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August 23, 2006

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Cory Hojka

One thing I'd like to know is whether the cellular providers in both markets mitigate the cost of phones as an incentive for subscribers to sign long term contracts. If American cellular companies provide customers a $250 phone for $50, but with features turned off, is this really a harmful arrangement? With the exception of Verizon, who do not use the same cellular technology as most other carriers, I can usually purchase an "unlocked" phone and use all of its features on any cellular provider. This implies that the American consumers have a choice in most circumstances, between low-cost crippled phones and long-term contracts or, alternatively, fully-featured phones at full price with month-to-month service agreements. Consequently, I'd wonder if Europeans are offered the same choice, or perhaps have a different array of incentives and constraints that eliminate the possibility of the American model?

James

Maybe I'm missing something, but what do the cell phone companies lose when someone uses Wi-Fi and VoIP? Couldn't the cell phone keep a log and send the information to the company? And if so, couldn't the company charge something for those minutes? The result would be better service in some places (inside some buildings for instance), but no real loss to the companies. If anything it would improve service and reduce the burden on their infrastructure.

Cory Hojka

James,

The economic disincentive to cellular providers when it comes to VOIP over Wifi is that the use of the phone does not incur any charges over the cellular network. WiFi is a distinctly different transport mechanism that carries data independently of whatever cellular network is available. As for VOIP, many of those services are free of charge unless you attempt to contact a phone number via VOIP that is not actually on the VOIP network (i.e., SkypeOut). Therefore, with VOIP and WiFi there is no reason to deal at all with the cellular company and there system.

Now, It is true that cellular packages in America tend to be X minutes for Y dollars each month, so one might assume initially that cellular providers would be happy that the burden on their networks could be reduced by WiFi/VOIP. There's two problems that I can see though with this assumption:

First, people will eventually shift down in their monthly packages over time. They'll see that they aren't using as many minutes, so at some point they'll decide to shift to a cheaper package, thereby leaving the cellular providers with less income over time (assuming no price hikes).

Second, not all cell phone consumption imposes the same costs on cellular networks. While it's been quite a few years since my work on cellular networks, I'm still fairly confident that the most expensive area of coverage for cellular providers tends to be areas such as highways and large gatherings of people (i.e., conventions, sports arenas, etc.) where coverage and quality of service need to be near perfect. In comparison, when someone is gabbing on their cellphone at home or in the office, unless they are by the interstate, it's probably far less costly for the cellular providers to reach that subscriber. Consequently, the cellular provider makes more money from minutes burned at home or at the office than when you are driving on the highway, and once you bring in WiFi/VOIP cell phones into the market that whole expectation will go out of wack. Instead of users burning up juicy minutes on low-cost calls at home, the only time they'll probably be using cell phones is when they are on the go, because the home and office is most likely where WiFi networks will exist.

Overall, we've probably have two major concerns for cellular providers about WiFi/VOIP-enabled cell phones. The first is that consumption of cellular minutes will decrease, and the second is that the decrease in consumption may likely affect the most profitable areas of cellular consumption.

Gus

James-

Interesting question. I've a few guesses.

First, the cell company (don't know who it is, Cingular, I think) simply wouldn't dare, especially with the ongoing net neutrality debate. BellSouth, for instance, doesn't dare charge its DSL customers when they use Vonage to make a phone call, even though this is business lost to a competing service that is being run over BellSouth's own network. There is an important difference in the e61 case: the cell company would be charging the customer for a competitor's service running over third party's infrastructure. To the extent that net neutrality raises red flags, this raises twice as many. Here one provider is leveraging its network+services bundle against two competitors (one network and one bundle), instead of against just one (a service, eg, Vonage). (Note, if this a Cingular service, Cingular is 40% owned by BellSouth, 60% by ATT.)

Second, the WLAN/VoIP service looks like it is mostly aimed at business customers. The Nokia literature sells the ease of integrating the e61 with the Avaya and Cisco VoIP PBX solutions. This is not Vonage-level VoIP--this is the serious stuff that business and governments are switching to, to consolidate their connections to local, long distance, and data networks (three expensive tubes) onto a single data connection (one expensive tube).

This leads to a few problems with billing for the VoIP access. First, these companies would just balk at the idea and disable the service. They already have wired phones where they have the VoIP access--why bother paying more to use this wireless gadget? Perhaps future VoIP deployments could replace wired VoIP handsets with e61s--but that market is at least another product cycle away. Indeed, a deployment on that scale would probably frame the product as a VoIP handset that could also work with the cell networks. And second, a lot of VoIP traffic is company internal, either within a building or between sites (but not hitting the PSTN). The cell company would need a way to differentiate between these two types of VoIP traffic.


