There have been lots of articles recently about the iPhone and AT&T – each tackling an individual aspect of the relationship between the carrier and the hardware vendor. But I wanted to take a step back and look at the AT&T/Apple relationship as a whole, and answer a fundamental question: overall, has the iPhone been good or bad for AT&T?
(Warning – this is going to be a long post – skip to the bottom if you just want to read the conclusions!)
Note: I wrote this post on the evening of 22 July, whereas AT&T’s Q2 numbers were released the morning of the 23rd. A quick look through the Q2 numbers reinforces several of the points made here and doesn’t appear to contradict anything significantly. It appears the iPhone dragged down AT&T’s OIBDA margin by a couple of points – less than last time around, although that reflects the timing of the two launches in the quarters they impacted most strongly.
First, the good stuff
Let’s start with the positive aspects of the iPhone for AT&T. The obvious thing to look at is the impact on customer additions, and since very few (if any) mobile subscribers will choose an iPhone as their first device, the key metric to look at is customer wins from other carriers. Here’s a Morgan Stanley chart from late 2007 – based on their extensive surveys (all the usual caveats apply, but this is a really decent sample size and illustrates what I believe to be real trends):
I struggled to find a good title for this post and eventually settled on that rather bland one, but what this is really about is the fact that telecoms competition centers on the core network in Europe and the access network in the US, and that this is a result of the very different regulatory approaches over the last 15 years or so.
In Europe, a level playing field based on regulated access to the incumbent’s network
European regulation has focused on regulated access to a single incumbent infrastructure with the goal of creating a level playing field for competitors such that they can provide services on equal terms with the incumbents’ own retail arm. This started with carrier selection and pre-selection in the voice world, and extended to local loop unbundling and bitstream access in the broadband world, finally to be followed by wholesale line rental back in the voice world. All of this – if regulated at the proper price – means a competitor can offer voice and broadband services at essentially the same cost as the incumbent without building out much infrastructure of its own at all.
In the US, a botched attempt at incentives to invest…
In the US, meanwhile, the model was set up somewhat clumsily (it didn’t help that the 1996 Telecoms Act was conceived when the Internet was a marginal force and implemented when it was clear it would be a major disruptive factor in the telecoms market). Broadband wouldn’t become widespread for several more years but would become the major thrust of regulation under the ‘96 Act. The regulation, as applied, essentially created a variety of ways for competitors to access the handful of incumbent networks in different parts of the US at regulated rates. Resale (which has equivalents in only some European countries), UNE-P (which is roughly analogous to bitstream access in Europe) and UNE-L (analogous to LLU) provided competitors with a ladder of options which they could make use of as they built out their own infrastructure. Resale would be the first rung on the ladder, and as the competitor won enough business on that basis they’d build out more infrastructure and start using UNE-P. Once that was successful they’d move on to UNE-L, having built out more infrastructure. It was like the European system with appropriate incentives.
…followed by inter-modal competition
It was a great theory, but the pricing was botched such that there were perverse incentives and many competitors got stuck on rung 1 or rung 2 rather than moving to UNE-L. Many competitors’ business models were also based on those fabulous Internet economics and thus went belly up when that bubble burst. Over time, the regulatory emphasis in the US shifted towards what is known as inter-modal competition – essentially relying on competition between competing infrastructures rather than regulated competition over a single infrastructure. The UNE-P rug was pulled out from underneath the few remaining services-based competitors, who now had to negotiate rates commercially, typically resulting in higher prices. But in most markets a cable operator and an incumbent telco duke it out for supremacy.
The resulting competitive environments are very different
The results of these two regulatory approaches couldn’t be more different. In Europe, competitors have largely had to compete on price and on the various bundles they can create around their offerings. Broadband speeds are typically in the single digit Megabits per second, with a high ratio of downstream to upstream speeds. It’s cheap, but bandwidth caps abound. Increasingly, it’s likely that competitive differentiation will have to shift to the core of the network, which is where the clever stuff will happen. Whether it’s IMS or some other technology, the key battle ground is not the access network, which is shared by all the major competitors in most countries.
