The smartphone wars: There’s dross in them thar hills!

Ken Burnside emailed me an interesting tip about a boring financial fact that I think is absolutely fundamental to understanding the smartphone wars. Turns out there’s no gold in them thar hills; the return on investment of wireless networks is negative.

Exhibit A for this proposition is a ZDnet article titled Broadband networks: Returns on invested capital stink. They cite a research note indicating that the ROIC (return on invested capital) in wireless broadband is 0.3% over the last decade. That’s not a year-over-year average, it’s the ROIC for the entire ten years.

Sounds pretty bad, yes? Wait. It gets worse. Ken also points out, quite correctly, something the article’s authors missed. The annualized inflation rate from 2000 to 2010 – including the mini-deflationary cycle from 2008 to 2010 that we’re just now exiting – has been about 0.5% per year. So the inflation-adjusted returns to the carriers have been negative.

This is a more robust result than it looks like. Inflation of 0.5% compounded over 10 years is about 1.6%; this means for constant-dollar carrier returns to the carriers to be positive, the ROIC figures would have to be low by a minimum factor of over 5. Another way to look at this is that the carriers have been losing money to the tune of about 1% of ROIC, but with the losses largely masked by inflation.

Yes, I realize the ZDNet article doesn’t say whether the 0.3% was adjusted for inflation; it might have been. But an optimistic assumption about that turns out not to get the carriers out of their hole; the ZDNet authors argue real returns have been negative, though they don’t say by how much, because of huge and botched acquisitions. So the losses may not mount as high as 1%, but there doesn’t seem to be any way to slice the numbers that doesn’t indicate at least slightly negative ROIC.

This has a number of fascinating implications.

First: Markets are working. Despite the carriers’ oligopolistic behavior and obnoxious customer-control tactics, wireless users have captured almost all the gains from the infrastructure buildout.

Second: The carriers have a pretty convincing case for resisting further regulatory takings (including “net neutrality” rules) even given that their FCC licenses make them creatures of government fiat. There simply aren’t any “excess profits” to be taxed or socialized away.

Third: Google’s strategic direction looks smarter every day. They’ve put themselves in a position where they profit from the buildout without having to eat negative returns. Same goes for Apple, but Google’s advertising profits will probably scale better with network usage volume than Apple’s hardware sales.

Fourth: The carriers have to be playing a long game, hoping they can amortize their buildout costs and move into net profitability before something disruptive happens.

Fifth: The carriers are desperate to cut costs and drive up margins. But not symmetrically; they’ll tend to favor cost-cutting, because the causal link to better ROIC is both more direct and easier to demonstrate to investors.

To understand that last point, you have to understand how net-present-value accounting works. When firms do their capital-allocation planning they apply a discount to future profits because money has time value – that is, having money now is better than having money later. Below a threshold positive ROIC it’s better to keep your capital in your pocket. If your ROIC is negative it’s much better.

Taken together, all these do a good job of explaining some otherwise puzzling features of the smartphone wars.

The big one is why the carriers have fallen into Android’s honey trap. They’ve traded cost-cutting in present time (by the amount of NRE they no longer have to use on in-house software development) for future loss of control over their customer base. If their ROIC were positive enough, this would be crazy. But now we have good reason to think it’s slightly negative – and if you’re underwater and using net present-value accounting, it’s difficult to construct a scenario in which foregone future profits matter more than cutting costs to get into profitability now.

For exactly the same reason, Windows Phone 7 is a no-hoper. Windows licensing fees are not just like NRE, they’re actually worse because they’re a recurring expense that will come right out of per-unit margin on sales and bring with it all the strategic problems of losing control of your software layer. It would take seriously bad drugs to get a carrier CEO to buy that combination.

I’ve predicted before that carrier skinning of Android wouldn’t last long as a business tactic, and indeed it seems to have been in decline since T-Mobile shipped the unskinned G-2 in October. Giving it up is a similar trade; reduced software-development costs now for loss of customer control later. What I didn’t get was how brutal the cost-reduction pressure on the carriers is. Even in a positive-ROIC situation, it’s likely that carrier skinning would fail the net-present-value test as consumers caught wise to how much it sucks. Since carrier ROIC is actually negative, the relative value of unexpended capital goes way up and there’s basically no hope that the NRE spent on carrier skinning pays off. The only thing sustaining it has been mental habit and irrational territoriality.

(OK, you in the back there waving your hand frantically. Yes, I know about deals like the NASCAR/Sprint tieup. NASCAR pays Sprint to skin phones as a marketing move. Yeah, you’re right, this is a different business case from carrier skinning. The problem is that NASCAR has to pay Sprint’s entire NRE for the NASCAR skin or the deal is worth less than nothing to Sprint. In fact, it’s worse than that because NASCAR also has to pay Sprint for taking a time-to-market hit and afterwards being stuck with a down-version build of Android that Google is teaching consumers not to want. Those costs pile up fast, so tie-ups like this don’t have a bright future. We might already have seen the last one.)

It’s also easy to see why carrier marketing is pushing the smartphone transition so hard – they’re chasing sales of higher-pricepoint, higher-margin handsets. They’d do this anyway, but the negative ROIC on their buildout makes it panic-urgent. Android exploits this urgency; if the carriers had enough positive return, capital spent on in-house development of their own smartphone OSes or Windows Phone 7 licensing fees might still pass the net-present-value test.

The most interesting question though, is what’s going to happen and how much blood is going to be spilled when investors figure out out just how utterly hosed the cell carriers are. Negative ROIC right now plus Google successfully commoditizing their future equals get the hell out while you still haven’t lost your shirt. Where are the carriers’ profit margins going to come from a decade hence?

I think it’s actually time to ask a more radical question: will the carrier oligopoly still exist in ten years? And I’m inclined to think the answer is no.

To see why, let’s start from the ZDnet analysis. They think carrier ROIC is negative because the carriers have been wasting crap-tons of money on stupid acquisition deals. Empirically it’s hard to argue that the acquisitions haven’t been stupid, but there are deeper questions here. Like: why are these acquisition deals stupid? And: Is that stupidity essential, entailed, or is it plausible to imagine a history in which the carriers played smarter and kept their ROIC positive?

To answer these questions we need to go back to the basic Coasian theory of the firm, in which corporate scale is driven by the difference in communications and transaction costs between the interior of the firm and the exterior; the higher that difference, the more internal diseconomy of scale you can tolerate and still win. Now consider a business environment in which that difference is steadily dropping (because faster, cheaper communication is lowering overall transaction costs). The optimal competitive size of firms drops with it.

So, why are the carriers huge? Because large capital concentrations both demand and reward heavyweight management structures. During something like a huge infrastructure buildout, you need capital concentration and the smart move is to merge your lump of capital with as many other lumps as you can as fast as you can, because the biggest lump is likeliest to win the infrastructure race. Thus the big stupid M&A deals – strategy sound, execution poor.

But what happens when the buildout is done? You’re stuck with the diseconomies of scale from bigness, but your massive lump of capital isn’t so much help any more. This is exactly the situation the cell carriers are in.

I hear you boggling. “Huh?” you say, “There’s lots of the U.S. and the world where the cell coverage sucks.” That’s right; it’s because there isn’t enough expected volume and return from extending coverage to justify the capital cost. For years now the carriers have only been extending their networks to avoid losing market share against each other, not to increase overall coverage. From the financial-minimax point of view, the cell buildout is done. We won’t see dramatic coverage improvements before a technological break that dramatically lowers cost per square mile covered.

But while this is going on, communication/transaction costs are still dropping, so the diseconomies and penalties of being large enough for the buildout phase are still rising.

My conclusion: eventually, investors will bail and the carrier oligopoly is going to disintegrate. And I mean dis-integrate – lose the vertical and horizontal cohesion it now has. Maybe Google will buy the towers up cheap at the going-out-of-business sale.

132 thoughts on “The smartphone wars: There’s dross in them thar hills!

  1. Good analysis on how some of the cogs fit together, but I thought it was common knowledge that the carriers were sinking more money into infrastructure than they had managed to pull out. Maybe that’s just because a good friend of mine works for AT&T. Anyway, from an investment return perspective, carriers like AT&T are stuck doing this, because the only thing with a worse ROI than cell phones is a single non-DSL landline to a detached residence…

  2. I for one am looking forward to cheap monthly data plans and Linux (in the form of Android) on every device. It will be almost as pleasant to observe as Microsoft’s gradual decline into irrelvance.

  3. I’d be interested to see these numbers put in perspective with those of non-broadband networks. I used to think the carriers had massive ROI on these. Also it seems to me that the article only covers the US. The situation could be very different in other countries (especially in smaller and more densely populated ones) .

  4. >The situation could be very different in other countries (especially in smaller and more densely populated ones) .

    Oh, sure. Especially and small heavily urbanized ones. Hong Kong and Singapore are probably best case from a carrier point of view.

  5. @Hugues

    2G networks had positive ROI mostly because of texting – IIRC voice services paid for the investment but not much beyond that. However texting was insanely profitable and allowed all sorts of other revenue gathering services such as ringtone downloads and premium text services.

