The Wall Street Journal ran a piece today by Andy Kessler, who is apparently a former hedge fund manager who wrote a book called “How we got here” about the 1970s and how they shaped today’s society (and who also has a significant telecoms and technology background, according to his online bio). The piece is available on his website too in case you’re unable to penetrate the WSJ paywall. Unfortunately, the piece is misguided in some places and downright inaccurate in others, and needs some form of detailed rebuttal. I’m sure others will also feel the need to respond, and hopefully better than I can here, but here are some thoughts on the piece. It’s also about time we straightened out the facts on Google Voice, because so many of the pieces that have been written on the topic don’t really seem to grasp what Google Voice is, so I’ll try to kill two birds with one stone here. (I’ve written one previous post on the topic of Google Voice here, if you’re interested).
I’m going to go through the piece in order for thoroughness. First, the opening paragraph:
Earlier this month, Apple rejected an application for the iPhone called Google Voice. The uproar set off a chain of events—Google’s CEO Eric Schmidt resigning from Apple’s board, and the Federal Communications Commission (FCC) investigating wireless open access and handset exclusivity—that may finally end the 135-year-old Alexander Graham Bell era. It’s about time.
First, it’s not clear that Eric Schmidt resigned from the Apple board over the rejection of the Google Voice app – the small matter of an FTC investigation may have been a factor. In addition, there’s the fact that the two companies compete in the email, browser and now operating system markets, which meant that Schmidt was having to recuse himself from more and more discussions on the board anyway. Secondly, the FCC is very specifically investigating this particular case, not wireless open access or handset exclusivity in general, as a result of the Google Voice incident.
I have no real beef with Kessler’s next paragraph:
With Google Voice, you have one Google phone number that callers use to reach you, and you pick up whichever phone—office, home or cellular—rings. You can screen calls, listen in before answering, record calls, read transcripts of your voicemails, and do free conference calls. Domestic calls and texting are free, and international calls to Europe are two cents a minute. In other words, a unified voice system, something a real phone company should have offered years ago.
Except perhaps to say that a “unified voice system” is a bit strong – this “system” is entirely dependent on the existing phone systems offered by the “real phone companies”. Having said that, Google (or, more accurately, Grand Central) certainly provided some useful innovations and created a great service, and I’m a (small-volume) user of the service myself.
Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that’s nothing—hence Google’s proposal to offer voice calls for no cost and heap on features galore.
The first sentence is important: contrary to the headline of the piece (”Why AT&T Killed Google Voice”), there are only rumors at this point, and AT&T has flatly denied that it blocked the app. The FCC investigation is seeking to answer in part the question of who blocked it, so a bit more nuance is probably in order there. But the bigger objection to this paragraph is the assertion that voice is simply a form of data, an idea Kessler returns to again and again throughout the piece. That needs a bit of examination, because it’s misleading.
While there’s a sense in which that’s true – all communication is ultimately “data” – it’s only true in the technical sense if it’s carried that way. Which it isn’t, on today’s cellular networks and most public telephone networks. Other than where voice over IP is used, voice is circuit-switched, which means it ties up an entire (virtual) circuit from end to end for the duration of a call, making it unavailable for other purposes. Data, on the other hand, is typically packet-switched, meaning that a data “connection” in fact only uses up network bandwidth when packets are actually being sent back and forth, otherwise freeing up that bandwidth for the use of others. As such, voice networks and voice calls use network capacity in a very different way from data, with different equipment required and different economics associated with them. It is therefore at best a gross oversimplification to say that “voice is data” in the current mobile market. In time, yes, we’ll evolve to voice carried over the data network, and at that point the statement will be true, but we’re a long way from that point yet.
What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.
For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%. With customers unplugging home phones and using flat-rate Internet services for long-distance calls (again, voice is just data), AT&T’s wireline operating income is down 36%. Even in the wireless segment, which grew 10% overall, per-customer voice revenue is down 7%.
