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But starting in 2007, there have been challenges to these business models. Some within the Internet community are clamoring for “open access

The Year That Was Wireless

Monday, December 03, 2007

The first cellular system in the United States went live in 1981. The very first system was launched in 1979 in Japan, and Nordic Mobile Telephone, which was also launched in 1981, was the first system in Europe.(Note: according to several articles on the web the first system was actually deployed by AT&T in January of 1969 for the Metroliner train) We had mobile phone service prior to that in the form of MTS and IMTS phone services, but wireless phones did not really come of age until the mid 1990s when we added PCS spectrum and the average monthly cost dipped below $50.


Now, in 2007, there are more than 250 million wireless customers in the United States, and according to MRI’s Survey of the American Consumer, 14 percent of U.S. households are using wireless phones in place of wired phones and this number is growing. The Average Revenue Per User (ARPU) differs from country to country with a low of $3.91 per customer in Pakistan to a high of $61 in Ireland, and the United States average ARPU across all network providers was $52.12 in the second quarter of this year, according to Merrill Lynch. In the United States, we use an average of 781 minutes of voice per month per subscriber.


For many years, the wireless industry had a business model of building out networks and charging for airtime on a per-minute basis. This is still the case in other parts of the world, but in the United States we have switched to “buckets” of minutes, family plans, free calls on evenings and week-ends and free calls between family and friends on the same network.


With the advent of 2.5 and now 3G voice and data services, there came other changes in revenue models. Network operators are receiving additional revenue from data services and they are making money on applications and services sold and delivered over their networks.


But starting in 2007, there have been challenges to these business models. Some within the Internet community are clamoring for “open access,” asking that the wireless networks be open to any device and that these devices be able to download any content or application that can be accessed over the Internet. In other words, they want the same level of access across the wireless networks as they have today via their PC and a DSL, cable or fiber connection to the Internet.


They also want to be able to make their own decisions about the devices they use and they want these devices to work on all of the networks so they are not precluded from using their favorite device on their favorite network, as they claim they are today.


This year has seen a number of changes. First, Apple introduced the iPhone, with a sleek new user interface and a five-year exclusive contract with AT&T Wireless for phone service. Apple’s business model was seen as unique because it controls the distribution of the phone and receives some of the recurring revenue AT&T Wireless collects for service. In point of fact, Apple is not the first company to receive a portion of the revenue generated by a network operator―the BlackBerry model has included this type of revenue sharing for a long time. However, it is the perception that Apple was the first that leads people to believe that Apple and others will continue to change the way we buy and use wireless devices.


Next, or rather prior to Apple, was Google’s push for full open access for the new 700-MHz spectrum that is scheduled to go to bid starting January 24, 2008, and this is the week that potential bidders must declare their intention to bid. The FCC seemed to go along with Google, at least somewhat, by declaring 22 MHz of 700-MHz spectrum to be open access spectrum. But the FCC did not give Google all of the points it had asked for. There is no provision in the open access requirement for network operators to wholesale voice and/or data services. Further, if the reserve price of $4.6 billion is not met, the spectrum will be re-auctioned without the open access requirements. I think it is a foregone conclusion that Google, which probably does not want to build and run a network, will bid on this block of spectrum but may not go beyond the reserve bid price—thus ensuring that the winning bidder will have to honor the open access requirements.


Some, and the real question in my mind is how many, believe that the wireless community is under siege and will be forced to change for the betterment of all customers. These people can point to the recent Verizon Wireless announcement that it will open its network in 2008, it will permit any approved device to be used on the network and it will provide the ability to download any application or data customers want to access.


So 2007 was certainly a year where network operators came under increasing fire for the way they are doing business and how much they are charging for their services. As we have seen from the Verizon Wireless announcement, network operators are starting to make some of the changes that will, according to those who believe this way, make the wireless operators better citizens and we will see a whole new series of technology advances, device choices and increased experimentation.


Smaller companies will enter the wireless device market, consumer electronics companies will decide to build wireless into their devices to add more value and we will have so many more types of wirelessly-enabled devices on the market that pricing models will need to change as well. Perhaps we will end up with the Sprint/WiMAX model that is based on a monthly fee on a per-person or per-family basis instead of per device.


In reality, we are not far from that type of pricing now. Family plans come close and it will not be a huge leap to go to the per-person or per-family pricing that Sprint advocates for its WiMAX network.


Then there is the ongoing issue concerning bandwidth. Can we really provide open access to any application and content over wireless networks with finite bandwidth that is shared? I have written much about this topic in previous commentaries and blogs, so I won’t spend a lot of time on it here except to say that there are still many misconceptions out there about how much bandwidth we really have available, who should have access to it and how it is to be managed so that a few data hogs do not cause problems for the rest of us. The entire issue of wireless bandwidth is one that you either understand or you don’t. I am resigned to the fact that those who don’t understand it won’t take the time to learn about it and will continue to assume that by adding more cell sites―pico, micro and femto cells―we will be able to keep up with the demand for our wireless bandwidth and that with all of this new spectrum coming online in 2009 and 2010, the adoption of next-generation technologies, software-defined and cognitive radios, we won’t run into bandwidth constraints and problems as we take the Internet wireless.


The year 2007 was when high-powered companies began to take on the wireless industry, and as I stated in a recent panel on 700-MHz, even if Google does not bid on the spectrum, it has started a process that will change wireless going forward. Its announcement that it will release a Linux-based, free operating system for phones called Android, and that the developer’s kit is free, is seen by some as a threat not only to wireless operators but to those who sell their own operating systems, especially in the smartphone marketplace. This includes Symbian, Microsoft, Apple, Palm, RIM and others, but I, for one, don’t believe Android will change the economics of handsets very much. Rather, it will provide another platform for developers to use, but it is not clear whether there is a business model for Android developers to make money writing applications.


Changes are coming. The Internet community is being very vocal, the wireless community is responding, and somewhere between the existing wireless models and the models being proposed by those from the Internet side of things is a set of compromises that will have to be based on economics, network capacity and network security. There won’t be a definitive end result here, but rather an evolution that will be worked out and, for the next few years, should be considered as a work in progress.


What does 2008 hold? Some of the answers are easy: an iPhone with 3G capabilities, iPhone clones and ipks (iPhone killers), winners of spectrum that won’t be completely available until 2009 or 2010, next-generation trials and tests, perhaps new business models based more on the Google ad revenue model than on customer payment, or a combination of the two, and continued disagreement about the use of our wireless bandwidth. Network operators will be working to make sure that as many of their customers as possible have wireless access while a small percentage of customers try to get more than their fair share because they believe it is their right to do whatever they want, whenever they want.


This will sort itself out over the next few years. I almost wish Google would decide to build out its own network to have a truly open network, with a wholesale model, total choice of devices and access to anything by anyone. It would take Google several years and a bundle of money to build it, but when it was done and Google had to deal with customer issues regarding access and data speeds, it might fully understand that managing bandwidth is tricky at best.


But I don’t believe Google will build out its own network. I don’t think it wants access to a portion of the U.S. wireless population, I think it wants access to all 250 million customers. This will only happen by cooperating with the incumbents and finding common ground that protects the networks for the benefit of all customers yet permits more open access.


Andrew M. Seybold


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