In the US, meanwhile, the competition in broadband is all about the speeds. Verizon and AT&T’s fiber rollouts have enabled broadband speeds which lit a fire under the cable operators they compete against, who have returned in kind with higher speeds of their own. I live in an area where Verizon has recently made available a 25Mbit/s down, 15Mbit/s up broadband service for $65 a month (less as part of a bundled package). Cablevision, the local cable company, offers lower speeds, but they’re still much better than what most are seeing in the UK. There are no bandwidth caps (Time Warner Cable, the only company to really push in this direction, was scared off by the backlash), and there’s very little competition on anything other than speed. The access network is the source of differentiation in the US broadband market, and that’s unlikely to change. It’s only possible because there are two competing infrastructures, which itself is only possible because of the existing cable TV networks that predated the broadband market by many years.
Implications for future market development
What’s interesting is what this means for future market development. In Europe, alternative operators will continue to have to fight tooth and nail for whatever little differentiation they can find through service, bundling with other offerings, and core network enhancements that somehow improve performance or offer better integration with other services. All while being squeezed on margin because these things are all a tough sell when the basics are the same. In the US, meanwhile, we’ll see a speed race between the two sets of companies – less intense in AT&T territory (and even less so in Qwest territory) – but there nonetheless. I’d argue that this will benefit customers more because there will be real differentiation between the two on speed and constant upward movement in the maximum speeds, making possible more services. I don’t like the chances of the many alternative broadband providers in Europe, while the series of effective duopolies in the US looks likely to be a lot healthier.
The iTunes store apparently has around 65,000 applications in it these days – an impressive number, to be sure. But with that sort of scale (and even at a tenth of that scale) comes a real challenge around application discovery. The iPhone 3GS can show up to 176 applications on its 11 home screens (that’s up a couple of screens and therefore a couple of dozen applications from the 3G version), so there’s a huge mismatch there in terms of how many apps are available versus how many you can put on your phone in a usable fashion.
But the bigger issue is how to find useful and relevant new applications. How I discovered the ones I have on my iPhone:
I searched for them (i.e. I already knew roughly what I wanted)
They were profiled on the front page of the App Store
They were covered by one of the blogs I frequent
They are extensions of services I’m already using.
Those four methods have worked well but they’re limited. What if a genius somewhere comes up with an application that’d be perfect for me but it doesn’t get covered in the blogs, doesn’t get highlighted on the App Store, isn’t connected to any service I’m already using, and serves a need I don’t know I have? That’s not that far fetched. Even when you do know what you want – the first of my four scenarios – finding what you want in the app store is tough, because there’s so much clutter in there. Scrolling through multiple pages of app logos (with no indication of what they do) gets tiresome quickly. There are 86 pages of “Productivity” apps in the App Store, and that includes (just on the first page) everything from a wind chime app to help you get to sleep to a database application to an app for keeping track of the movies you own. It’s overwhelming and it’s not likely to help you find what you need unless you know the name of it already. Ratings don’t help, because only apps that get used a lot have enough ratings to be assigned an overall rating, so the obscure apps that might be helpful don’t benefit.
Someone on TechCrunch suggested that the App Store needs a genius feature, akin to what’s available for music. That’s probably not a bad idea: it could even be a really simple format similar to the Amazon “people who bought this also liked this” feature and it would probably be helpful. But I think there’s always going to be a problem with the sheer number of apps in the App Store, which raises the question of what a useful number might be. A tenth of the current number – around 5-10,000 – seems about right. It’s certainly far more than Palm currently has in its Pre app store, but much less than the rapidly growing iTunes App Store.
In the meantime, I guess we’ll have to keep relying on whatever mediocre tools are out there. One I’ve come across recently is a feed that lists the latest apps added to the store. It’s a little overwhelming too – no filters to weed out the trash from the good stuff (and there does seem to be an awful lot of trash). But it’s another way to slice the data. There are some more tools listed here. But overall it feels like a lost cause, and a lot more about luck than quality when you do run across something worthwhile.