    The carriers have screwed up 3G deployment mostly because they have been desperate to make it as profitable as SMS and failing because the walled garden approach doesn’t work with the Internet. As a result they tried to maintain metered usage rates that simply encouraged subscribers to look at alternative ways of communicating whenever possible. Unsurprisingly pricing your data service high leads to no one using it and hence negative ROI. We can thank Apple and AT&T for actually coming out with a flat rate data plan that allowed people to actually use the 2.5G and 3G networks the way they should have been used.

  6. I’m not sure I agree with the article conclusion, though. I wouldn’t be surprised at a push toward consolidation, as a part of rent-seeking, but of course with lots of pushback from regulators. I think, if the buildout really is essentially done, that at least AT&T should be reasonably profitable going forward. In any case, the investors won’t bail until there’s a hiccup in the dividend payment. Personally, I don’t think the buildout is really finished until they start putting fixed cellular on the side of homes, but I think the most expensive part of the buildout (licenses, land, power and other infrastructure) is probably largely complete.

    But what happens when the buildout is done? You’re stuck with the diseconomies of scale from bigness, but your massive lump of capital isn’t so much help any more. This is exactly the situation the cell carriers are in.

    To the extent that Android helps with a competitive proliferation of devices, Google and the carriers are on the same side. Just like Microsoft needed all the competition to commoditize the computer hardware, the cell companies need really cheap terminals. And they are coming. As you point out, the carriers are playing a long game. They know that the government forced them to allow attachment of anything to a landline, and they can see that repeating. The flip side of that is that, at some point, they don’t have to spend anything at all on phones. They don’t have to stock them, specify them, or support them. That’s actually a net win for them — let somebody else concentrate on the brutal terminal business while they concentrate on the brutal business of building, maintaining, powering, and connecting cell towers.

    Now, it may be that eventually, WiFi is ubiquitous enough that cell phone data isn’t used for much. That’s certainly the elephant in the room, the big bet that the carriers have taken. To the extent that the carriers lose that bet, the buildout really is done, and they just need to milk the voice/minimal data business they have. But even that business could probably be a cash cow, starting today.

    Assuming, though, that WiFi isn’t and won’t be ubiquitous enough. (I think this is probably still a pretty good bet, at least for unencrypted WiFi.) What happens when the carriers get really cheap terminals? Every power meter, every vending machine, every parking meter, every car, everything is on the net. How much would it cost AT&T to support a vending machine sending a few data packets at 3 AM to explain that it is out of moon pies? How much value can they extract from that? Probably at least $3/month/machine. Power meters? At least 10 cents/meter/month, for one or two data packets/month, in perpetuity. Maybe more, for the meters that control air conditioning loads, etc.

    It may be that the carriers spent so much they will never be really profitable, but as long as they make enough to cover their operations and debt service, it doesn’t really matter whether the investors flee or not, the carriers will still exist in some fashion. And as soon as one of them trips and falls, the others will probably pick over the bones, and become more profitable.

    Your scenario of google picking up the assets as they start failing is intriguing, but most probably counterproductive. google wants good, essentially equal relations with all the wireless companies, and that would die as soon as they got in the business. The regulators wouldn’t let google pick up the assets of more than one company in any case, so the next thing you know, Microsoft and Oracle would own wireless companies. It’s hard to imagine google starting down this path, unless they can acquire a big enough company at the outset (AT&T or Verizon) and their internal number crunchers show that they can make money by offering free wireless.

  7. >Your scenario of google picking up the assets as they start failing is intriguing, but most probably counterproductive.

    That line was mainly intended as a joke.

    However…some technological break that renders the cell infrastructure obsolete is more a matter of “when” than “if”, especially given the speed at which the cost per square mile of WiFi/WiMAX coverage is dropping. Then of course there’s Long-Range Ethernet, which would make a nice cheap backhaul for a net of WiMAX towers. Google is already experimenting.

    Your optimistic scenario for the carriers depends on their present infrastructure remaining competitive for a timespan measured in multiple decades. I am quite doubtful of this.

  8. Your optimistic scenario for the carriers depends on their present infrastructure remaining competitive for a timespan measured in multiple decades. I am quite doubtful of this.

    The question is not whether they ever get back their prior investment. The question is whether they (possibly after restructuring if the debt burden is too high) can be cash flow positive with the infrastructure they have. I agree it’s not a slam-dunk, but I also think that the competitive market for terminal devices that Android is helping to foster is actually a net benefit for the carriers, and could help them exist for a bit longer than otherwise. Even the WiMax will have a huge sunk cost in licenses and land, so they aren’t going to want to drive the price down too quickly.

    You are absolutely right that they are facing the same sort of problems as the airlines and chip companies. If an airline can fill one more seat on a flight that’s already scheduled, it’s worth doing even for $20, because it’s pure profit. However, if they fill all the seats at $20, they will go out of business, so in some cases they don’t want to drop the price because it sets a bad precedent. Chip companies have similar issues, but not quite as bad. The first chip might cost $5 million, but the nth chip only costs 20 cents.

    Obviously, a monopoly or a cooperating oligopoly can make a killing in this environment, but the oligopoly is not stable, and when it disintegrates, it will be as painful as airline deregulation, and the landscape will change somewhat, but I think that cell carriers will still exist, just as airlines still exist today.

  9. @esr:
    But what about the government? They’re not going to let the entire wireless industry to collapse, since the wireless infrastructure is now considered an important national asset. If such a collapse were to occur, you can bet the wireless providers will be labelled as “too big to fail” and we’ll be seeing bailouts all over the place.

  10. I have difficulty imagining a situation where a giant, entrenched, built-out, government-sanctioned, regulatory-capture monopoly won’t find a way to make money by the trainloads and milk its customers for every last discretionary dime. (From a practical standpoint, there seems little difference between a true monopoly and our oligopoly.)

    Hopefully my pessimism is wrongheaded and esr will prove correct. But thus far I haven’t noticed much evidence toward the customer being the victor here.

  11. >>Assuming, though, that WiFi isn’t and won’t be ubiquitous enough. (I think this is probably still a pretty good bet, at least for unencrypted WiFi.) What happens when the carriers get really cheap terminals? Every power meter, every vending machine, every parking meter, every car, everything is on the net. How much would it cost AT&T to support a vending machine sending a few data packets at 3 AM to explain that it is out of moon pies? How much value can they extract from that? Probably at least $3/month/machine. Power meters? At least 10 cents/meter/month, for one or two data packets/month, in perpetuity. Maybe more, for the meters that control air conditioning loads, etc.<<

    Power companies are already using their own network, the power lines, to transmit usage data to the central office using "smart meters". I have one on my house. I suspect power companies, at least, have the smart grid/smart meter in mind for their metering solutions. And, if they have to reprovision the entirety of their network to accomplish that, then they might as well market that service to others who might need it, like vending machines, etc. At the very least, I believe that this "cash cow" will potentially have competition from this angle.

  12. What’s wrong with my math? 1.005^10 = 1.05… – so that’s 5%, not 1.6% over the ten years.

  13. @dean:

    Power companies are already using their own network, the power lines, to transmit usage data to the central office using “smart meters”. I have one on my house.

    A lot of smart meters use RF, for example, to talk to a truck that drives by. Some of them do their own mesh networking.

    I suspect power companies, at least, have the smart grid/smart meter in mind for their metering solutions.

    I don’t think broadband over power lines is going anywhere, at least in the US. The largest deployment shut down earlier this year. The problem is that power lines are really just big antennas, and not very well engineered ones at that.

  14. >What’s wrong with my math? 1.005^10 = 1.05… – so that’s 5%, not 1.6% over the ten years.

    One of us dropped an intermediate zero somewhere, I expect. No matter; if you’re right, the carrier losses are half an order of magnitude worse and my argument is that much stronger.

  15. “Google’s advertising profits will probably scale better with network usage volume than Apple’s hardware sales.”

    Does this partly explain why Apple is getting into the mobile ad business, too, with iAd and its 40% cut of revenues therefrom? An attempt to create a revenue stream that scales better than just selling iPhones all over the place, and that, in fact, might continue even after Android drinks Apple’s milkshake at the low end?

    ESR says: Yes, I think that’s exactly right.

  16. Wait, so WinPhone7 is hosed because carriers lose control over the software layer, so they should use Android.

    But Android also makes them lose control over the software layer, in the next paragraph.

    Seems like the only comparative negative is thus the WP7 licensing fee, then.

    I suspect that there are cases where the net gain is greater than the licensing fee; I’ve gotten to play with WP7 and it’s actually good (which is the first time I’ve been able to say that about a Microsoft mobile platform, having used CE/Mobile on handhelds on and off since version 3).

    (On the whole collapse problem… doesn’t buildout actually never stop at some level?

    By which I mean, I shall assume that wireless communication technologies aren’t going to stop at LTE, and further that as they increase in bandwidth, the backend, be it microwave or physical lines, will also need to be built up.

