The wireless business is a strange one. It involves a high degree of network operator control over the whole environment, enabling precision price discrimination through handset lock-downs, myriad price plans and less-than-wholly-open networks. On the other hand there is fearsome competition in most of the world. These opposing forces may make wireless the last bastion of the vertically integrated telco for a long time to come. Or they may make the walls come crumbling down faster than anyone thought possible. Why is this and which way will things fall?
At the heart of the matter is a paradox created by the very nature of mobility. The critical moment is the ability to locate and authenticate to a network. If you're on the move, you need to be constantly covered by the network, despite moving between coverage zones. Only a wireless wide-area network (WWAN) suffices. WWANs cover a lot of space, and overlap in a way fixed networks do not. Hence people get a lot of choice of service provider -- typically six independent networks in the US, and three to five in most other developed countries. So in one way celular is a terrible business to be in because the physics of it encourages too much competition.
But you don't just need any network tower to be in your sight. You need to be constantly provisioned to that network as you move between cells; the mere existence of technically compatible signal coverage isn't enough. Furthermore, you want to provision to the same service anywhere in the country when you travel, always with contiguous coverage. This favors the emergence of an industry structured around a few very large and pervasive wireless networks, rather than a hodge-podge of connectivity sewn together via multiple roaming agreement brokers. Just like with the Disney/Comcast deal, the theory is that when your industry has a limited number of large suppliers a vertical approach can be pulled off. Too much competition and it falls apart; the oligopoly of control isn't sustainable.
So in summary, the very act of moving around demands contiguous provisioning, and by induction a nationwide network. The huge expense required limits the number of entrants, who in turn practice the fine art of gouging the customer for every penny. The existence of early supernormal profit encourages competitors. During network build-out, regional competition is muted and many can enter the market. Eventually everyone builds perfectly overlapping networks which erode that profit.
Eventually the question of mergers comes around to restore profitability, such as the sale of AT&T Wireless. New entrants cannot easily come in and compete directly. This is because incumbents can drop prices low enough to make a new nationwide build-out unattractive. The only entrants are distuptive technologies like OFDM, virtual network operators attacking niche markets, or business models built by leveraging some other existing asset like power lines.
WiFi is really a portable network solution, rather than a truly mobile one. The lack of coverage and doppler tolerance means Mohammed's laptop needs to go to the connectivity mountain and stay there, and not the other way round. So provisioning to the network is a sporadic event. In the absence of contiguous coverage needed for mobility, being asked to pay to provision yourself isn't a big deal. The connectivity aggregators are only offering a moderate convenience advantage over a normal credit card payment. Coke can build a business around convenience of distribution. Physical thirst requires immediate satisfaction. Unless you're a sad case, Internet access in the airport lounge can probably wait the 60 seconds it takes to type in a credit card number.
On top of this, true mobility implies a small form factor device. Is that a laptop in your pocket or did you get a blind man to design your misshapen jacket? Small form factor devices don't have the user interface required to do things that need tons of bandwidth. So there's little edge a WiFi network has over a WWAN when mobile. A dual-mode cellular/WiFi phone is not of interest to a road warrior. WiFi won't undermine the economics of truly mobile cellular access. It is probably fatal to the business case for most laptop-oriented technologies like CDMA's EV-DO.
For wired connectivity, you aren't mobile, so you aren't needing to travel between provisioning zones. Setting up your DSL or cable account is a one-time hassle. Clicking once at the start of the evening that you promise to pay the hotel $10 for the access isn't a big deal. Clicking OK on your phone as you drive down the highway just to keep a call alive is a big deal. Interestingly, a dual-mode WiFi/cellular phone is of interest as a fixed-line displacement product -- but only as a replacement for a cordless phone converged into a cellphone handset, not as a means of extending mobility.
So perhaps what we're really seeing is a re-layering of the industry into three tiers: fixed, portable and mobile. The network may be a dumb pipe in each case, but the mobile end of the spectrum (no pun intended) will remain closed and controlled. The "end-to-end" concept will be irrelevant because users may be have to pay the full value they receive for each service rather than the marginal cost of a packet. Every service will still need permission of the lethargic carrier.
User- or municipal-built networks using WiFi or WiMax will fail to achieve universal provisioning, because it involves an economic co-ordination problem that is not worth solving. The number of people both mobile and under-served by cellular is too small. So they will not cater to the truly mobile user for the forseeable future. Some limited portability market may survive a shake-out -- he who has the greatest usability and convenience for provisioning will win out. The only price premium will come from that convenience of provisioning, and no application or device control will exist.
Stationary access (fixed or wireless) will be cheap -- it is getting there already. The user will not only overcome the provisioning problem, but will even build their own network access if necessary. Such access providers will be totally driven out of the services market, including voice. Telepocalypse ho!
Note that it is the stationary nature of the user that determines the industry structure here, not the use of fiber, copper, fixed wireless, satellite or yodelling.
As a last thought, a study of the airline industry I once saw suggested that fares were little affected when a monopoly route became a duopoly. A third entrant resulted in a significant price drop, and a fourth (or more) created something akin to the nirvana of perfect competition. Thus while mobility will come at a premium, the premium is very sensitive to the number of operators. The switching cost for airline customers is lower than that for cellular customers. So cellular is probably only competitive at 4 or more nationwide networks. Maybe something for the competition authorities to keep in mind when approving consolidation of the cellular carriers...?
Posted by Martin Geddes at 11:09 PMTrackBack URL for this entry:
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