Third (back to the outer question), the cell company probably doesn't know how to handle the billing that you suggest. These companies are notorious for having problems with their existing billing systems. Integrating an entirely new billing model into the existing system probably isn't worth the trouble, without first knowing that the business model will last more than a few years.


And, finally, the "log now send later" model is one that begs hacker abuse. The e60 series has enough functionality that it is hackable at a software level. It wouldn't be long before there was a program that you could download to zero out your call log before it was sent to the carrier. Illegal? Perhaps. Detectable? Not really.


Just some guesses.

--Gus

Gus

More directly in repsonse to Prof. Picker's question:

There are three main differences that come to mind when I think of the US and European (an Japanese) cell markets. First is land mass and population density. As Cory correctly says, it is cheaper to provide service to denser areas. (Though I expect Cory's point was made as a function of the per mile cost of running the physical cable to connect cell towers to the PSTN; but the general proposition holds even if this cost is constant.) It is also easier to roll out denser networks, with less up front investment and less risk associated with a failed endeavour (because you can more quickly redeploy). These are generally supply-side effects.

Second, the US billing system is very different from most of the rest of the world. We are fairly unique in charging both ends of the call for airtime. Elsewhere only the calling party pays. This is true for both land and cell lines, if I recall correctly. Exactly how this affects things is tricky--but it is a difference worth noting. It certainly creates arbitrage opportunities between land and cell lines (creating more of a concern in the US that VoIP/Wifi would be substituted for the cell networks). And, if you are more likely to make calls when you are away from home/work (from wifi, that is), European would carriers have less to fear from wifi. I don't know if this is actually the case, but it is the sort of effect the different billing models might have.

And third, the market demand is very different in Europe (and even moreso in Japan). They frequently get the cooler toys first. In part this is because we invent the new technologies and get locked into the first generation, and they deploy the more advanced and easier-to-upgrade subsequent generations of the standards (the supply side question). But this also has to be because the markets on the Earth's larger landmass have more demand for these technologies.

As with my last response, just some guesses. It's a hard question.

--Gus

Doug Lichtman

Randy,

Good puzzle.

One thing I don't understand is how Nokia expects to win market share with a crippled product. I always thought that the only way to successfully offer a crippled product is to do so in a market where you have market power. If not, you can offer a lame product, but someone else will then come in and offer the full-featured one, stealing your customer base.

Unless I'm missing something, the cell phone hardware market is pretty competitive in the US. Thus, in addition to your puzzle about regional differences, I'm puzzled by what even their US-centric strategy could be here.

Tim Lee

The market power in this case isn't that of the cell phone manufacturers, but rather of the wireless service provider. (i.e. Verizon, Cingular, T-Mobile) Consumers only get to choose among the cell phones offered by their service provider.

Virtually all cell phone on the market today are crippled in the sense that they're hard-wired to only work with their service provider's proprietary features. There would be nothing technically difficult about setting up an Internet-style cell phone network in which any service provider could offer service to any phone. But wireless providers have apparently found (or at least assumed) that they can make more money if they keep their networks closed, making it easier to engage in price discrimination. (See, for example, the $2 charge for a 5-second ringtone)

The difficulty with WiFi is that it would be relatively easy to hack a WiFi-equipped phone to access services not provided by the cell phone company. That would undermine the wireless companies' elaborate price discrimination mechanisms and potentially reduce their profits.

LAK

Uh, just because some Phone manufacturer is prevented by American cell phone companies from mass-launching wifi versions of their phones, doesn't mean you have to bend to their will. Welcome to the global marketplace. Get yourself a completely legal unlocked European version of the phone you want, including that Nokia.

Because I am required to have a Blackberry for work and because Blackberrry hardware stinks and I'm averse to the "corporate tool toting a large blackberry" look, I have a Sony-Ericsson smartphone, the P910a, that isn't even marketed by a major American cellular provider, but which has "Blackberry Connect," software that allows its use on Blackberry push email networks.

Incidentally, they just came out with a new version, the p990i that has Wifi and which works. Symbian, the open source OS that is run on Nokia and Sony Smartphones is awash in software and I've already seen news of Skype compatible software to use in Wifi areas, thus bypassing the cellular network completely.