    The tower is the cheap part of all that, as I understand it. The tech-dependent transcievers and especially the backend are not cheap to upgrade.)

  17. >Seems like the only comparative negative is thus the WP7 licensing fee, then.

    And the fact that you wouldn’t have the option to sever your relationship with Microsoft without a traumatic break. One of the key advantages of open source from a customer perspective is that if you fall out with your vendor, you can hire someone else to maintain it. That makes a huge difference in business risk.

    >On the whole collapse problem… doesn’t buildout actually never stop at some level?

    Look at the evidence…rates of tower construction and so forth. I suspect you’ll find that when you include siting, powering, and antenna costs that the transcievers are a relatively small piece of the budget – at least, the carriers behave as though that’s true. The things are just silicon, after all; familiar scaling rules apply.

  18. The basic problem for the carriers is simply that we don’t *need* a bunch of overlapping networks. A single utility covering the nation as a regulated monopoly would probably be much better for everyone except the carriers. (All you geezers remember Ma Bell before they broke it up?) That’s what drove all those ‘foolish’ aquisistions. It’s John D. Rockefeller trying to eliminate ‘ruinous competition’ all over again.

  19. >The basic problem for the carriers is simply that we don’t *need* a bunch of overlapping networks.

    Wrong. We need a minimum of two, to keep each other honest.

  20. @LS

    >The basic problem for the carriers is simply that we don’t *need* a bunch of overlapping networks.
    >A single utility covering the nation as a regulated monopoly would probably be much better for
    >everyone except the carriers.

    We may not need them, but in the long run, it probably works out best for all involved. Just as an all android or all iOS phone ecosystem would suck, so too would an all Verizon, or Sprint or AT&T ecosystem. Competition is never a bad thing, and I for one wish I could go back to the days of regional cell carriers. I miss my Suncom account and my 1500 minutes with unlimited web for two phones for a mere $70 / month. Sure I only had service in 3 states and would have to pay roaming otherwise, but for those few times I left those 3 states, I could buy a $30 prepaid nationwide SIM and be just fine.

  21. > I suspect you’ll find that when you include siting, powering, and antenna costs that the transcievers are a relatively small piece of the budget – at least, the carriers behave as though that’s true.

    That IS true. However, there’s another cost factor involved there, and that is the cost of backhaul links. From what I hear, many cell sites are served by a couple of T1s or by microwave links. Perfectly fine for voice/text traffic but totally inadequate for 3G/4G data traffic. Rumor has it that this was AT&T’s main capacity problem, not cell density/load.

  22. >>What’s wrong with my math? 1.005^10 = 1.05… – so that’s 5%, not 1.6% over the ten years.

    >One of us dropped an intermediate zero somewhere, I expect.

    There’s an easy way to do this with small numbers.

    Note that (1+x)^n = 1 + nx + o(x^2).

    If x is small, then x^2 is tiny.

    So if you want to compound 0.5% over 10 years, multiplying by 10 is less likely to result in dropping zeroes.

  23. > That IS true. However, there’s another cost factor involved there, and that is the cost of backhaul links.

    But the cost of upgrading/maintaining backhaul links to the towers is minuscule compared to the cost of upgrading the last mile to everybody’s house. And, I think even that’s mostly “done” for now, for AT&T.

    Verizon may be another story entirely. I think their backhaul capacity dearth is why they were doing deals with google that had everybody screaming foul.

    > Rumor has it that this was AT&T’s main capacity problem, not cell density/load.

    I hadn’t heard that. I have seen the opposite, e.g. AT&T recently upgraded 55 cell sites in New York to add spectrum. But AT&T has a large network, so it wouldn’t surprise me that some cell towers had insufficient backhaul.

    BTW, for competitive (or anti-competitive) reasons, AT&T is still buying spectrum.

  24. esr:

    The networks would have been built on the assumption that they would achieve an annual roic of 10% (say). What I assume happened is that the prices obtained by the networks were much lower due to overcapacity. As a general point, any high fixed cost investment is likely to prove disappointing unless there is some barrier to entry. What normally happens is that excess capacity is built by optimistic operators and pricing then plummets.
    With telecoms there is an additional problem of shorter asset lives due to the rapid change in technology and price deflation.

  25. I hadn’t heard that. I have seen the opposite, e.g. AT&T recently upgraded 55 cell sites in New York to add spectrum. But AT&T has a large network, so it wouldn’t surprise me that some cell towers had insufficient backhaul.

    AT&T’s cellular network is one of the oldest, also. I suspect that many of their oldest cell sites are converted analog towers. So I think it’s likely that both things are true: insuffucient backhaul capacity + cell density/load.

  26. > Second: The carriers have a pretty convincing case for resisting further regulatory takings (including “net neutrality” rules) even given that their FCC licenses make them creatures of government fiat. There simply aren’t any “excess profits” to be taxed or socialized away.

    As if economics actually mattered in such cases. The “scarcity” and “public airwaves” arguments are sufficient.

    The carriers will push for any regulation that they think will help their bottom line. In return, they’ll roll over for anything that they think is neutral. Govt, being govt, will take that deal.

    It seems unlikely that the carriers will correctly judge the effects of regulation, but that won’t factor into their decision.

  27. With telecoms there is an additional problem of shorter asset lives due to the rapid change in technology and price deflation.

    Incidentally, this is part of the reason for the wireless telecoms to act in an oligopolistic manner. It’s behavior that stretches back into the history of the wired phone system. Anyone else remember when the telcos refused to allow direct-connect modems and everyone had to use couplers? :) The telcos acted the same then; they tried to slow the spread of technology to consumers in order buy them additional time to build up the infrastructure, which never really happened until the passage of the omnibus telecom bill deregulating the entire industry in 1996.

  28. LS Says: The basic problem for the carriers is simply that we don’t *need* a bunch of overlapping networks.

    esr Says: Wrong. We need a minimum of two, to keep each other honest.

    Nah…what a lot of people say about competition doesn’t work out in practice. The natural thing for ‘competing’ businesses to do in a mature industry like cell phone networks is to collude to cut down on ‘ruinous competition’. Two carriers would simply do everything they could to keep the status quo, and the entrance of a third competitor would be absolutely impossible. Cell phone networks are a utility, like electricity. They shouldn’t overlap.

    A single national network does not have to suck…AT&T did a fine job back in the old days. I was there.

  29. > But what about the government? They’re not going to let the entire wireless industry to collapse, since the wireless infrastructure is now considered an important national asset. If such a collapse were to occur, you can bet the wireless providers will be labelled as “too big to fail” and we’ll be seeing bailouts all over the place.

    Perhaps the carriers will be “convinced” to become a public utility, run on a cost-plus basis, for a buy-out at 10% over their cost. The “natural monoply” and “efficiency” arguments are politically sufficient. (Note that I didn’t say valid.)

  30. >Nah…what a lot of people say about competition doesn’t work out in practice.

    You really haven’t been paying attention, have you? As I pointed out in the OP, cell users have captured almost all the gains from the buildout. The cell carriers are a textbook demonstration that competition works quite well even when an oligopoly is doing its best to be collusive.

  31. > A single national network does not have to suck…AT&T did a fine job back in the old days. I was there.

    Yes, AT&T’s network was great. Good dial tone, indestructible phones. I remember all that. But do you remember how much a long distance call cost?

  32. > But do you remember how much a long distance call cost?

    I was also there and remember the pace of innovation … glacial.

  33. > A single national network does not have to suck.

    There is so much wrong with this statement on so many levels I am overwhelmed by the number of obvious problems this would generate, so obvious that only the most susceptible mooks brainwashed by government/corporate agitprop could not realize it, but I shall attempt to enumerate the most prominent ones for your convenience:

    1. Content filtering. If private, we can’t escape. If public, utterly inevitable given the grasp of the FCC.

    2. Atrocities against privacy too tempting to ignore. Data piracy, terrorism, political unrest, just about anything will be used to justify this. I don’t want to put the TSA at my terminal.

    3. Software lock-in, while not as much as a problem as it could have been due to the rather fortunate market penetration of a free and open source Unix, remains possible as the hypothetical carrier shoves its ugly protocols down our throats.

    4. Lack of redundancy. The One True Carrier would only build as much infrastructure as it needs to stay the One True Carrier, especially if it is public.

    > AT&T did a fine job back in the old days.

    a. They certainly ain’t now.
    b. They weren’t back in the day.
    c. Most of the data being transferred then was analog audio; text can be monitored with significantly less effort due to computers and whatnot.

  34. I’m not very surprised by this. Cell nets are a mature industry, and profit margins in mature industries tend to be very slim. Compare it to the airlines, for example.

  35. A single national network does not have to suck…AT&T did a fine job back in the old days. I was there.

    You have got to be kidding. Long distance calls were ridiculously expensive, and you couldn’t make international calls without taking out a second mortgage and signing away your first born. And you had to pay extra for touch-tone service. And it wasn’t much better under the Baby Bells, either. I, for one, am glad that they deregulated the phone system.

