset vendors aren't completely clean either.  A vendor with a hot handset may restrict its availability to a single operator in order to extract concessions from them.  Can you say iPhone?

It's a wonder that some operator or handset company hasn't been sued already for restraint of trade.  With the amount of operator shelf space shrinking in the US due to mergers, I think it's only a matter of time before there's a legal detonation. 

In addition to the legal risk, these restrictions have the effect of restricting customer choice and competition, so they are bad for transparency.  It's time to open up the handset market.  To make that happen, subsidies should be separated from the purchase of a particular phone.  When someone signs up for a plan, they should get a voucher for a discount on any phone.  The voucher can be used at that time to buy a phone in the operator's store, or it can be used later to buy a phone in any other store. 

This would encourage more selection and competition in mobile phones.  It would create more direct competition between operator service plans.  And it would put the wireless and wired networks on an even footing (can you imagine a wired data provider limiting the brands of PC that you can use with your cable data connection?).

In the US, I think we should consider one other step to open up the handset market.  In most of Europe, and many other parts of the world, there is a vigorous retail market in mobile phones sold separately from an operator.  Because everyone is on the same network standard, and because all the phones use SIM cards, it is easy to buy a new phone at retail and pop your card into it.  You do lose the subsidy, but virtually all customers know they can at least switch phones if they really want to.  This leads to a much larger selection of phones, and to higher competition between operators because it's easier to choose separately the phone and service plan you want.

The US market is much less open.  Most mobile phones are sold only through operator stores, and it can be very hard to switch from one operator to another because they have different network technologies, and some of them don't even use SIM cards.  Because it's so hard to switch phones, I think most US mobile users are barely even aware of what a SIM card is, and how to find it in their phone (most of them would probably confuse it with the SD card).

To open up the handset market, the US should require that all mobile phones use SIM cards, and that they be switchable between the major operator networks.  That way someone could go into a consumer electronics store, buy the phone they want, and use it with any network.  This will have to be phased in over time, but we're already moving toward it anyway.  Verizon and AT&T are both moving to LTE, and there are very strong rumors that Sprint will do so as well.  So some day we'll have one standard cellular technology base in the US.  In the meantime, we'll have to buy dual-mode phones that use both LTE and either GSM or CDMA, depending on which operator you use.  But the chipsets for smartphones are increasingly capable of handling several different networks, so they can switch between LTE, GSM and CDMA.  I think it would be reasonable to require that future smartphones sold in the US be SIM-based and capable of operating on all three standards.  I think the real question is how quickly we could phase in that requirement; if you have thoughts on that please post a comment.

4. Enable toll-free apps and websites.  As I discussed in Part 1, we need the data equivalent of a toll-free phone call, in which a website or mobile app company would pay for the data traffic generated by a particular app or site.  This requires changes to the operators' billing infrastructure, but I think it will be essential for enabling the growth of mobile data.  It should be an extremely high priority for the operators, and it's in the interest of web and app companies to get together with the operators to define standards for these charges, so they'll be easy for developers to work with.  I suspect there's an important role government regulators can play in helping to encourage these negotiations.

5. Do not allow the operators, or the web companies, to discriminate against one-another.  I agonized over this one a lot.  The operators would like to be able to charge web companies extra if they want reliable delivery of data (for example, in a time-sensitive app like video streaming), or if they want a guarantee of a certain level of throughput.  I understand why they want to do this, because it would help pay for their infrastructure, and I do not think it is inherently evil.  But I think it would cause too much collateral damage to the mobile market.  In fact, I think it would put us on a road toward wrecking mobile data.

The first problem is that hidden back-end charges like this are essentially an invisible subsidy for cellular data.  A user won't know the real cost of the data he or she is using, and this could end up increasing traffic on the cellular network artificially, contributing to data overload.

