Monday, June 21, 2010

Some dumb pipes worth more than others

A longstanding concern of telecommunications carriers is that they will be reduced to the providers of “dumb pipes.” While demand for the Internet — and particularly the mobile Internet — continues to grow, they may find profit margins squeezed to commodity levels if they are merely providing commodity services.

The near-term role of mobile operators was the key subject of discussion at the inaugural CEO Summit of the Mobile Entrepreneurs Forum Monday in London. In part, it was because the first keynote speaker was Vodafone cofounder (and longtime board member) Dr. Mike Walker, OBE. In part, it was because the European carriers were prominently sprinkled among the audience at the 11 discussion tables.

Thus it should not have been surprising that — framed by a sunny operator keynote — that most of the tables took an optimistic view of the first discussion question of our breakout session: “what role will [mobile] operators play in five years’ time.”

Everyone agreed that the future of mobile data usage is the mobile Internet. Even for Vodafone, the era of walled gardens is ending, and users expect access to the best content available, whatever access method they have.

The optimistic view argues that carriers can offer a seamless experience, that they are a crucial nexus of the mobile ecosystem, or that by buying exclusive rights to key content — such as a big soccer tournament — they are becoming media companies. Several tables (including ours) also noted that the operators are sitting on a wealth of individual consumer usage data — which Google can only dream of — that they might figure out how to monetize some day.

The Mobile Internet: How Japan Dialled up and the West DisconnectedA few also suggested that operators could play a role in selling billing services. Apparently among the Europeans present, no one had heard of NTT DoCoMo, which mastered that model with i-mode a decade ago.

However, the operator at our table was a no-show and we had two Americans, so we took a much more pessimistic view about their future. Existing operators face three types of threats: increased commoditization/competition among existing rivals, possible new entrants, and ways of capturing value (iPhone App Store, Android Market) that bypass the operator.

The end of flat rate mobile data is both an opportunity and a threat. Operators will be able to charge the data hogs what they are really costing, but at the same time, it will reduce the attractiveness of 3G networks relative to wired and hotspot alternatives — particularly for American teenagers addicted to watching YouTube.

Consolidation — reducing directly rivalry — might be a hope for operators to moderate some of these pressures. However, based on the past 30 years of telecom regulation, I think few countries will allow the number of operators to drop below three — exactly because healthy competition is needed to keep honest the would-be oligopolists.

Our group concluded that the near-term prospects for US operators were not good, as the bypass threat posed by Apple and Google were already quite strong. We thought that in the near term, European carriers would continue to milk their market power — although one other table noted that two French DSL carriers are stitching together roaming across millions of WiFi hotspots to form, in effect, a new mobile Internet network.

Certainly in China the operators remain a chokepoint, and another table suggested this was true in Latin America. So the geographic variation remains considerable — some pipes are more scarce (and thus more valuable) than others.

However, what was striking in retrospect is that the mobile phone companies are almost in exactly the same boat as the US cable TV companies. The cable TV companies have the advantage of mindshare providing entertainment content, albeit less growth. Both, however, may end up being just “dumb pipes” by which users access the open Internet, to use content provided by those who didn’t have to pay to build the pipes.

Monday, June 14, 2010

Airline consolidation: bigger but not better

This year I’ve had the joy of spending lots of time experiencing mediocre airline service. In particular, United Airlines has truly refined the definition of steerage with their 4th class (ala the Titanic) below the traditional 3rd class service called coach.

Once upon a time, the full-service carriers provided service, but since 9/11 they have been cutting any semblance of quality or service in the name of cost reduction. (Delta and United seem to have fallen particularly far, American and Continental not so much.) Today we have the irony that Southwest provides more service for its tickets (e.g. checked bags) than its former full-service rivals.

Lacking innovation in a mature industry — and uninterested in improving quality — the response instead seems to be consolidation via merger. After Delta-Northwest, we now have the prospect of United-Continental. Bigger is not better, but it is bigger and perhaps there are minor scale efficiencies to be wrung out.

The lame duck president of the industry’s trade association, Giovanni Bisignani, was quoted as saying that the industry will consolidate into “a dozen global brands supported by regional and niche players”.

Certainly the existence of regional players makes sense – Southwest doesn’t need international linkages to survive, and for that matter neither does EasyJet (or RyanAir). But I’m not sure what’s magical about “a dozen.”