  36. I have limitations on what I can say on this issue.

    Right now, the carriers are all competing for the same group of customers; the 4G rollout is something that, for the most part, every carrier rightfully dreads. There is a huge capital sink, and a big advantage to being the first mover…provided you get two year’s head start.

    We watched Clearwire and WiMax rollouts tank two years ago as two carriers tried to get that head start and ran out of capital before they could make enough money to stop hemmorhaging money. They managed to do this just about the time the credit markets were seizing up like an engine packed with sand…but that caused nearly every carrier to NOT put large amounts of capital out there, in large part because they were’t going to be able to get loans at any price to do it.

    Two things changed.

    1) LTE/WiMax compatible phones hit the market in Asia, and then in Europe, and started getting some buzz.
    2) Apple’s iPhone proved that there was a much larger market for data plans than had ever been considered, and when competitors to the iPhone hit the market in a viable way, existing infrastructure was going to prove inadequate.

    Testicles, meet bench vise. Bench vice, show the testicles a nice, close grip.

    Up until Verizon started doing it, every carrier was trying to put it off for “another quarter, and we’ll see what happens…”.

    The one sterling piece of news for the carriers (and the thing driving a lot of M&A idiocy) is that the current financial market situation means that carriers are sitting on large piles of cash. About the only thing that carriers use credit for is building out large chunks of infrastructure…and the credit market siezure two years ago caused them to go on a cash-and-carry basis and postpone many things while accumulating money.

    I think that one of the major carriers is going to decide to ‘skip out’ of the 4G upgrade cycle due to fear of depreciation of assets versus deflationary pressure. There are two competing incentives – “Don’t let Verizon get that two year head start” on the one hand, and “It will get cheaper to implement the longer we wait” on the other. I think that the major carrier that avoids 4G is going to look like it’s run by geniuses in the short term, and will then have a sudden and spectacular customer flight issue, and will then get acquired by someone else. The possible disruptor is a 5G standard emerging from the market, which they can be the early adopter on.

    This type of transition is hard to time right and timing it wrong is usually fatal.

    As to Google buying up cell networks – they did just spend 1.9 billion to buy a huge chunk of networking infrastructure in New York City.

  37. >Up until Verizon started doing it, every carrier was trying to put it off for “another quarter, and we’ll see what happens…”.

    Verizon isn’t breakiing trail on 4G. Sprint is. Sounds like you ought to be referring to the 3G rollout.

  38. >> A single national network does not have to suck…AT&T did a fine job back in the old days. I was there.

    >Yes, AT&T’s network was great. Good dial tone, indestructible phones. I remember all that. But do you remember how much a long distance call cost?

    In the late sixtys, it could take quite a while just to set up a long distance call. every hop had to be handled by a live operator.

    It took four operators, five minutes if things went well, to call my uncle — 200 or so miles away. Admittedly both ends were in quite rural areas. And the cost was significant, don’t remember the numbers. Now then, it really doesn’t cost any more, time or money, to call Florida, diagonally the opposite corner of the country, than Seattle, less than 200 miles away.

    I don’t want ma bell back, even though the current setup is hardly perfect.

  39. While Sprint was first out the gate, they were doing it in selected markets. There are indications that Sprint is capital constrained.

    Verizon 4G is currently covering about 3x the number of potential customers. Verizon made a MUCH larger bet on this, and is the carrier everyone is trying to play catch up to. AT&T has the best shot.

    T-Mobile is also behaving as though it’s on a short leash in terms of capital to spend on this.

  40. > And you had to pay extra for touch-tone service.

    If you still have a landline, and you look at your bill very carefully, you will probably find you are still paying extra for touch-tone service. Around here, I think it’s around 18 cents a month…

    It would be interesting to ask the phone company to provision a pulse-dial only line and take out the 18 cents, just to see how that worked.

    On a related note, my parents had a “party line” without any other parties on it for years until they moved. I vividly remember AT&T phoning up to talk to my dad about twice a year about moving to a non-party line. We were grandfathered, but since they weren’t provisioning party lines any more, they were eager to get the extra revenue stream for no extra infrastructure.

  41. > As to Google buying up cell networks – they did just spend 1.9 billion to buy a huge chunk of networking infrastructure in New York City.

    I thought they bought an office building?

  42. >T-Mobile is also behaving as though it’s on a short leash in terms of capital to spend on this.

    Agreed. I think that’s a large part of the reason they’ve been pushing Android so heavily. Differentiation on the cheap.

  43. Aren’t we all still paying a tax on our phone bills that was originally put there to help pay for the spanish-american war?

    Is Spain beaten yet?

    Update: A quick Google search reveals that they stopped collecting it in 2006.

  44. This article about the wireless networks reminded me of something Warren Buffet said about textile mills years ago.

    In a quest to become more efficient, the mills would spend money on new equipment. In theory the new machines made them more efficient, so they could make more money.

    But in practice every mill made these improvements, and none of them made any more money. The benefits all flowed to the consumers in the form of lower prices. Thus they would have sunk in more capital to no effect.

    It is the fallacy of composition writ large. Wireless networks seem to be the New England textile mills of our age: a lousy commodity business.

  45. If you still have a landline, and you look at your bill very carefully, you will probably find you are still paying extra for touch-tone service. Around here, I think it’s around 18 cents a month…

    LOL. As if I’d ever give the local telephone monopoly a single red cent after they screwed me over — twice — and ignored my demands to fix the problem or I’d go elsewhere. (They actually laughed at me.) So go elsewhere I did. These days, I have the Sprint cellphones and Vonage’s VOIP service.

    It would be interesting to ask the phone company to provision a pulse-dial only line and take out the 18 cents, just to see how that worked.

    They probably won’t. My mother-in-law similarly had a grandfathered party line and hard-wired rotary beating stick phone up until December of 2009 when they told her as of the 1st of January 2010, they were finally replacing the old switching equipment in her area and that she’d have to get a touch-tone phone. She’s in Michigan Bell Ameritech SBC AT&T territory. In other parts of the country, YMMV.

  46. > that she’d have to get a touch-tone phone.

    That’s probably a lie. I can’t imagine any CO equipment wouldn’t still handle pulse dialing. It’s definitely still a requirement for CO silicon, like the last CO silicon I helped build.

    Telephone standards don’t die. They accrete. Building silicon that allows a linecard that can be built that meets all disparate worldwide standards is quite an engineering exercise.

  47. Massive category error. The article is about broadband networks. Mr. Moffett is the Senior Analyst for U.S. Cable and Satellite Broadcasting at the “sell side” of Sanford C. Berstein & Co.

    He loves to bang his drum about Verizon’s FIoS, claiming it’s a “lousy product for Verizon investors”.

    Moffett has been making the rounds lately complaining that a wireless apocalypse is afoot, telling any journalist who’ll listen that the wireless market is “collapsing” and/or “grinding to a halt.” Why? Because as new subscriber growth slows and the market saturates, incredible profits for carriers like AT&T and Verizon Wireless may soon be downgraded to only somewhat incredible. Carriers may soon have to start competing more heavily on pricing, driving stock prices down. That’s great for you and I, but crappy news for Moffett’s clients.

    Again, the report referenced by the article applies to broadband networks. Your application of (a trade-rag article on) it to the wireless cellular industry is a misapplication, at best, and belies a significant lack of understanding on the subject. Your lack of knowledge about accounting basics is also apparent.

    Le Roi est mort, vive le Roi!

  48. >Massive category error. The article is about broadband networks.

    Think again. The cited study specifically included wireless. In fact, one of the interesting things about it was the comparison of ROIC for different networking modes.

  49. I’m not sure how much credence I’d put in the ZDNet article or the underlying book. It’s pretty easy to compute a meaningful ROIC for an industry that’s more or less in steady state regarding capital investment. It can be both difficult and misleading to compute ROIC for an industry that’s going through a massive round of investment in long-lived capital assets. It’s pretty easy to figure out how much has been invested, but the return part is tougher. If you only count the profits you’ve made to date, it’s pretty easy to understate the return you’re going to make over the life of the assets. If you try to figure the profits you’re going to make over the longer term, you wind up making a bunch of assumptions about future revenues and asset longevity that may turn out to be wrong.

    And of course, this has all happened before. Around 1900 the many competing independent wireline phone companies found that competition was messing up their profits. The result was that Theodore Vail rolled them up into a single firm that was big enough to use the government to guarantee their ROIC. Rent extraction via regulation can be at least as profitable as providing a service customers will pay for voluntarily.

  50. doc, while there is a germ of correctness in what you say (predicting ROIC on long term capital investments requires assumptions about future revenues), the problem for the carriers is that the ‘churn factor’ of rolling out a new generation of wireless data towers every 5-7 years (or more frequently than that) means that the carriers have all gone to very short term ROIC calculations.

    And under those calculations, the returns suck. They suck even harder when inflation is factored in.

    The only way they don’t suck is that if the carriers don’t do this, they lose their customers and their revenue streams to those who do. Nearly every other differentiator between carriers gets blown away in comparison.

