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Analyst Angle: Wu What?

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Strategy Analytics’ Chris Ambrosio, M:Metrics’ Seamus McAteer and Current Analysis’ Peter Jarich.
Professor Tim Wu, a Professor from Columbia University who popularized the concept of net neutrality, recently wrote a paper called Wireless Net Neutrality, a catchy but ultimately misleading name. Just as a preliminary disclaimer, I am a general supporter of the net neutrality principles articulated by the FCC, but not of the concepts as laid out in Professor Wu’s Wireless Net Neutrality paper.
Professor Wu discusses four areas that he describers as warranting attention:
1, Network Attachment
2, Product Design and Feature Crippling
3, Discriminatory Broadband Services
4, Application Stall
While Professor Wu’s concepts are sexy, popular and well intended, there are serious flaws in both his facts and his analysis, which make his recommendations difficult or even counterproductive to implement in the real world. Due to the space constrain of this column I will discuss just the first two areas of Network Attachment and Product Design of Professor Wu’s paper.
Professor Wu proposes that any wireless device should freely attach itself to any network. There are several holes in his argument. He criticizes that wireless carriers are locking their devices and make it impossible to get the phone to work on a different network. What Professor Wu here conveniently downplays that wireless carriers are subsidizing handsets to a significant degree and that American consumers are benefiting substantially through this practice. Mobile handsets are not being made by little elves on the North Pole and come for free. Typically, handset subsidies are between $80 and $200. These subsidies make it possible for Americans to get a phone that they would otherwise not purchase.
Also, please note that when you go into a store it typically gives you three prices: No contract, one year contract and two year contracts. If the consumer chooses the no-contract price, s/he can have the phone immediately unlocked. When the customer chooses a subsidized cost, the carrier, in my opinion rightfully, expects a term of exclusivity to recoup that subsidy. Otherwise, as many prepaid carriers experience, criminal gangs purchase the phones at subsidized prices and resell it overseas for a handsome profit.
Especially in the prepaid market, which significantly caters to the least wealthy Americans, handset subsidies open up the world of wireless telecommunications to a segment of the population that would find a $100 handset simply unaffordable. But also on the top end the same is valid. Just as an illustration, the Apple iPhone Professor Wu mentions will sell for $500 and $600 with a two-year contract from Cingular. By accident, Amazon.com had an unlocked version up for offer for a day-and the price on that page was $1,300. So Cingular is here the bad guy? I don’t get it.
Professor Wu also laments that consumers are choosing the subsidized phones and thereby distort the marketplace. How could they? I always thought choice was good and that the consumer was ultimately right. Maybe Adam Smith was wrong after all. Also, please note Apple chose not to build the phone with a landline modem or any other technology. Thank goodness they chose to design a phone at all-let’s just hope it works as advertised.
Furthermore, Professor Wu would like to see a Carterphone. Well, in the standards-based GSM voice ecosphere, we have that already. If you have an unlocked phone, its voice capability will work on every GSM network. Professor Wu complains that consumers do not know they can get their phones unlocked, but a simple search on Google or Yahoo entering terms like “gsm phone different carrier” gives you the answer to how to get your phone unlocked. If people have no initiative to find a solution for their problems, then why complain that they have none? Initiative goes a long way.
In the rest of the U.S. wireless ecosphere, things look a bit different. While CDMA is a radio air interface standard, its actual implementation has significant variations that make each CDMA implementation the equivalent of a cockney slang or southern twang. The basics are there but you have trouble understanding unless you have an ear for it.
In the wireless data world, every carrier exercised their entrepreneurial right to differentiate their approach to providing data service to their customer base, and one unfortunate side effect is each company’s approach is different. The only remedy for that would have been state intervention akin to planned economy-and we all know how that usually ends.
Professor Wu furthermore complains that while Nokia launches more than 50 phones in a given year, U.S. wireless carriers have only chosen to offer a handful. The average wireless carrier “only” offers around 25 handsets at any given time. Why do they do that? Limited shelf space, just like in a supermarket where you get 25 different detergents. Wait! I don’t get 25 different detergents in my supermarket, but maybe 10-and they are the same in virtually all competing supermarkets. Why should wireless carriers be held to a higher standard than supermarkets?
What Professor Wu also did not mention is that there are Nokia stores in this country. One of them, just around the corner from Columbia University, is on East 57th and 5th. He can’t even get all 50 phones at Nokia’s own store-even though many phones are there that are not sold by U.S. carriers and will work on a U.S. carrier’s network-and when someone wants to buy one he will get sticker shock-$350 and up for a phone, because it’s unsubsidized and Nokia needs to make a profit in order to stay in business and make all these handsets Americans don’t have enough of. I am sure if Nokia would see a major business in selling its phones this way in the U.S., it would open more stores that just two-the one in New York and one in Chicago.
Coercive product design-yeah right. I asked one of the three largest carriers a few weeks ago why a given phone manufacturer had changed their charging interface again and if they could get the handset manufacture to standardize on just one interchangable charger. Wouldn’t that be sweet? The response was that the handset manufacturers do what they want to do and that the carrier has the choice to take it as-is or wait six months and be late to market compared to the carrier that chooses the standard design. How coercive is that? I have wireless service from almost a dozen wireless service providers and change handsets frequently and I can tell you that all of them have the supposedly missing call timers of how long I am on the call. Also, there is a nifty little feature called *MIN or *BAL that I can choose to get my minutes consumed. Just read the “friendly” manual.
The next complaint about paying $60 to $240 a year to be able to download pictures is flat out wrong. From day one I was able to send pictures directly to an e-mail account for no extra charge. You just paid for the cost to send the picture, not for three plans. The reason why some carriers’ picture sizes are restricted is that wireless bandwidth costs a lot more than wireline bandwidth. The megabyte costs the carrier somewhere between 5 cents and 20 cents depending on where the customer is. Rural areas are more expensive, urban areas are cheaper due to the overhead cost of the T-1s. Isn’t it natural that carriers want to avoid incurring losses on wireless picture mail? The reason why carriers pushed WAP (and by the way WAP is crap or at least in the early versions) is bandwidth constraints. A 20 Kbps (GPRS) or even 80 Kbps (1xRTT) connection will give you a really bad HTML experience. If the customer is always right, as I am told they are, carriers need to avoid giving a customer a bad experience. Only now that networks can do 400 kbps+ HTML and picture mail on a phone can be
a decent experience.
Then there is the ubiquitously mentioned “evil” Verizon decision to cripple Bluetooth. Outrageous! Well, here is the reason: Both the data card for the laptop and the phone download at the same speed. The average laptop user consumes around 100 MB a month, the average phone user around 40 MB per month. The data card costs $60 to $80 per month, the access to the web via the phone $40. If I can connect my phone via Bluetooth to the laptop, I save $20 and use 2

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