Saturday, November 7, 2009

Commoditization of cellular networks

We all have heard about how the wireless providers do not their networks to be dumb pipes. But developments lately seem to be moving towards making the cellular networks as dumb pipes. Interesting article in Forbes where the author points out how this is happening with cooperation of small operators such as MetroPCS.

and this might be better for the consumers. Of course, network providers can also provide services on such dumb networks and if these services are compelling, they can still make money.

A decade ago there were three phone businesses: local, long distance and cellular. The first two have already collapsed, done in by advancing Internet and cellular technology and the cutthroat competition they unleashed. Americans paid $110 billion annually for long-distance phone calls nine years ago. It's now down to $55 billion and still shrinking. Local phone companies took in $126 billion at its peak eight years ago; that sum has fallen to $86 billion and is dropping fast.

To date the cellular calling industry has been immune from the commoditization infecting the rest of the phone business. Today's Big Four carry more phone calls than ever (almost 2 trillion minutes last year) and took in more money doing it than ever before ($105 billion). Collectively they control 90% of the U.S. market, and this cozy oligopoly hasn't succumbed to ruinous price wars--yet. Over the past three years, for instance, the four giants hiked the price of single text messages from 10 cents to 15 cents, and then to 20 cents, despite the lack of any plausible link to their underlying costs.
When Linquist looks at that sort of pricing he sees not strength but weakness. Modern cell phones can do thousands of things, from downloading TV shows to finding the nearest Korean restaurant. Nevertheless, the cellular industry still makes almost all its money charging for just two applications: making phone calls ($116 billion) and sending text messages (roughly $12 billion, the carriers won't give exact figures). Everything else is considered generic "data." All of those thousands of other uses, many of which put much greater strain on the network than calling or texting, bring in the remaining $20 billion in revenue.

Apple first loosened the industry's hold two years ago when it persuaded AT&T to let iPhone owners download all sorts of software enhancements. AT&T consented, but didn't give up full control, requiring the software be screened before it went on sale. It banned applications that let customers make phone calls using their cellular Internet connection, and for an obvious reason: In both the local and long distance phone markets, customers' ability to route calls over the Internet helped new competitors savage prices.'

In October AT&T caved in to consumer and political pressure and lifted its blockade of Internet calling software. The market chopped 2% off AT&T shares the next day, but Ma Bell's competitors followed suit anyway. Verizon announced it will release new phones that its subscribers will be able to customize in almost any way they please. Vonage, which specializes in shifting calls from traditional home phones to the Internet, unveiled similar software for the cellular world that can run on a BlackBerry.
and a few graphs in the article are also good. one of the graph shows how the average number of mins spent by a subscriber has gone up as the cost of each minute has come down although now it is reaching a plateau arguing for other services. The other graph shows how the revenue from local and long distance has come down over time. Cellular revenue is at an all time high now but for how long?

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