    Carriers are scrambling for anything that lets them leverage existing capital investments, and you can expect the contract calling and data plan with termination fees to be held close to the heart of the carriers, because without it, revenues plummet precipitously. The carriers will rapidly climb up-market in terms of features on smartphones – and be giving them away for free – to preserve this business practice.

  51. Esr: thoughts on the Google-opened VZW LTE700 build in this context?

    Patrick: have you read _A Switch In Time_?

  52. Aren’t we all still paying a tax on our phone bills that was originally put there to help pay for the spanish-american war?

    Here’s a fun historical tidbit: Catholics in Pueblo Colorado were still paying a “crusade tax” until 1945. The last “official” crusade was in 1456. So taxing for the war long after the war is not without precedent!

  53. >Carriers are scrambling for anything that lets them leverage existing capital investments, and you can expect the contract calling and data plan with termination fees to be held close to the heart of the carriers, because without it, revenues plummet precipitously. The carriers will rapidly climb up-market in terms of features on smartphones – and be giving them away for free – to preserve this business practice.

    I have no doubt you’re right – in the carriers’ position, defending the contract system to the last gasp makes sense.

    On the other hand, there’s equally undoubtedly a retail price point below which potential customers simply won’t be interested in contract subsidies. You talk of “climbing up-market in terms of features”, but one of the easiest effects of SoC (system-on-chip) construction to anticipate, because we’ve seen it in other gadget markets, is that it’s going to make that kind of vertical discrimination damnably difficult. Unless they can somehow differentiate using off-chip features, and previous experience tells us that the market for (say) titanium cases is quite limited.

    A more interesting question, then, is whether and how the carriers will sell contracts once the handset subsidy is no longer a draw.

  54. >Esr: thoughts on the Google-opened VZW LTE700 build in this context?

    I might have some if I had any idea what you were talking about.

  55. Let’s assume that SoCs mean that the ‘monkeys climbing the features tree’ race ends carrier subsidies and slashes contract revenues by about 80%. The carriers become fungible bit-haulers.

    How many carriers will remain after that?

    Who will fund the next generation of wireless tower rollouts? They seem to hit every 3-5 years at this point…and a wireless standards upgrade and rollout is in the realm of chip-fab expensive, and does not appear to be dropping in cost as rapidly as phones are.

  56. @ esr
    >A more interesting question, then, is whether and how the carriers will sell contracts once the
    >handset subsidy is no longer a draw.

    The same way that Timewarner, Comcast and AT&T lock you into contracts now, by “guaranteeing” your rate. Every couple of years, timewarner rolls out some new either service or pricing war with a content provider and starts running ads about how their rates are going to go up, but act now and they can guarantee your rate for the next 2 years. The rates go up a little, then work their way back down, all the while timewarner is saying “Look our rates went up a few months ago, we can’t guarantee it won’t happen again, but we can guarantee your rate for 2 years, just sign here.”

    Also discounted service for the first 6 months.

  57. >How many carriers will remain after that?

    I don’t know. It depends on how important the contract system actually is to carrier margins, and that’s business-critical information that you probably couldn’t pull out of a carrier with rack and thumbscrews. We can be reasonably sure they net a profit on on pay-as-you go simply because they still sell it; Cathy and I didn’t renew when ours with T-Mobile expired in November. It may be relevant that the T-Moble salescritter we talked with actually told us there was no point in re-upping for the phone Cathy wanted, as it’s on sale unlocked at WalMart – it sure didn’t sound like he’d been heavily indoctrinated to flog contracts.

    I’m just speculating, now, but it could be that the strategic point of the contract system is more to reduce churn and consequent quarter-over-quarter revenue volatility than to jack up margins per se. If so, its demise will have little impact on ROIC and our salescritter’s behavior made sense; he had us pegged, correctly, as reasonably happy long-term customers who are unlikely to become churn statistics.

    On the other hand, contracts could be vital to their profit picture. We can be pretty certain they make more money on contract customers, which is reason enough for them to defend the system with a ferocity in inverse proportion to overall margins, but that doesn’t tell us how critical that increment actually is. Assuming that it’s 10% of overall margins would lead to very different conclusions from assuming it’s 90%.

  58. >The same way that Timewarner, Comcast and AT&T lock you into contracts now, by “guaranteeing” your rate.

    That makes sense.

    It also suggests that my previous speculation about the contract system may correct – that it’s more a volatility-smoother than a boost to margins.

  59. esr Says: As I pointed out in the OP, cell users have captured almost all the gains from the buildout.

    It’s an unsustainable bubble. Things cost what they cost. There will be an industry-wide shakeout and the cell users will all end up giving up their gains in the form of higher rates.

  60. Regarding contracts, I think it’s more likely that they’ll go the route that Bright House Networks has gone here in Florida, which is actually no contracts. They reduce customer churn in two ways: 1) by offering different service levels and 2) by offering exclusive “must-have” content that other providers don’t have.

    For example, BHN recently upgraded their network. They gave everyone a small speed boost from 7 to 10 Mbps and then from 10 Mbps to 15 Mbps and simulatenously added 20 Mbps and 40 Mbps service levels to compete with the other major provider, Verizon’s FiOS. You can upgrade your service for a small price increase, or keep what they gave you for free. That keeps a lot of heavy Internet users from switching and brings in extra revenue to boot.

    On top of that, they are the sole purveyors of a local 24-hour news station that almost everyone in the Tampa Bay area watches, Baynews 9, along with a local 24-hour sports station that almost everyone in the Tampa Bay area also watches.

    Perhaps they are in a unique position, but when I see smaller providers handing out no-contract post-paid service plans, I can’t help but think that the major providers will eventually have to compete or STFU.

  61. @esr:

    > It also suggests that my previous speculation about the contract system may correct – that it’s more a volatility-smoother than a boost to margins.

    I think there’s a lot to this. Not only does churn have large direct costs; it also has large indirect costs in customer support. It’s a well-known secret that you can call up most providers and get them to drop your rate. With a contract, they only have to deal with once per couple of years per subscriber. So, it makes sense for them to give a good price to someone they won’t have to deal with again for awhile. If they give a good price to someone who only sticks around another month in any case, they’ve wasted the customer support time as well as the lost revenue.

    @ls:

    > It’s an unsustainable bubble. Things cost what they cost. There will be an industry-wide shakeout and the cell users will all end up giving up their gains in the form of higher rates.

    That would be true if the operating costs were higher than revenue, but when the cash flow is good and it’s only sunk costs that lead to (potential) unprofitability, it’s quite often the lenders and stockholders that take it in the shorts.

  62. > It’s an unsustainable bubble.

    This might be true. The past is not exactly encouraging on this score; worldwide, the rush to 3G created a bubble that, when it collapsed, destroyed more value than the dotcom bust. At least one European government was brought down by the resulting red ink (which is a good argument against state-owned carriers, but that’s another thread).

    >There will be an industry-wide shakeout and the cell users will all end up giving up their gains in the form of higher rates.

    Second clause doesn’t follow from the first. As Patrick Maupin says, it depends on what portion of the overinvestment is sunk – and, just as critically, on what portion of it went into creating infrastructure that would retains capital-goods value after the bubble burst.

    One relevant thing I’ve learned is that the cell carriers don’t outright own most of the cell towers in the U.S. Instead, there are dozens of holding companies, most regional and relatively small, who own towers and lease them to cell carriers and others who need antenna space. These are not volatile assets; all five major carriers could crash tomorrow without killing the tower holders, who would just hunker down and wait for the next wave of customers to want to hang silicon on their high steel. They’re also not monopoly assets; building towers to compete with existing ones can’t actually be that difficult, or we’d see a lot more consolidated ownership pattern involving fewer and larger holding companies.

    So, would cell users have to give up their gains after a crash? Not if tower builds are the big cost driver, no. The towers are already there. For a rate spike to happen, you’d have to believe that either (a) cost of transciever equipment dominates the siting cost, or (b) there’s something inherently expensive and tricky about running backhaul networks. Neither proposition seems very plausible.

  63. esr said: Look at the evidence…rates of tower construction and so forth. I suspect you’ll find that when you include siting, powering, and antenna costs that the transcievers are a relatively small piece of the budget – at least, the carriers behave as though that’s true. The things are just silicon, after all; familiar scaling rules apply.

    I completely agree that the biggest one-time cost is siting and the tower itself and the antennas (which presumably need replacement when there’s a big technological switch to a different band, but not very often), and that power is probably a significant ongoing cost.

    (And actually, that would be interesting to know – how much power, in kwh, does a busy cell tower use in a year? How about a non-busy one? A non-busy one in a mountainous or rural area where more traffic will be at the limits of range? Tx/Rx power is low per-phone, but I haven’t got the slightest idea how efficient the transcievers are in terms of power in : power out. But I digress, a lot.)

    What about the back-channel I also mentioned (and really meant to imply was the significant bit, but failed to do so)?

    It’s either microwaves or physical lines (whether copper or fiber), and as bandwidth demands inexorably increase, they’ll need either more microwave or more line bandwidth to support the mobile users.

    That buildout seems like it’ll have to be ongoing, at least until (if it ever happens) bandwidth demands plateau.