The same FT article had a snippy response by an Indian bureaucrat:

Praful Patel, India’s minister of state for civil aviation, said: “All I can say is if Giovanni is right and we have 12 global brands, three will be from India and three will be from China.”
Much as I’m a firm believer in the rise of China and India, both are years away from running even one world-class global airline, let alone three each. Perhaps they can acquire such competencies — for example if China folds in Cathay Pacific — and the one thing that these airlines (particularly the Chinese) have going for them is a wealthy state sponsor able to fund large acquisitions.

What will happen if Cathay combines with a Chinese airline, or Continental with United. I’d like to think the higher quality partner will be the surviving culture, but if the goal of consolidation is scale (or other forms of cost reduction) then there’s little reason for optimism.

Sunday, June 13, 2010

Not all innovation is good innovation

A frequent frustration has been the lie perpetuated by con artists (or politicians) that all change is good. For these fraudsters, “change” (or “reform”) becomes a mantra or a cloak to hide any close examination as to whether the proposed change is a good thing or a bad thing.

Clearly, not all change is good. Hitler, Stalin and various ayatollahs come to mind. Different factions like different forms of change: in the US, leftists fight deregulation or tax reduction while rightists fight various forms of social change.

Similarly, in his talk Friday at the Tilburg Conference on Innovation, Prof. Andrew van de Ven of the University of Minnesota noted that “innovation” is also both a good thing and a bad thing. He called on scholars to refuse to be drawn into any definition of “innovation” that it as synonymous with “good thing”.

Alas, such intellectual honesty is in scarce supply among politicians and bureaucrats — as well as some industry trade associations. “Innovation” becomes a mantra of those seeking to wrap themselves in the halo of scientific progress — as with the current White House and its “Strategy for Innovation.”

Van de Ven pointed to a paper 20 years ago by William Baumol entitled “Entrepreneurship: Productive, Unproductive, and Destructive,” which made a similar point about entrepreneurs and the new ventures they create:

[T]here are a variety of roles among which the entrepreneur's efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game-the reward structure in the economy-that happen to prevail.
Baumol argues that if the incentives are right, entrepreneurs grow new profit-making enterprises that provide employment, wealth and other societal benefits. In corrupt, non-transparent, or other hostile environments, entrepreneurs join the gray or black market, or create criminal enterprises.

So perhaps if we’re lucky, a reminder to academics about the accuracy of our constructs will eventually filter into the media and the political caste. But I’m not optimistic.

Wednesday, June 9, 2010

Wireless data fails through its own success

On Monday, Steve Jobs had his iPhone 4 demo fail due to Wi-Fi congestion problems at the WWDC conference. (Blogger Liz Gannes of GigaOM theorizes that ad hoc hotspots set up by attendees contributed to the problem.)

Also this week, while passing through O’Hare airport, I desperately tried to log onto the Boingo paid hotspot but could never get a reliable connection among the dozens (hundreds?) of travelers also trying to use Wi-Fi.

There’s been a lot of publicity about AT&T cutting back on unlimited all-you-can eat bandwidth for its 3G service — thanks to heavy usage by a significant fraction of the iPhone customers — as well as the speculation that other 3G carriers will do likewise. The problem isn’t going to go away with LTE (or WiMax).

But this is also clearly a problem with Wi-Fi as well. Networks designed for people checking email or flipping 2 web pages a minute cannot handle the traffic generated by YouTube.

What the wireless industry seems to ignore — probably deliberately — is that this is an inherent (and perhaps insolvable) problem of wireless communications. Wired communications are scale free — you can add new wires and routers and switches indefinitely.

On the other hand, wireless spectrum cannot be extended indefinitely, and there’s only so much smaller you can make the cell sizes (from microcells to picocells). The past decade has benefitted from increasing spectral efficiency, but spectral efficiency in 4G is only slightly better than 3G.

So while Moore’s Law seems like it will have a 50 year run, the improvement in wireless data efficiency appears it will only run about 20 years before it hits the wall.

Has the industry overpromised? Is it ready for the consequences when it fails to get the additional spectrum it dreams of? Right now I see the problem, but not the complete implications or possible solutions.

Tuesday, June 8, 2010

iPhone 4: is that all?

I must say, I was underwhelmed by the iPhone 4 announcement — and not just because of the leaks. Apparently I was not alone.

Most of the hardware changes — like a better camera — seem to be achieving parity with high end phones by Nokia et al, rather than pulling away from competitors.

The 326 dpi screen is the one exception: I haven’t seen it, and it strikes me as the sort of change that could seem underwhelming at first, but over time become a game changer.