And so it goes, the market adapts to its needs, exepect when the consumer is ill informed and doesn't know what's out there, which seems to be always. Ah the day when advertising and marketing is about informing the consumer and not confusing him into buying something he doesn't want.

Cory Hojka

"As Cory correctly says, it is cheaper to provide service to denser areas. (Though I expect Cory's point was made as a function of the per mile cost of running the physical cable to connect cell towers to the PSTN; but the general proposition holds even if this cost is constant.)"

These assumptions are not necessarily correct. My point about the cost of supplying cellular service isn't relative to the cost of running physical cable or physical service (especially when the major costs are in the electronics of the base stations and master switching centers), but rather to the level of service a cellular provider must provide to remain competitive.

On a highway, for example, therey can be essentially no reasonable situation where a cellular connection should fail due to a lack of coverage or capacity. Otherwise, customers will switch by the hundreds to a rival competitor that doesn't drop calls. Consequently, the coverage of these essential zones must be extensive and extremely reliable, thereby requiring multiple base stations, expensive antennas, considerable planning by engineering staff prior to modification or deployment, etc., etc.

On the other hand, there are places where the quality of service ("QOS") does not need to be as high, such as in residential areas. Can't get coverage in the basement or do your calls get dropped on some suburban intersection? The cell phone company probably isn't going to care. Unless you are in a wealthy neighborhood, where possible business owners might be led to switch their company contracts due to the poor service, they'll probably let you suffer. Also, given the limitations on cell towers in residential communities, there probably isn't much ability to resolve the problem. Regardless, coverage in these areas is not going to require the investment and planning as high traffic areas. The lower amount of traffic requires less expensive equipment and planning generally, while the lower required QOS also aids in cutting the required level of expenditures. Therefore, even though costumers are paying the same rate for usage of their cell phones at home, the cost of supplying that service is likely to be far less than on the highway.

Alena

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Glen Whitman

"We will have to figure out whether we are going to try to regulate that or regulate efforts by people to hack the products they have taken home to turn on latent features."

Did you intend to imply that we must regulate one or the other? Or is regulating neither also a viable option? (Given the competitiveness of the cell phone market, I'm inclined to take the hands-off approach.)

Randy Picker

No, I wasn't trying to suggest that we necessarily had to regulate one or the other. I just wanted to intimate that either of those might be regulable (is that a word?).

Kimball Corson

But Randy, a cell phone can say a great deal about you. Aside from communicating an exaggerated sense of self importance to the astute observer, a hands free unit (with consolidated mike and ear piece), when used while walking in circles at an airport and talking loudly, gives a very strong impression of shear lunacy to casual observers.

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Tim Wu

Okay I am way late to this -- but I think we're missing the big question.

The question isn't why Verizon doesn't want the E61 to be sold. The question is why Nokia won't sell it anyhow. Nokia shouldn't usually care what people use their phones for -- in the sense that we don't expect Dell to care if people use their computers for VoIP.

So that's what I'd like to know -- why is Nokia going along with this? Do they need carrier approval to sell their phones to US consumers? How can that be?

Shannon

I depends upon the need of the consumers! I think some of of them will like it. just like me, i love cellphone and i love innovations on it. Actually i got my phones from affordable family cellular phone plans http://www.bestcellularphoneserviceplans.com because they have a wide selection of phones from Wi-fi and the one that has RSS feed etc...

Sephen Jones

Hi

I am sure that mobile phones will toggle between wi-Fi when there are more [free] wi-Fi points. Until then, adoption will be limited.

Regards

http://www.wi-find.com

Cindy

I recently bought a WiFi accessible phone. I can't use it like the T-Mobile and that is fine but here is my problem. My carrier cannot disable the WiFi technology in the phone BUT if my phone connects to WiFi, I am charged for it.

My question is this: How can a cellular company charge me for WiFi that I already pay for in my home, on equipment that I own? I know they can charge me for their data service but why the WiFi without my subscribing to their data service? Again, it is not set up to take the place of cell calls like the T-Mobile phone. It is simply the HTC cell phone with WiFi technology. Thanks

Cindy

I recently bought a WiFi accessible phone. I can't use it like the T-Mobile and that is fine but here is my problem. My carrier cannot disable the WiFi technology in the phone BUT if my phone connects to WiFi, I am charged for it.

My question is this: How can a cellular company charge me for WiFi that I already pay for in my home, on equipment that I own? I know they can charge me for their data service but why the WiFi without my subscribing to their data service? Again, it is not set up to take the place of cell calls like the T-Mobile phone. It is simply the HTC cell phone with WiFi technology. Thanks

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