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Avoiding the 'AOL problem'

I believe we are at a turning point in the history of the wireless industry. Data is driving wireless revenues and is the focal point of product development in nearly every sector of the mobile ecosystem, with Cisco's $2.9 billion acquisition of Starent being a signature "event." But there are deep concerns, too.

There is continued downward pressure on data pricing at the same time networks are having a hard time keeping up with demand. AT&T has been a favorite target, but I have found growing variability in the 3G "experience" across many operators' networks. Add to this the intertwined issues of network neutrality and open access, which would result in operators losing even more control over their own "domain" (i.e. the network).

Those who remember the early days of the Internet (barely fifteen years ago!) might be reminded of America Online (AOL). As essentially the "eighth RBOC," AOL performed three principal functions in its heyday: it served as an on-ramp to the Internet with vast banks of modems serving dial-up access; it offered customer service reps who would hold the hands of Main Street USA trying to get onto the Internet for the first time; and, not unlike today's wireless operators, it served as both "pipe" to the Web while offering some of its own unique services (AOL mail) and content. But growth and network demand outstripped AOL's capacity. AOL became known as "America on Hold"-- and the company never quite recovered. Broadband was the final nail in the coffin of its initial business plan, eliminating the need for AOL's dial-up service, and diluting the value of its unique content.

We see the writing on the wall in wireless. Complaints of network congestion are growing. AT&T showed great top-line growth in wireless, but margins were impacted by subsidies and network costs skewed by iPhone sales and traffic demand. And even if the FCC's net neutrality intentions are laudable in theory, I think they are naïve with respect to wireless industry economics.

The term "wireless data tsunami" is being used in a lot of circles these days, even occupying an episode of Cramer's Mad Money last week. Now, I've always interpreted "Tsunami" as something you run from, rather than to. So how can we ensure that this data traffic growth continues to be more of a "wave" of opportunity, rather a "tsunami" that overwhelms?

1. Pricing and Economics.

It costs a wireless operator about $0.04 to deliver a MB of data. Plot that against the average usage of 200 MB/month for iPhone users and close to 1 GB/month for broadband wireless connection from laptops. And for those who think wireless data could displace home broadband in the way wireless voice has displaced landline voice, the average home consumes 10-15 GB of data a month. That's double what it was three years ago and TV and movie downloading are still in their relative infancy.

So, first, we have to convince the FCC that wireless industry economics are different than that of wireline--even with 4G (which reduces cost to deliver data by about half) and more spectrum.

Second, we have to re-think wireless pricing. We have downward pressure on price at the same time many believe we can't sustain a flat-rate model. In a more extensive Lens piece on price, I argue that usage-based pricing will be a nightmare. But I do think there are some alternatives, such as:

• Tiered pricing, similar to what we've seen with DSL. If people want to download an episode of Lost over the WAN (2GB, by the way), they should have to pay for it. Why not a good-better-best approach to wireless data plans?
• Pricing built into content similar to the Kindle model. If certain apps are highly consumptive of network resources, charge a premium for them. Example: The HD version of a TV program on iTunes typically costs $1 more.
• Surcharge for select apps/content. Sort of like a prix-fixe menu at a restaurant with certain "premium" items incurring a surcharge.
• Congestion pricing. Charge more to use the network at certain times of day, or encourage big downloads to occur at "off-peak" hours. We do this with airlines, and roads, why not networks?

2. Better Management of the Network

Fourth-generation networks, with their added capacity and spectral efficiency, provide some relief--to the order of about a 50 pecent reduction in data delivery costs. But if wireless continues on its current trajectory, traffic growth will continue to exceed capacity growth. There are lots of opportunities for those able to help operators with network and congestion management. What I have seen so far is evolutionary, rather than revolutionary, representing a range of tools, rather than a silver bullet. Examples here include intelligent caching, and packet flow optimization techniques. There is also a greater sense of urgency with respect to backhaul: we need more of it, and for it to cost less. This would mean a more competitive backhaul market than we have historically had.

In addition to technology solutions, there are some tactics to encourage more intelligent use of network resources. People with iPhones, wirelessly embedded netbooks, and other high-end phones/low-end computers use these devices as a substitute to their PCs in many scenarios, even inside the home and other locations where broadband networks/WiFi are available. I think the operators recognize this, which is why even the hold-outs such as Verizon Wireless are now offering smartphones with WiFi and doing deals with WiFi providers, as a way of offloading traffic from the WAN where it makes sense. As part of this, I believe that Femtocells, rather than being a customer-centric solution for indoor coverage, represent more of an operator-centric solution for effective network management in buildings, leveraging the broadband network.

3. Customer Service

This is an overlooked elephant in the room. Customer service might seem tangential to a discussion of wireless network capacity, but it is a huge (and disproportionate, compared to other industries) drain on opex and one significantly affected by the network neutrality debate. Wireless operators are still handling all manner of customer service--for free, not outsourced, and increasingly for issues having little to do with the core "wireless" experience. As an example, if I am having trouble syncing my MAC and my BlackBerry, I call my operator. Why? I have to pay to call Apple, and I can't call RIM. In most corners of the Internet and PC world, you have to either pay for customer service (Dell, Microsoft, Intuit), or it's nearly impossible to talk to a human being at all (Amazon, eBay, Skype, Google).

Why is this relevant here? Well, in a network neutrality/open access world, it might be great to use Skype or Google Voice over 3G networks, but who do customers call when the quality of the call isn't too great or they have some technical issue? Not only are these issues far afield from typical wireless customer service agent expertise, but call volume from smartphone users significantly over-indexes that of feature phone users. Going back to the AOL analogy, remember that AOL held consumers' hands onto this thing called the Internet in the mid-to-late 1990s. Their care centers became as overwhelmed as their modem farms, and the reputation of the company was tarnished forever.

As operators consider how to allocate their capex and opex resources in this new--but different--growth phase, they will be looking to other entities riding the wireless data wave to take on some of the support costs.

Источник: FierceWireless

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