    The numbers there would be interesting; it feels, lacking them, like bandwidth upgrades might well be significant costs over time even if the tower and most of the rest of it stays the same…

  64. Guys,

    Doesn’t a lot of that silicon for the latest build out comes with expensive IP attached? Not much IP on towers and antennas.

    Yours,
    Tom

  65. “it’s quite often the lenders and stockholders that take it in the shorts.”

    Well, when you get to that point your company is bankrupt. Just like the rest of the economy, the carriers expanded with borrowed money and now they have to pay it back. They need to get that money or die.

  66. > They need to get that money or die.

    That’s not how most bankruptcies of businesses with good cash flow work.

  67. @baylink>Esr: thoughts on the Google-opened VZW LTE700 build in this context?
    @esr> I might have some if I had any idea what you were talking about.

    Here are some hints:

    VZW: Verizon’s ticker symbol.

    LTE: Long-term evolution. A set of radio technologies, commonly referred to as “4G” by AT&T / Verizon.

    700: an obvious reference to the 700Mhz band, which used to be UHF TV channels 52-69.

    Google-opened:
    http://en.m.wikipedia.org/wiki/United_States_2008_wireless_spectrum_auction

  68. > I might have some if I had any idea what you were talking about.

    That would be your problem, not mine.

    Verizon Wireless’s 700 MHz Block-C LTE buildout, which — because of Google’s intervention, something I’m pretty sure I heard about first right here on this very blog — is going to be required to allow any FCC approved handset, and permit any protocol over IP; specifically, they will not be allowed to contractually prohibit VoIP from customer handsets.

  69. Eric, the reason there are holding companies for towers is because everybody hates towers. When somebody gets to build one, the municipality expects them to put everyone’s antennas on it. Thus no cell company wants to own it. Instead you have the holding company building them and renting space to multiple vendors.

    Basically, the holding company has a franchise from the local government.

  70. >When somebody gets to build one, the municipality expects them to put everyone’s antennas on it.

    Ah, that makes sense. I wondered why the holding companies were so regionalized – thinking about the production inputs it seemed like there were economies of scale that ought to lead to big national-scale holdings.

  71. >That would be your problem, not mine.

    You were kind of cryptic. Now that I know what you were pointing at, what’s not to like? The most interesting question is probably whether Verizon will come up with some sort of slimy end-run around the openness requirements.

  72. > I think it’s actually time to ask a more radical question: will the carrier oligopoly still exist in ten years? And I’m inclined to think the answer is no.

    Well, not disagreeing with any of your analysis, but there are other, big pressures to scale upwards. Not only are the decisions made by executives who are of course more interested in their own bottom line than the real needs of the business, but the costs involved in legislative lobbying. Regulatory capture, both offensive and defensive, is expensive, and having fingers in 535 different legislative pies is easier with a single, large firm than a trade group of small firms.

    I think the safe bet remains on several large, blundering corporate entities.

  73. >Regulatory capture, both offensive and defensive, is expensive, and having fingers in 535 different legislative pies is easier with a single, large firm than a trade group of small firms.

    You make a telling point. Corporate gigantism is usually symbiotic on and mutually dependent with government gigantism. This probaly is the best single argument for the proposition that the oligopoly will continue.

  74. yes the network infrastructure game has been widely known to be a colossal financial f*ckup for quite some time, as over-enthusiastic fools have jumped on the internet-meme bandwagon and sunk masses of other people’s money into capacity that quite simply has not been demanded to the modelled degree by the market.

    something overlooked by you, ken, and zdnet: the carriers’ numbers will actually look a LOT worse internally. this is because most companies assess internal investment opportunities vs their internal “hurdle rate”: the minimum return acceptable in order for the company to be able justify diverting investment to it. consider that this is typically around 8-10% real (post-inflation) return….
    “oops!”

  75. Well, “what’s not to like” is my view as well, though you’re right that VZW may try to pull a fast one. They’re actually signing up subs as of this month, so we’ll see how the market plays it.

    But it seems an even more apropos play to your argument, since in fact handset makers won’t have to go through the carrier; I’m hoping to see dedicated VoIP and PoC/PTT handsets in the space, as soon as VZW proves its stripes, one way or the other…

  76. This is somewhat OT, but the concept of an ‘auction’ for EM spectrum is intriguing from a conservative-libertarian stand-point, and raises all sorts of questions for me. Is the assumption the whole spectrum is some natural resource, like ore in the ground? The way the Wiki article made it sound, the auction was really for a license (which is revocable at governmental whim) to operate within a particular bandwidth, not a transferal of property rights, because property right would imply the ability to make whatever decisions about that property the owner deems fit, including who can use it and what rents to change. By what right, other than government fiat, does the Fed have to grant such licenses? Certainly the Constitution gives the federal government no power to grant licenses for any resource, only at best to make regular the commerce between States. This smacks of government extortion. I may be late to the party on that one, but I don’t know much about the state of affairs prior to the creation of the FCC, and it’s only been since becoming a reader of this blog that I gave much consideration to the topic.

  77. >”something overlooked by you, ken, and zdnet”

    reads unintendedly harshly. would have been better phrased perhaps as “something minor but relevant…”

  78. @matt minton

    A band of spectrum is an exclusive and limited resource. Use by one party excludes use by another party. So the use has to be regulated to allow any profit for anyone at all.

    As the exclusive use of a band of spectrum allows large profits, economic theory suggests that putting a price on this license via an auction would lead to maximal efficiency.

    I will refrain from arguing it’s political justification.

  79. >I may be late to the party on that one, but I don’t know much about the state of affairs prior to the creation of the FCC, and it’s only been since becoming a reader of this blog that I gave much consideration to the topic.

    Prior to the creation of the FCC, the courts were developing a system of transferable property rights for spectrum using land tenure and homesteading as a model. This was aborted by the Communications Act of 1934, which seized control of all spectrum on national-security grounds and created the FCC.

  80. By what right, other than government fiat, does the Fed have to grant such licenses?

    The commerce cause. Communications equipment and services tend to be interstate in nature, and thus regulation falls under the purview of Congress, who created the FCC through the Communications Act of 1934. Whether you think this is valid or not is another issue entirely, but that’s the official party line.

  81. > A band of spectrum is an exclusive and limited resource. Use by one party excludes use by another party.

    Untrue! Interference is a receiver artifact! The waves pass through each other, unaffected, while still in EM form.

  82. A band of spectrum is an exclusive and limited resource. Use by one party excludes use by another party. So the use has to be regulated to allow any profit for anyone at all.

    I think you left a key word out of there: A band of broadcast spectrum is so limited; line-of-sight links can share the same frequency and pass right through each other. Furthermore, the exclusivity of a broadcast frequency is limited geographically based on the propagation characteristics of that frequency, and transmitter power.

    My house and lot together constitute an exclusive and limited resource. Use by one party excludes use by another party. The only “regulation” that needs to be done is government recognizing the crimes of trespass, breaking/entering, etc. There is nothing to the argument that radio wave transmission frequencies are “public” that doesn’t equally apply to real estate, portable personal property like automobiles, netbooks, and iPhones. They are all limited resources. Either you believe that individuals who create value have the exclusive right to control that value (in which case the “public airwaves” really belong to the heirs of Marconi and Fessenden, and the broadcasters who maintain expensive transmission equipment on their “homesteads”) or you think that government should somehow manage the resource for the putative common good. I know where I stand on that question.

  83. Sure, Monster… but does restricting the exploitation thereof to the Large Public Corporate Oligarchy serve that common good?

    The idea of “auctioning” spectrum is pretty recent; it postdates the deployment of AMPS and PCS, IIRC; mid-90s?

  84. J. Jay Says:
    > A band of spectrum is an exclusive and limited resource. Use by one party excludes use by another party.
    Untrue! Interference is a receiver artifact! The waves pass through each other, unaffected, while still in EM form.

    That’s nice to say, but useless in a practical sense. For a cell phone system you need receivers – and there’s your interference. Even for a system like CDMA, where signals on the same basic frequency can coexist, separated by their different codings, you can’t have too many of them. (The signals other than the desired coding look like noise to the decoder, and can overwhelm the signal you want.) Bandwidth is not unlimited, and you can’t shoehorn more data through a channel than it can handle. Claude Shannon figured all this out 60 years ago.

  85. What interests me is that the carriers aren’t trying to get other people to provide their coverage for them. Imagine the following: in exchange for installing a Pico Cell in your home/office/whatever which you pay for and maintain, you get credit for the data capacity which it serves to the public at large (for the specified carrier). Not Wi-Fi, but very local 3G/4G coverage, voice and data. You might get credit at a 10:1 ratio for the first 100MB transferred by each unique device/account each month. Thus if you operate a high-capacity set of microcells/picocells, you could possibly get your whole data and phone access for free.

    This would result in much better service for customers (5 bars everywhere!) and reduce the demands on the broadcast spectrum which is highly loaded. In this case, you might actually expect New York City to have much better connectivity than the more rural areas, because you’re always using local connectivity rather than the big towers.

