Sustainability of the Mobile Industry

This report from Strand Consulting has been getting a fair bit of play in blogs and press. Its the one that says the iPhone is not any good for the operators. You have to give them your contact info to get the full report, but it's free.

This all reminds me of the underlying business model for most of my time at Sprint. Or rather, the quest for a business model. Fairly soon after 2G wireless service launched it became clear that mobile was not a totally different beast, but just wireless telephony. Sprint had been around for way over a century as a local, then long distance company.

Even with new models of content (vs. just people talking to each other one way or another), the default path for mobile operators will be the same as that of the wireline services: commoditization. Dial tone will become a commodity, available from any number of competitors, and incremental improvements are fleeting. It doesn't matter "dial tone" changes to internet service, and circuit-switched voice moves to VoIP. They still will become a "dumb pipe," and get paid pipeline operator rates.

Sprint tried to solve this by becoming an entertainment company. Whatever that means. Every operator tries to solve it by constantly questing for the next big network, and many (especially in North America) by locking consumers in with contracts, and restricting handsets to their network. Some effort is also placed in trying to "differentiate" from competitors, but often it's degrees only, or simply restricting (e.g. locking GSM devices to a network) vs. true differences.

Apple's model is worth looking at also. Because it's not too different from what Motorola did in the RAZR era, Nokia gets away with in much of the world, and most other manufacturers aspire to. When a handset is the big coveted thing – basically, any time the man on the street knows what it's called – every operator wants to sell it, and often has to put up with other demands from the manufacturer to get the rights. The content distributed on the handset, the device UI, the pricing and more is more under the control of the manufacturer than usual.

Operators that want to brand their service, or simplify their customer care experience, by adding their own content, offering the same applications and the same UI on each phone, end up with these supposedly profitable, yet annoyingly out-of-place devices in their lineup.

Incidentally, I saw this sort of stuff up close. Sprint didn't carry the RAZR for a long time. It was not dissimilar from the iPhone hype, but soon enough everyone carried it. And Sprint had to live with a much less Sprinty phone than usual. Much the same happened for the StarTAC, only worse. Nokia, similarly, got away with a lot for a long time as well.

All these strategies all short term solutions. I mean both

1. The operator model of exerting their ownership on everything hanging off their network, avoiding real openness and avoiding playing nicely with any other network unless they are required to or get too much bad press, and...
2. The manufacturer model of exerting their ownership on everything hanging off their phone, avoiding real openness and avoiding playing nicely with any other hardware of any sort unless they are required to.

Here's where I'd normally say how to solve things. And for individual companies I am sure I have shortish-term opinions, but as a global entity, as a sector, I have no idea. I do have predictions. There are, to me, three likely futures:

1) Failures and Mergers

The worst case is the current model just keeps going with loans and prayer, and eventually an operator fails. I am sure some part of it gets bought, but to global finance, it's a graveyard. Anyone else on the fence suddenly doesn't get an extension on their credit, and dozens, then scores of major operators fail. As you approach one dominant operator per market (country, usually) customers start loosing. Lack of competition on an entrenched product means no price pressure, and the operators charge enough to profit (especially with the debt obligations some take on by absorbing the failed operations) openness initiatives dry up, and lots of innovation with it. Without competitive pressure, do not expect things like new types of networks to go online unless rapid and robust revenue can be made from them. This sort of future could go on and on until something disruptive happened, even if not the best technology, like a satcom provider finally figures out how to be competitive.

2) Multi-Tier Consumption

I can see something not dissimilar to the current setup, with a similar number of competing operators and manufacturers, continuing with a totally different pricing model. Take some of the concepts from Chris Anderson's Free. Even if nothing is actually free, two levels of service, or other models of add ons seem like something that could regularly generate revenue. I don't mean the current system of pricing new, cool things expensively, as that's not sustainable (someday, things have to level off, or lending for those networks will kill everyone, or something) or of over-pricing the services that are cheapest to operate (SMS vs. voice rates in North America make no sense. A favorite crazy thought of mine is to sell add ons to phones, like they do for cars or, more specifically, high-end watches: add a metal case, move from a plastic, to a glass, to a high-grade crystal screen, and so on. A basic level of hardware (or service) is available for a cost low enough to attract everyone, with a fee for extras that do not change much over time. (Note my phone-customization example requires cooperating with handset manufacturers, instead of sorta fighting them).

3) Something else

Seriously, although it's not a thing in itself, I think the result is more likely to be something unforeseen and unpredictable than anything I can dream up. A Kindle-like mode, with a non-phone device using paid-once service, is an example (if pervasive enough) of a disruptive change. There are several technological or market possibilities like this I can come up with, and I am sure a half dozen plausible ones I don't know about.

Regardless, I do not see the current model muddling through for even another decade. There are other trends at work (new networks, embedding networking, the rise of smartphones with increasingly little operator control) exerting other pressures that I see no one talking about as big trends that will influence the whole business. Especially if no one in charge starts realizing how their business really works, it might not be working very soon.