I’m not sure this episode uncovers anything about AT&T’s health as a company at all. While I think AT&T may be a little over-reliant on the iPhone (see more on that here), its financial results continue to be impressive. Focusing on the wireline results isn’t really relevant in the context of a piece about the wireless market, but yes, wireless voice revenues per customer are declining, because, erm, average prices are coming down, which rather goes against the grain of the piece. And it’s not clear that whatever action was taken in regard to the Google Voice application in any way stifled innovation in the mobile data market. (on the topic of wireline versus wireless revenues, this recent piece on MSN Money was a lot more insightful, but that’s not really the point here).
Wireless data service is AT&T’s only bright spot, up a whopping 26% per customer. How so? As any parent of teenagers knows, text messages are 20 cents each, or $5,000 per megabyte. After the first month and a $320 bill, we all pony up $10 a month for unlimited texting plans. Same for Internet access. With my iPhone, I pay $30 a month for unlimited data service (actually, one gigabyte per month). Is it worth that? The à la carte price for other not-so-smart phones is $5 per megabyte (one-thousandth of a gigabyte) per month. So we buy monthly plans. Margins in AT&T’s Wireless segment are an embarrassingly high 25%.
I’m not sure wireless data service is the only bright spot, but again the analysis here is odd. What is the point Kessler is trying to make here? That it’s embarrassing AT&T’s wireless margins are 25%? This from a former hedge fund manager? Is he objecting to the fact that AT&T allows you to text all you want for $10 per month when individual messages are 20 cents (in fact, it’s $20 per month)? I can’t tell what he’s objecting to here.
The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don’t have wired pipes, but by owning spectrum they do have a pipe and pricing power.
That’s an odd statement if ever there was one. The very definition of providing a communication service is giving customers a way to communicate, which has traditionally meant a phone line (whether wireline or mobile). There’s no trick here, and the idea that the only reason for having a pipe to your customers is to gouge them seems an odd summary of the last 135 years of telecoms history. Spectrum isn’t the pipe either – the cellular networks carriers build out to make use of the spectrum are the pipes (or perhaps we should say “series of tubes“?).
Aren’t there phone competitors to knock down the price? Hardly. Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. That all gets passed along to you and me in the form of higher fees and friendly oligopolies that don’t much compete on price. Google Voice is the new competition.
So, the point is there is no competition because the government forced the wireless carriers to spend billions on spectrum? Isn’t this supposed to be a piece about how the government can solve problems in the mobile industry? It’s also not clear how the spectrum fees have created a “friendly oligopoly” (note singular noun – I’m pretty sure once there are several oligopolies it stops being an oligopoly) – scarce spectrum has created the present oligopoly in the wireless market in the US, as it has everywhere else. And no industry wants to engage in price competition, especially if it has large sunk and/or fixed costs, and most would prefer to compete on features (e.g. exclusive phones). If price competition is your goal, you’re fighting a losing battle, for everyone concerned.
But now we come to one of the biggest problems with all the stories about Google Voice – the idea that it is somehow competition for the mobile phone companies when it’s running on their devices. As it currently works, Google Voice works on the basis of hooking up your existing connections (wired, wireless, whatever) to its service, not creating new endpoints. While there are workarounds, the vast majority of users see this as a way of integrating their existing endpoints into a more unified service. Since the US uses an airtime system (i.e. charging for inbound and outbound calls) for billing for mobile voice usage, every domestic Google Voice call that connects to an AT&T iPhone generates exactly the same usage and therefore the same charging as a call originated through the standard iPhone interface. AT&T is still very much in the picture here, and still making money off those calls. All that’s changed is the interface. AT&T (and even Apple) might not like the fact that the system bypasses their interface, but AT&T still gets the money, so this isn’t competition for revenue, just the UI. Others such as Skype and Truphone, which actually provide an alternative client for making calls over VoIP from the iPhone, thereby bypassing the carrier, are the true competition for AT&T in this space, but their apps are still sitting in the iTunes app store.