There are also big practical problems with implementing charges for quality of service.  As Dean Bubley has pointed out repeatedly (link), there are huge drawbacks to this sort of approach.  To give one example, there is no way to guarantee quality of service when you don't know how overloaded a particular cell site will be.  If one high-priority video session comes in, does the operator shut down five other "regular" data sessions to make way for the high-priority one?  In that case, the "regular" customers are not getting the service they paid for, and they won't even know it.  They'll just think something is wrong with the web app they're using.

I agree with Dean that there's no way to make a system like this work predictably and fairly.  Better to just charge users for the data they consume, let them know how much that costs, and allow them to adjust their own usage patterns.

The other reason we should ban quality of service fees is because in some cases they could produce in a destructive power struggle between operators and websites, with users caught in the middle.  US cable television is a nightmare example of what not to do. 

In cable television, it's common for network operators and content companies (the cable channels) to pay each other for services.  For example, Home Shopping Network reportedly pays cable TV companies to be included in your service package, because they know they'll make more money if they're seen in more homes.  They are, effectively, subsidizing your cable television service. 

On the other hand, many of the most popular channels charge the cable companies a fee for the privilege of carrying them.  For example, ESPN (the leading US sports network) reportedly charges cable companies about $4 per month per household; other popular channels are in the 5-20 cent per month range. 

The same sorts of things could happen in the mobile web if the operators could charge websites for service.  For instance, what if Facebook started offering video streaming as part of its services?  If the mobile operators tried to charge Facebook for its network usage, what is to stop Facebook from turning around and demanding a fee from the operators for allowing them to carry Facebook? 

Unless we're very careful, we could end up with a situation in mobile similar to the one in cable TV, where users get caught in disputes between the network operators and the content creators.  Some of those arguments in the US have been incredibly ugly, with users tied into long-term contracts for cable service but unable to access the channels they thought they paid for.  And remember, in cable we get these messes even though we have only have about a hundred channels to negotiate.  On the web, you have literally millions of them.

The operators should not kid themselves that they would win in this sort of showdown.  If Facebook cut off its traffic to Sprint's servers, what would happen?  Would users abandon Facebook because it's not on the Sprint network -- or would they switch off of Sprint because it doesn't have Facebook?  I think we all know the answer to that: there would be crowds holding pitchforks and torches outside the Sprint stores.  The websites have far stronger brands and far more user loyalty than the operators.  So it's unlikely that the operators will really be able to coerce money out of the most successful websites.

In practice, I think the operators would be able to get fees only from small startups that don't have brand awareness with users.  That becomes a barrier to entry for those companies, which historically have been the source of most online innovation.  To give a real-world example of what that could do to the web, look again at cable television programming: A small number of networks dominate the selection of channels, resulting in slow innovation and reduced choice.  There is very low turnover in these channels. 

If the web worked like cable TV does, we'd all still be using AOL for e-mail.

I've talked with people at small startup cable channels, and they are incredibly bitter about the barriers they face getting placement on cable systems.  They're actually counting on the web to let them bypass the cable operators.

I think the only way to make the mobile market work efficiently is to make the payment mechanisms as clear and visible as possible.  Make users pay for the data they use, and allow web and app companies to make their sites and apps toll-free if they want to, but don't start creating hidden layers of fees and subsidies.  That will just distort the market and expose operators to retaliation.  My operator friends, this is a war you cannot win -- so don't start the battle.

To formalize this settlement, government regulators should ban both operators discriminating against websites or types of traffic, and websites withholding their content from a particular operator or network.

6.  Encourage open WiFi.
  As I mentioned above, we're not creating a standalone cellular network, we're creating an integrated wired and wireless network.  WiFi has a critical role to play in that network, and we should make it even more central.  Here's a question for you:  How often have you tried to find an available WiFi network, and seen no networks at all in range?  I can't speak for other countries, but it almost never happens to me in any populated part of the US.  But how many times have you tried to sign onto WiFi and found only locked access points?  That happens to me all the time. 

We already have a very dense, well-populated wireless front end to the data network in most places that matter, but we can't use it fully because most of the access points are locked down.