The software changes in iPhone OS 4 (now “iOS 4”) — available to most iPhone owners — seem more impressive. Many of them are incremental, but together they should help Apple stay ahead (for now) of its rivals in terms of ease of use. Still, this feels a little like 1991, when Apple was ahead but Microsoft (now Android) was beginning to close the gap.

More seriously absent is the one change that was absolutely essential. To quote USA Today:

Well, geez, I don't like this." Jobs says about network woes during his demo. He moves on to show off differences in pictures with the retina display. And new photos do look a lot better, but the demo to show in the New York Times is failing and Jobs isn't happy.

"Scott, you got a suggestion?" Someone in the audience responds, "Verizon!" Jobs says we're actually on WiFi here.
Still, the aggressive tradein policy by ATT suggests they are worried that some other carrier is coming in 2010. Let's hope that consumers get another option before the year is out.

Wednesday, June 2, 2010

Growing old is tough

HP’s latest announced job cuts repeat the lesson of its past decade: financial health is coming at the cost of employee security.

A chart in the Wall Street Journal article illustrates how CEO Mark Hurd is trying to raise the company’s operating margin to 10% — a figure achieved only once, at the end of 2009. The WSJ also reports that cutting 9,000 workers — implied to be largely from the 142,000 workers who came with the purchase of EDS — will create a $1 billion charge and a predicted $500-700 million/year in savings.

Meanwhile, the online headline for Merc columnist Chris O’Brien takes a more provocative view:

HP increases its leading product: Ex-HP Employees
The headline on page C1 of the dead tree version is more tame: “Innovation, alas, is no longer the HP way”, but both recount the $45 billion in acquisitions and 93,000 layoffs since the Agilent spinoff in 2000 left HP with 88,000 employees.

While Silicon Valley is conceived as a center of innovation, O’Brien writes:
HP's strategy forces us to acknowledge that success in the technology industry can also be gained through methods we tend to associate with old, tired industries. Buy a company. Cut costs. Trim employees. Repeat.

Indeed, HP has reclaimed its position among tech's elite companies during a decade in which it failed to produce a single, signature innovation.

When you think HP, you think "Compaq merger" or layoffs. Consolidation is the brand.
What I think the article fails to put in perspective is that the IT industry — what people normally associate with “Silicon Valley” — has reached middle age. Tech is not as old and tired as cars and steel, but its Fortune 500 companies are neither young nor vigorous.

Overall, tech “growth” is negative, cost-cutting is king, pressure on margins is relentless. HP’s buy-and-cut strategy resembles Oracle and other mature enterprise-oriented companies. It’s not HP — it’s the industry. Commoditization in mature industries means that cuts are standard operating procedure.

Apple (right now) is pursuing a different path, but that’s the exception that proves the rule. Apple is venturing into consumer electronics, where there are plenty of old-line CE firms that are either cutting or even fading away.

This reminds me of the old saying that acquired personal relevance when I personally reached middle age: Growing old is tough — but it beats the alternative.

Tuesday, June 1, 2010

Andy wants you to buy his openness

On Tuesday, the Merc had a (very brief) Q&A with Android founder, now Google Mobile executive Andy Rubin.

I recommend the entire interview, but let me quote the most relevant passage to this blog:

Q: Since you started this effort, industry and government regulators have moved toward making the market much more open. Given that, is Google's Android effort still necessary?

A: I think so. It's a progression. We're at a moment in time right now, but the definition of openness is going to change over time.

What does openness mean? Is a platform that is open to outside programmers open? Is a platform that has an open content store open? Is a platform that's open source open? All those definitions are still in flux, I think.

So I don't think it's time to give up. I think it's time to double down.
I certainly agree with most of this — openness is ambiguous, with lots of definitions. However — like others — I reject the idea that “open” is a bright line, black or white — rather than shades of gray.

One of the shades of gray, of course, is whether openness in (say) hardware is more important than openness in (say) search engine choice.

Still, Rubin seems to have an element of realism (and perhaps self-awareness) absent from other Google exec pronouncements. I’m not quite as skeptical as Steve Jobs is about “do no evil” — but clearly Google (like other companies) is spending most of its time doing what’s good for Google.

Thus far in mobile, Google has used openness in its mobile platform as a club to gain influence or advantage over the various industry incumbents. To the degree to which the openness is genuine and accurately portrayed, Google certainly deserves credit both for giving people what they want and pressuring the rest of the industry to be more open.