Footnote:
Two of my recent favorites are (with iTunes links):
Prowl – an extender for the Mac notification system Growl, which allows you to push notifications to your iPhone for various events on your Mac, such as new Twitter messages via Tweetie, or IM messages from Adium. Apple’s push notification servers seem to have been playing up a fair bit recently, but when it works it’s pretty effective. It would have been nice to try this out before buying, but at $2.99 I figured it wasn’t too much of a risk. It would be nice, though, if more paid apps gave you a day or so to try them out before forking over money.
Reqall – a great to-do app I used once long ago through the web version and forgot about. The new iPhone version is very nifty, and if you upgrade to the Pro account online it does clever things with locations too. Much cheaper and for my money just as good as many of the full-featured desktop Mac to do lists.
There’s been a lot of buzz recently about Google Voice, which is finally sending out invites to the many who have registered to participate in the private beta it’s running. But one thing has struck me about Google Voice during all this hubbub: it’s so 20th century!
Sure – Google Voice offers a variety of attractive features, like forwarding calls to various phones, visual voicemail, voicemail transcription and so on. But these have been available to some extent for years. Find-me, follow-me services and simul-ring services have been available on PSTN and VoIP systems for quite some time. Visual voicemail is becoming increasingly prevalent on high-end smartphones, and voicemail transcription services are common with VoIP offerings and will become increasingly so elsewhere. The web interface for all of this is somewhat innovative, but not ultimately hugely different from VoIP offerings in the market already.
The striking thing, though, is that all this is delivered over the PSTN, and in fact relies on circuit switched telephony to work. Google Voice doesn’t provide you with a phone or even a VoIP client – it is entirely a service for connecting your existing landline or mobile phones together. Yes, there’s some VoIP in the back end tying it all together, but this is the telephony version of Google News – a nice modern-looking front end enabled in the backend by a bunch of legacy services. This is ironic, since Google has had a VoIP client for quite a few years now in the form of Google Talk and the chat function buried in Gmail. But it’s completely unintegrated with Google Voice and the two seem to be developing entirely separately.
One of the key barriers to large uptake of Google Voice is the absence of number portability: the ability to switch an existing number to the service. Without that, you’ll have to notify everyone of your new number, and remind them constantly when they keep forgetting (and pray like heck that the service works out, or you’ll be telling them all to switch back). Number portability, which some have suggested may be coming to Google Voice soon, would solve that problem. But it also raises a unique issue: with regular number portability, you’re shutting off your old phone entirely, but with Google Voice you’ll still need a number to route the calls too, since it doesn’t provide an endpoint of its own. I’m not sure most carriers are set up to allow you to port a number off their network while maintaining the phone line: in essence they’ll have to issue a new number, which they may not want to do, and which their customer service reps may not know how to do (or want to do). What then? Will Google have a massive customer service issue on its hands when it launches portability? And all this with a service that has no real revenue stream at this point?
Perhaps they’ll solve that issue long-term by adding a VoIP client so that it provides its own endpoint and you can indeed cancel the service you had previously, but then it’s become something rather different – a VoIP client, something people have resisted for all sorts of reasons (some of them quite good). And I really don’t think they want to go the ATA / primary line replacement service – not least because that gets you into taxes and fees territory. And I’m not even going to get into how they make money here when there’s no real opportunity for advertising.
Overall, though, Google Voice in many ways feels very last century – a service that merely forwards calls between various old fashioned phones with a zippy interface. It’s getting lots of buzz, but as I noted earlier this week in a tweet, any closed beta from a well known company will do that (think of Gmail). I’m not convinced this is the telco killer some are making it out to be, even with the new mobile apps.
"A Social Telco is an operator which seeks and achieves deep integration between its own core assets and functionality and that of social networks and the broader sphere of web 2.0 services and applications in order to develop new channels for its services and harness greater innovation in the creation of new services."
This post provides a brief introduction to the topic. This blog as a whole provides more detail! The term is my own invention but I hope it may prove useful in describing one of the ways telcos need to evolve to stay relevant to their customers.