There are good reasons for the lockdown.  If you leave your WiFi router open, it can be hacked (actually, it can also be hacked if you keep it locked, but that's a topic for a different post).  Also, in the US if someone downloads child pornography or does something else illegal on the Internet, the law often goes after the router owner because that's the only person they can find.  You can read some horror stories here.

But getting those connections opened up would have huge benefits for the public, because it would take some of the pressure off cellular wireless.  Rather than telling people to close off their connections, we should be encouraging them to leave them open.  Regulators could help this in a couple of ways:

--First, we should require that the next generation of WiFi routers have a pass-through feature enabling public access to the Internet without giving access to the user's home network.  Traffic from the user's private connection should have priority over the public one, and if public usage is excessive the user should be able to throttle it.

--Second, the law should be changed to protect people whose open wireless connections are abused without their permission.


So that's how I think the future of mobile data will look: unpredictable growth, always skating the line between overloaded and overpriced, and with a huge variety of users, almost all of them with some sort of limits on their data service, and many with budget plans that encourage very careful use of data.  For the health of everyone involved in the market, I hope we'll also get regulations that make the market more transparent, and more open to new players.

It's a different mobile data world than many analysts have been predicting, but that's not necessarily a bad thing.  Often the best business opportunities happen when conditions change unpredictably.  I think this is one of those times.  So I'd like to conclude by recapping the big opportunities as I see them...

For handset vendors, I think the most interesting new opportunity will be the smartphone designed for people with limited data budgets.  How do you entice people into gradually using more data?  This is an opportunity to do a fundamental rethinking of the smartphone user experience.  Since different people will probably respond to different data features, I think it will also be an opportunity for smartphone vendors to stake out their own market segments, helping to insulate them from the intense commodity price pressure we're likely to see in generic smartphones as the market fills up.
Try to think like an automobile vendor in 1950.  Do you want to compete with everyone else in midsize sedans, or would you like to dominate a smaller segment like station wagons or sports cars?

To target a segment, you'll need to hire people who know how to design integrated hardware-software systems rather than just devices, and you'll need to learn to partner closely with app and web companies as peers (rather than the serf-overlord relationships you're used to having).

In the last couple of days I've been contacted privately by some people who predict even more revolutionary moves by the handset companies, most notably the idea of selling a phone at retail bundled with airtime that you've bought from an operator.  In other words, the phone comes with its own network service.  That's what Amazon did with Kindle, and there's nothing in principle to prevent a handset company from doing the same thing. 

I think there would be a lot of implementation challenges, most notably keeping access to that third party network if it starts to run out of capacity.  But it would be intriguing to see what someone like Apple would do with this.

For operators, I think it's important to pick your battles.  Although covert traffic-shaping and charging websites for service is very seductive, in the long term that will lead you into intense conflicts that you're not likely to win.  It would also create more incentives for the handset companies to set up their own virtual networks, which really would transform your networks into dumb pipes.

I think it's better to focus on new business models that are a win for both you and your business partners.  The most appealing of these to me is toll-free data.  That would be intriguing to a lot of web and mobile app companies, allowing you to build cooperative alliances with them.  And it's a whole new revenue stream that might become very large over time.

For web and app developers, the emerging segmentation of mobile data makes the idea of "enticement" even more important than it is today.  How do you give people some software for free and then entice them into paying for add-ons or other apps?  Already most of the mobile app developers I talk to are thinking along those lines, and obviously that business model is very well established on the web.  But as smartphones reach down to more price-sensitive people who are less enthusiastic about data, there will be intense demand for apps and websites that can entice them into starting to pay for bits of mobile data. 

These "data on-ramp" apps are not always intuitively obvious, and will probably differ by country (for example, mobile horoscopes were a major driver of beginning data use in parts of Asia).  The companies that can find the on-ramps will be incredibly valuable to investors, handset companies, and operators.

What do you think?

That's my take on the situation. What do you agree and disagree with?  What else would you add to the picture?  How does it differ in your country?  And most importantly, what do you think the opportunities are?  Please post a comment and share your ideas.

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