    Companies have tried this with WiFi hotspots, but part of that failure is that customers can just as easily connect to one of the many free hotspots around, and the service was typically disproportionately expensive. This model would provide an incentive for customers to install this equipment, the carriers provide unified billing, management and coverage in less-sparsely populated areas. I’m not willing to fork over $45/month for a mobile data plan, but I’d be willing to plug in a $150 device and run off of the credits I get from helping to provide better service to others.

    Eric: There is another area where business efficiency isn’t correlated with actual value delivered: billing. The biggest thing that the carriers manage right now is billing. Note that one of the advantages advertised by ComCast is that “you get TV, Internet and Phone all on one bill”. Other companies are making similar arguments. Imagine for a moment that each cell tower billed you separately. At best, you’d be getting dozens, if not hundreds of bills per month assuming that you didn’t have to worry about pre-registration. Though unbundelling is economically much more economically efficient, it imposes a much greater cost on the customer.

  86. but does restricting the exploitation thereof to the Large Public Corporate Oligarchy serve that common good?

    Land is not restricted to large corporate oligarchies. It is subdivided into small lots for residences such as mine, medium-sized lots for retail businesses, and larger lots for farms and factories. (Government retains only buildings required for the provision of government services, and the relatively-thin strips for road right-of-way that connect those private and public spaces, maximizing individual freedom.) Why would we expect broadcast spectrum that is truly a form of property (and therefore subject to such subdivision) to be any different?

    If you consider that a property interest in broadcast spectrum can then be appraised, and property tax assessed upon it, just like every other form of property, there will always be an incentive for the holders of underperforming spectrum to seek out other buyers who can make more valuable use of it. Of course, those evil corporations’ stock holders will also provode some of that pressure; they won’t like having high-valued, but low-income assets on the books.

    I really don’t get the anti-corporate mentality. The corporation is the mechanism by which a bunch of little guys can band together and compete against the big guys. If (one of) these evil corporations exploit(s) employees and customers to make huge profits, then capital should flow freely toward an upstart competitor that treats its employees and customers a little bit better, which would cause the exploited to flee the incumbent(s) in droves.

    If there are enough people to form an electoral majority to crack down on the evil corporation, then let that majority each kick in a few shekels to buy stock in Good Guys, Inc., which promises to never exploit anyone at all. You’ll run the bastards out of business in no time.

  87. > I really don’t get the anti-corporate mentality. The corporation is the mechanism by which a bunch of little guys can band together and compete against the big guys.

    The big guys being… whom?

    Public and Oligarchy were *material* adjectives in the topic of my complaint, Monster.

  88. Baylink:

    Foneros hasn’t impressed me much, hence why I pointed out ‘not Wi-Fi’ in the original post. In their case, they are trying to compete against McDonalds, Wendy’s who are offering free Wi-Fi. In short, they are trying to start small and grow big; I’m proposing starting big and growing small.

  89. > (The signals other than the desired coding look like noise to the decoder, and can overwhelm the signal you want.)

    Y’all need to get your terms straight.

    Noise: non-coherent
    Interference: coherent

    Other signals: Interference

  90. Spectrun bandwidth a property?

    This means that you have to police every household. Because it means that no one will be allowed to generate EM radiation in that band. Not even in the privacy of their bedroom.

    EM spectrum bands are also very limited. You could have only a few broadcast bands. So it could never be an open market.

    If this is treated as a property, it will have some peculiarities.

  91. > In their case, they are trying to compete against McDonalds, Wendy’s who are offering free Wi-Fi.

    One guess who the guy is behind McDonald’s (and the rest of Wayport/AT&T’s 80,000 location) wifi network:

    Give up? Jim Thompson (Eric banned him over a year ago.)

  92. >That would be your problem, not mine.

    Not just here, but in general too, this is kind of a silly statement. Actually, it is the speaker’s problem, if he really does want an answer.

  93. >ESR says: Read this.

    There’s nothing on that page that says what Jim Thompson did.

    Anyone?

  94. @some guy
    Obviously, Jim wasted eric’s time.

    Every blog that is read will attract trolls and other weeds. Unchecked, the weeds will push out the plants you want to grow.

    Remember that a weed is a plant in the wrong place. A blog owner simply must put weeds in their right place to keep her garden accessible.

  95. >There’s nothing on that page that says what Jim Thompson did.

    He repeatedly violated every rule in that post, including masquerading after I banned him. Probably the weirdest hater I’ve ever run into, combining compulsive hostility with a transparent need for my approval in a way I haven’t seen before or since. Pretty bright and technically capable, though; I tolerated his crap longer than was good for the quality of the blog because of that.

    Further note: Thompson was one of my type cases of Embittered Old Fart – I reveal this only because he’s already banned.

  96. I have a pretty good idea, now you mention that, whom might be your archetypes for a couple of the others.

    I suspect others do as well, and we probably won’t agree on them, so like you, I won’t say who they are.

    Back on topic: @Jesus Lizzard

    Re CDMA: if you think that the “non-tuned” signals in a CDMA system are coherent WRT the one you’re listening to, I think you need a refresher in how rake receivers work.

    You might be able to make an argument that they’re *time coherent*, but I’m not sure that supports the argument I believe you to have been trying to make.

  97. Eric,

    If Thompson was an Embittered Old Fart, does that make you (just) an Old Fart?

  98. “Now, it may be that eventually, WiFi is ubiquitous enough that cell phone data isn’t used for much.”

    I’m in a socialist/statist shit hole (contract job, and no, not California, OCONUS) and while waiting for a “real” broadband connection to be established I bought this little USB powered 3 or 4 G to wifi device that is about the size of a large cookie. I get sufficient bandwidth from it, but it’s not cheap bandwidth. Then again nothing here is cheap.

  99. > Yes, AT&T’s network was great. Good dial tone, indestructible phones. I remember all that. But do you remember how much a long distance call cost?

    I’m *still* leery of making long distance calls on landlines. I have this rule in my head that says “Long Distance Is Expensive”, so I have (well, had back in the states) a cellphone plan that obviated that issue.

  100. >At least one European government was brought down by the resulting red ink (which is a good argument against state-owned carriers, but that’s another thread).

    I’d say it’s an argument for more state owned carriers, as long as there are private carriers as well.

  101. @Last Word:

    This article almost gets it. Being in the advertising business isn’t everything. Ever use Gmail or Google Docs? They don’t show very many ads at all. On Gmail, for example, there is exactly one ad shown at the top of the interface. and it’s a one-liner. Doesn’t seem like showing ads on Gmail could possibly be very profitable.

    But what are they really doing with Gmail or Google Docs? They’re building the biggest data warehouse of consumer demographic information EVAR!! That’s what’s valuable. It adds value where they do have the big ads and the big ad dollars on major websites. And it’s information they can sell to other advertisers or use to target those big ads.

  102. I figure gmail and the rest of google apps are about building a connectivity graph (‘social networking’), not demographic profiles.

    It’s still pure fucking evil.

  103. Which applications do you see on the horizon that might change the cell phone landscape? Video is an obvious one. It seems the bandwidth requirements for video might drive the construction of even more towers in areas that are already built out. Are there other apps?

    And do you see phone-to-phone networks (maybe via old fashion wifi) supplementing the bandwidth needs or creating new application opportunities?

  104. >It seems the bandwidth requirements for video might drive the construction of even more towers in areas that are already built out.

    No, what that sort of thing does is pull for an upgrade of the backhaul network serving the towers.

    >And do you see phone-to-phone networks (maybe via old fashion wifi) supplementing the bandwidth needs or creating new application opportunities?

    Quite likely. These are just now starting to be deployed, but so far only in a proprietary way that won’t scale well. An open-source implemenation over Android would be interesting.

  105. @ Aaron

    >This is the future of not only phones, but home computing:

    I think that’s a bit over optimistic. If I had to bet on the future of home computing, it would be decentralization. Your phone docked into a laptop may be one part of that, but I don’t see people in the future consolidating all of their home computing to a single mobile device. Aside from the issue of your computing power and resources then not being available to others if you’re out of the house, there’s also the issue of losing your entire digital life in a single pick pocket incident or a bad night at a bar, never mind the hazards of toilets and other standing water. Yes backups can help alleviate that problem, but then you’re back to a larger central device at home.

    Ideally I see a large central data source at home with multiple smaller devices throughout the house each with varying levels of hardware and capabilities to do various more specialized tasks (media, mobile, gaming) and all with better and (tech gods synchronous Internet connections willing) nearly globally accessible connections to the data store. Think cloud computing, but without entrusting your entire life to Google. Not that I don’t think people would give everything to Google, just that I would rather keep my data myself thank you very much.

  106. Ideally I see a large central data source at home with multiple smaller devices throughout the house each with varying levels of hardware and capabilities to do various more specialized tasks (media, mobile, gaming) and all with better and (tech gods synchronous Internet connections willing) nearly globally accessible connections to the data store. Think cloud computing

    It took 20 years to get here but you just described Mark Weiser’s UbiComp.

