Friday, June 03, 2005

Innovation in the Wireless Space

The WSJ's Walt Mossberg claims that in the US wireless market, "the wireless phone carriers have used their ownership of networks to sharply restrict what technologies can actually reach users." Tom Evslin at Fractals of Change agrees and brings up the example of Hong Kong, where mobile phone companies do not have control of which phones and programs can run on their network. [Speaking of which, his posts on telecommunications are phenomenal.]

Their argument that the carriers are harming innovation, however, seems unfair and only true at the margin. The huge leap in innovation occurred when the carriers invested billions of dollars in the infrastructure necessary to create national networks and, again, when they invested billions to upgrade their networks for digital service, data capabilities, etc. Compared to this investment, innovations like the Treo are quite small and incremental.

Letting the carriers exercise ownership (i.e., control) of their networks is just another way of saying that they can seek to maximize profits. It's important that they do so because, in high initial investment, long payoff type industries such as wireless communications, cable, and satellite, companies are not profitable or cash flow positive until the network has been built out and deployed. In order to encourage future investment, development, and innovation in analogous situations, it's paramount that these companies earn a reasonable return on capital.

The Hong Kong market illustrates both the points both Tom and I are trying to make. It's true that, as a result of less carrier control, consumers there have more options when they look for phones, content, and mobile applications. However, it's also true that cutthroat competition prevents the carriers from justifying further investment outside of that required to sustain the current business.

It's not clear to me if Walt and Tom are calling for the carriers to willingly open their networks or if they are implying that regulators should take attention but I think competition will soon solve the issue. Considering that there are 4 large, national wireless carriers competing for customers, they will find it difficult to ignore innovative technologies for any sustained period of time. If customers demand the Treo, they will get it or else they will migrate carriers; the stodgy carrier will have to take notice or Wall Street will punish it for rising customer churn. On the other hand, forcing the carriers to open their networks through regulation will almost certainly lower the long-term returns of the carriers, crimping future investment and innovation.

On a side note, it's ironic to see Steve Jobs deploring the control that carriers exert over their network when he runs an even more closed system (iPod + iTunes) for music!
[Steve Jobs] is wary of producing an Apple cellphone because he would have to offer it through the “four orifices” – the major US cellular carriers – rather than being able to sell it directly to the public. We here in the US would have a far wider choice in wireless phone technology if wireless carriers did not have a veto over what is deployed on their networks.

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