Avoiding the 'AOL problem'

[1]I believe we are at a turning point in the history of the wireless industry. Data is driving wireless revenues and is the focal point of product development in nearly every sector of the mobile ecosystem, with Cisco's $2.9 billion acquisition of Starent being a signature "event." But there are deep concerns, too. There is continued downward pressure on data pricing at the same time networks are having a hard time keeping up with demand. AT&T has been a favorite target, but I have found growing variability in the 3G "experience" across many operators' networks. Add to this the intertwined issues of network neutrality and open access, which would result in operators losing even more control over their own "domain" (i.e. the network).

Those who remember the early days of the Internet (barely fifteen years ago!) might be reminded of America Online (AOL). As essentially the "eighth RBOC," AOL performed three principal functions in its heyday: it served as an on-ramp to the Internet with vast banks of modems serving dial-up access; it offered customer service reps who would hold the hands of Main Street USA trying to get onto the Internet for the first time; and, not unlike today's wireless operators, it served as both "pipe" to the Web while offering some of its own unique services (AOL mail) and content. But growth and network demand outstripped AOL's capacity. AOL became known as "America on Hold"-- and the company never quite recovered. Broadband was the final nail in the coffin of its initial business plan, eliminating the need for AOL's dial-up service, and diluting the value of its unique content.

We see the writing on the wall in wireless. Complaints of network congestion are growing. AT&T showed great top-line growth in wireless, but margins were impacted by subsidies and network costs skewed by iPhone sales and traffic demand. And even if the FCC's net neutrality intentions are laudable in theory, I think they are naïve with respect to wireless industry economics.

The term "wireless data tsunami" is being used in a lot of circles these days, even occupying an episode of Cramer's Mad Money last week. Now, I've always interpreted "Tsunami" as something you run from, rather than to. So how can we ensure that this data traffic growth continues to be more of a "wave" of opportunity, rather a "tsunami" that overwhelms?

1. Pricing and Economics.

It costs a wireless operator about $0.04 to deliver a MB of data. Plot that against the average usage of 200 MB/month for iPhone users and close to 1 GB/month for broadband wireless connection from laptops. And for those who think wireless data could displace home broadband in the way wireless voice has displaced landline voice, the average home consumes 10-15 GB of data a month. That's double what it was three years ago and TV and movie downloading are still in their relative infancy.

So, first, we have to convince the FCC that wireless industry economics are different than that of wireline--even with 4G (which reduces cost to deliver data by about half) and more spectrum...Continued [2]

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