    Personally i think Cloud Computing is both the right and wrong model.
    I don’t think the data is going to be offered globally, I think our mobile devices will have a (very lightweight) vpn clone that will allow them to tunnel in (i think something like the relative simplicity of bluetooth pairing but with the security of VPN) however most people won’t understand what’s going on, it’ll look like cloud computing until you want to share stuff with someone else.

  107. Yeah, cloud computing isn’t exactly the right analogy. I agree on a sort of background VPN type tunnel, and I’m thinking that the filesystem you have on your devices (at least for user data) will be less like what we have now and more of like a giant cache; every file would be accessible, but what is actually on the drive is swapped in and out based on frequency of access and other factors. That way even without a data connection, there’s a good chance what you want will be there, but without the manual sync and management we have today. There’s even still room in such a model for Google and Amazon and MobileMe type cloud computing to continue as it’s likely no matter how fast your home uplink gets, getting a file from a Google server will be faster, but google will act as a sort of middle space, rather than the primary storage location.

    The best analogy I can come up with is if your home storage is like the hard drive in your computer, then your mobile machine is like the processor cache and Google’s service would be something akin to RAM. Of course I could be dreaming wildly here, but they say the surest way to get someone to do something is to tell them it can’t be done…

  108. >You really have to check this out: hot from CES, it’s an Android phone (dual-core Cortex A9, 1GB RAM) that docks into a laptop shell to use with mouse and keyboard.

    I predicted this some time ago. Nice to see it materializing.

  109. I predicted this some time ago. Nice to see it materializing.

    You weren’t the only one. I seem to recall a patent awarded to Apple turning up on Slashdot around two years ago for this very sort of doohickey.

  110. Here’s a *very* interesting news article, which I just came across in doing a search to see if anyone was working on third-party handsets for Verizon’s freshly rolled out LTE700 “4G” (ITU says it ain’t) service: They’re *leasing* to smaller rural providers to fill in the holes; apparently the rural carriers will get most of the money, and the subs will have nationwide non-roaming to VZW’s whole network, if I read it correctly.

    If what’s happening here is what I think is happening, this markedly changes the odds that the LTE buildout will be as patchy as other wireless builds have been.

    http://www.wirelessindustrynews.org/news-dec-2010/2294-122210-win-news.html

  111. >If what’s happening here is what I think is happening, this markedly changes the odds that the LTE buildout will be as patchy as other wireless builds have been.

    Ah. I take it you think Verizon’s found a business model that lowers the return threshold on towers in thinly-populated areas, then?

  112. I think that their found business model that lowers the return… does what?

    If “that” was an extra word, then yes, I think that the result of this (and on re-reading the piece, I see this is an official program for rural builds) will in fact be to improve rural coverage; the responsibility for it, and the rewards which come with it, will go to the people served, who will in turn be able to use the entire footprint, and vice versa. Verizon will handle all the billing and support, I assume, so the locals will only have to slap up towers; it seems like a really smart idea.

    So smart that, coming from Verizon, I’m left looking for the sting in the tail… :-}

  113. @Baylink:

    I think Eric meant for you to expand “Verizon’s” as “Verizon has” not “Verizon.POSSESSIVE”

  114. Just a practical question on backing up droid phones since this seems to be a place where people who would know hang out.

    I just recently (a few months ago) hopped on the smartphone bandwagon and can’t believe that I’d held out as long as I did (I bought a G2 for myself and an SGS for my wife). But I have a practical question:

    STFW has led me to believe that a robust backup solution is possible only if I root the phone after which I could do something like dd if=any-parition-I-can-find of=file-on-sd-card which would presumably work. Or just spend the $12 for two copies of Ti Backup pro.

    HOWEVER, I’m a bit nervous about executing an exploit on my phone that I didn’t write and don’t fully understand. What indicators (if any) are there of the reliability and trustworthiness of the rooting code that’s about on the intertubes? I’d really rather not go ahead and install someone else’s malware payload onto my device and save them the trouble if that’s what’s up. Also, I’d really rather not spend my time h3x0ring my phone but the voice inside my head keeps yelling BACK IT UP. Are the non-root backup solutions that are out there “acceptable” for reasonable values of acceptable? (At this point I’m throwing a _lot_ of my day to day notes, data, etc. onto the phone, and would really rather not have to reconfigure and reinstall my apps).

    Thanks

  115. You might want to peek in on goodandevo.net, which is a website devoted to the Sprint/HTC Evo; there’s quite a number of people there who’ve rooted their phones, and will probably improve your confidence factor in the idea.

    The current full-backup software appears to be something called Nandroid, which, as you say, only runs on a rooted phone.

  116. @esr: Not unexpected

    Android Passes IPhone
    http://www.mobiledia.com/news/79297.html

    The report said Android surged to capture 26 percent of the market, from 19.6 percent in August, gaining enough ground from frontrunner Research in Motion and other competitors to beat out Apple, which had a 25 percent share.

    -Mobiledia

  117. I hear you boggling. “Huh?” you say, “There’s lots of the U.S. and the world where the cell coverage sucks.” That’s right; it’s because there isn’t enough expected volume and return from extending coverage to justify the capital cost.

    The problem is that cell coverage sucks just about everywhere in the USA by global standards. Access to 100 Mb/s 4G is routine in the Scandinavian countries and Asia. Here, I can get close to maybe a tenth that and that’s if I’m outside in downtown Boston on a clear day.

    Why is this? It’s the very problem you outlined: the American shortsighted and profit-centric attitude toward infrastructure buildout: “It won’t make us more money in the short term, so why should we upgrade our infrastructure? The ROI is greater on continuing to soak the consumer with limited data plans and tiered pricing.” Meanwhile outside North America countries turn (wired and wireless) broadband buildout into national projects, including regulations and passing measures acknowledging broadband as a human right, and reap the rewards of the superior infrastructure that results.

  118. >The problem is that cell coverage sucks just about everywhere in the USA by global standards.

    Your politicized analysis is, as usual, bogus. The real reason the Scandinavian countries and Asia have excellent cell coverage is geography. Those countries are, with the exception of Communist China, far smaller than the U.S.; also, much more heavily urbanized. Thus the incremental cost to cover each additional 10% of the population rises much more slowly than in the U.S., and cell nets can actually run at positive ROI rather than the slightly negative ROI as in the U.S.

  119. Your politicized analysis is, as usual, bogus. The real reason the Scandinavian countries and Asia have excellent cell coverage is geography. Those countries are, with the exception of Communist China, far smaller than the U.S.; also, much more heavily urbanized.

    Debunked, many many times on the internet. If it were true, the heavily urbanized areas of the U.S. would have data rates on par with these countries; as it stands now, the difference in effective data rates between New York and, say, Oslo is greater than an order of magnitude. And Oslo has a much more competitive handset market to boot.

  120. >Debunked, many many times on the internet.

    [citation needed]

    >If it were true, the heavily urbanized areas of the U.S. would have data rates on par with these countries;

    Even that doesn’t follow, because upgrading networks is a messy business in which older sections can drag on the effective data rate of newer ones.

  121. Try here for example. Really, it’s not hard to find. The geography argument comes up every time the broadband gap between the U.S. and the rest of the world makes headlines at a discussion site, and every time someone with knowledge of the regulatory regimes of both the U.S. and another country shoots it down. I didn’t politicize the analysis because the problem is political: telecoms regulations in the United States are designed to favor the existing players, instead of being designed to get service to the customers in the most efficient and competition-friendly way possible.

  122. >Try here for example. Really, it’s not hard to find.

    Oh, no. You don’t get away with changing the subject like that. Your original claim was, essentially, that U.S. cell coverage sucks because capitalism sucks, and that everything would be ooooh so much better if we just had the allmighty State’s thorny erection firmly shoved up our asses. You can’t support that with a link that vaguely.handwaves about the problem being regulatory capture!

    As it happens, I agree with the comment you linked to that we have a serious regulatory-capture problem. But that is never, ever, ever an argument for more state intervention, any more than alcohol poisoning is an argument for drinking more heavily.

  123. No, the point isn’t really that capitalism sucks: the European wireless market is far more competitive than the American one.

    Secondly, I was going to post something about how the American regulatory regime is almost uniquely prone to such regulatory capture (as in health care, where our system was practically engineered by Edgar Kaiser to let him reap maximal profits by poviding minimal actual care). Then I read an article about German officials conveniently overlooking regulation violations by wireless companies they had stock in/ties with…

    Still, we could do a lot better than what we are. Saying “it’s geography” is just an excuse.

  124. You can’t handwave away geography, either, though. The US is huge, something it is possible to ignore even in parts of the US itself, and made much less evident by the excellent interstate highway system. It is also not anywhere close to uniformly densely populated – often in a fractal fashion. I live in NJ, which has (or had, recently) both the most densely (residentially) populated square mile in the continental US (and possibly the world) and the least densely populated square mile in the continental US (Newark and the Pine Barrens, respectively).

    What works in Manhattan, NYC won’t work in Coeur d’Alene, ID, much less their respective outlying regions, and vice versa.

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