By the way, Apple also has a pipe—call it a virtual pipe—to customers. Its iTunes music service (now up to one-quarter of all music sales, according to NPD Market Research) works exclusively with iPods and iPhones. The new Palm Pre, another exclusive deal, this time by Verizon Wireless, tricked iTunes into thinking it was an iPod. Apple quickly changed its software to lock the Pre out, and one would expect Apple locking out any Google phone from using iTunes.
I guess this is why the stretched analogy about the pipe was introduced earlier – to somehow equate AT&T’s and Apple’s business models. There’s another factual error here – a pretty glaring one – in that Sprint, and not Verizon, has the exclusive on the Palm Pre. There’s a strange reference to “any Google phone” here too – as if it’s a theoretical possibility rather than a reality in the form of a growing number of Android devices, which as far as I know haven’t attempted to connect to Apple’s proprietary store.
It wouldn’t be so bad if we were just overpaying for our mobile plans. Americans are used to that—see mail, milk and medicine. But it’s inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
I’m not sure Kessler has really introduced any evidence on the topic of overpaying for mobile plans, but we’ll let that slide – the examples used seem to have been chosen more for their alliterative potential than for any sensible reason, but we’ll let that slide too. On to the real point here – that blocking Google Voice is somehow propping up AT&T. How so? Are we really “waiting for AT&T to transition away from its legacy of voice communications”? In what way? Didn’t Kessler say earlier that wireless data was the fastest growing area of revenue for AT&T? Isn’t the iPhone primarily about data, rather than voice? Yes, Apple desperately needs to make the approval process for apps quicker and more transparent. But I’m not sure there are lots of apps “waiting in the wings” – what would they be waiting for? There are lists of rejected apps, but many were rejected for good reasons and most later found their way onto the iTunes store in a modified form. If you’re waiting, go ahead and submit your app and see what happens.
So now the FCC and its new Chairman Julius Genachowski are getting involved. Usually this means a set of convoluted rules to make up for past errors in allocating scarce resources that—in the name of “fairness”—end up creating a new mess.
Some might say it is time to rethink our national communications policy. But even that’s obsolete. I’d start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data.
The FCC is getting involved, in a very limited and specific way – by investigating the case of the Google Voice application in particular. It’s not clear under what authority they’re doing this, but since it’s just a fact-finding mission at this point that doesn’t matter all that much. Since it is just fact-finding, talk of convoluted rules seems a little premature too.
I’m also not sure how “rethinking our national communications policy” can be obsolete – doesn’t that by definition mean replacing whatever may be obsolete about the whole thing? And for all the reasons I explained above, it’s utterly over-simplifying and hugely erroneous to simply treat all voice as data today – the vast majority of voice is not data – it’s voice, with all the quality, cost, infrastructure and other implications that has. But more to the point: data, broadly speaking, isn’t regulated. Voice is. Unless you want to move to an unregulated voice market (which the carriers would love, by the way) or a heavily regulated data market, that’s an unworkable proposition.
Now, on to the specific proposals.
We need a national data policy, and here are four suggestions:
• End phone exclusivity. Any device should work on any network. Data flows freely.
Any device can’t literally work on any network, especially since we have both GSM and CDMA networks (and now also WiMAX networks) in the US. But it is already possible to take any unlocked GSM phone and attach it to the T-Mobile or AT&T networks. Verizon has also built a model for allowing devices to be attached to its network in response to the open access provisions attached to the 700MHz spectrum it acquired (thank you, Google). But that’s a separate issue from exclusivity. Exclusivity certainly has its pros and cons – it allows devices to reach market at lower prices because the carriers are willing to make concessions in return. But it means that, as a consumer, you have to pair networks and devices you otherwise wouldn’t. But this is one of the prices we pay for a relatively unregulated market – we don’t always get what we want, but we do get a lot of good stuff. We have to take the rough with the smooth.
• Transition away from “owning” airwaves. As we’ve seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.
I love that Kessler uses WiFi as an example of interference-free networking. Anyone who’s tried to use WiFi in the presence of lots of other WiFi networks (e.g. in any relatively densely populated neighborhood) knows how untrue that is. Carriers have spectrum so they can provide predictable service and be able to make reasonable business plans. Would anyone roll out expensive 3G or 4G networks if they weren’t very sure they’d still have the spectrum to light them up when they were finished? WiFi is terribly suited for replacing cellular networks, which seems to be what Kessler is suggesting, even if it may be useful for extending coverage indoors (although femtocells seem to be the preferred solution for that problem in the US, without any regulatory intervention). And unless you have WiFi in your bathroom, I’m afraid there’s still a chance of dropped calls there.
• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don’t like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
A rather dramatic change of speed from Google Voice on the iPhone, but I’ll go with it. This has already happened, both at the municipal level and nationally through legislation. Competition for cable is coming both from the telcos (ironically) which are rolling out fiber-based networks, and through online-based offerings such as Hulu, iTunes (ironically) and Amazon. Interestingly, Kessler then employs the argument that competition provides de facto net neutrality, when he doesn’t seem to think the same argument applies with mobile networks (where there is significantly more competition and more choice than there is ever likely to be in local TV provision).
• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.
I’m not sure how government “encourages” things – it can really only mandate them or ban them. The doubling Kessler talks about has actually happened over the last 15 years without any help from government (speeds available to many consumers have gone from 30kbit/s in 1995 to almost 30Mbit/s today). The highest speeds aren’t uniformly available yet, but they are spreading rapidly and available to more and more households – again, without regulation. Voice policy has nothing to do with the deployment of broadband. And video policy is one of the major drivers behind the rollout of these networks, since the telcos are aggressively rolling out TV services over their new faster networks.
Technology doesn’t wait around, so it’s all going to happen anyway, but it will take longer under today’s rules. A weak economy is not the time to stifle change.
Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don’t need to file with the FCC.
And new features for apps like Google Voice are only limited by the imagination. Mother-in-law location alerts? Video messaging? Whatever. The FCC better not treat AT&T and Verizon like Citigroup, GM and the Post Office. Cellphone operators aren’t too big to fail. Rather, the telecom sector is too important to be allowed to hold back the rest of us.
“It’s all going to happen anyway” is the best possible summary of why a heavy-handed government intervention is the wrong approach. We’ve never justified government intervention on the basis of simply speeding up something that is happening already and there are good reasons for that.
Data isn’t toxic to old pipes – it’s what’s keeping them relevant – old copper lines had new life breathed into them by DSL, and are being supplemented or replaced with fiber connections which are designed to deliver lots and lots of data (yes, including video and even voice). Data doesn’t have any inherent value: it all depends what the content is. And today’s model has consumers or advertisers paying for content on the one hand and ever bigger pipes to stream it through on the other. Those pipes are provided by telcos, who don’t find them toxic in the slightest. And those new apps? Mother-in-law location alerts? Check. Video messages? Check. The telcos don’t need bailing out – you were arguing, Mr Kessler, just a few paragraphs ago about how high their margins are.
Look, I’m sympathetic to many of the points which are buried in the piece – above all, I don’t like the fact that the Google Voice app was blocked on the iPhone – I’d have used it on mine, and I think it was shortsighted of the AT&T/Apple combo to block it. But I don’t believe that justifies government intervention. It should spur me to either: use the web version (www.google.com/voice), which is what I have done, or find a carrier / device combo that will support it. I don’t believe the US mobile market is perfect as it stands: texting prices for individual messages are probably too high, mobile broadband is patchy, AT&T’s network coverage sometimes stinks, etc. etc. But I don’t believe any of this justifies the kind of intervention Andy Kessler talks about in his piece. Rather, I think “It’s all going to happen anyway” and players like Google can only help it on its way.
