Lowenstein's View: What's so bad about being 'the pipe?'

by Mark LowensteinWith the growth of smartphones and app stores, the familiar refrain "the operator is just a pipe" has intensified. This statement generally has a negative association, as if the Apples and Googles of the world are relegating the operators to irrelevance.

I beg to differ. I believe that that operator networks will become an increasing source of competitive differentiation over the coming years. Those who play their strategic cards right will win more customers because of their network capabilities and will also find new and innovative ways to leverage their networks into revenue-generating assets.

Let's think about operator networks entering what I call "Phase III." Phase I was analog and early digital, and was all about getting core networks built for voice, so that coverage, capacity, uptime and reliability could meet adequate parameters. Phase II has been about implementing mobile data capabilities. With great devices and more open application development platforms, the locus of competitive differentiation has shifted toward mobile broadband network availability, transmission speed and capacity. In developed countries, nearly all agree that the lion's share of growth and new revenue opportunities will come from data usage. Hence, Phase III will be increasingly defined by data network capability, defined by a host of new characteristics.

First, I think that the nature of the relationship between the customer and the operator is going to change, fundamentally--and sooner than many people think. Rather than selecting a "voice plan" and a "data plan," customers will think more in terms of a "network plan," choosing a bucket of "gigabytes" rather than "minutes." Those gigabytes can then be shared across multiple devices and/or members of the household or groups within an enterprise. Eventually, voice will be an app. And it will be harder to charge separately for "messaging," as it will be increasingly intertwined with social networking applications.

Second, nearly everyone agrees that demand for data will be exponential. Differences in opinion lie in what order of magnitude the growth will be. What it does mean is that there are going to be lots of interesting discussions about how customers and content/app developers can use the network. Femtos, for example, have become more about offloading (and backhauling) data traffic than about providing better indoor coverage. Operators will start charging a premium for applications or content that are heavily consumptive of data capacity. Want to download a 5 GB movie from iTunes or stream Netflix over the cellular network? That will be a $3 premium, thank you very much, perhaps shared between the operator and the content publisher.

Third, there will be more publicly available metrics around a broader set of parameters of network capability. It will not be enough to just say "biggest," "best," or "most reliable." Saying "fastest" will have to mean something, because it will govern what subscribers can do over the network, particularly given the accelerated pace of advancement in device capabilities. In two or three years' time I believe subscribers will have a much better view into what network capabilities are in their area. Just like you can now click on a coverage map to get pretty reliable information about network coverage in your area, a suite of tools will tell customers a lot more about data network capabilities in a given area, and on a real-time basis. Some tools will be provided by operators (especially those with something to trumpet), while there will be more third parties providing metrics to the public as well. It won't be enough to say "we've launched 4G in Dallas." We'll know much more about average uplink and downlink speed, performance during peak periods, extent of coverage, latency, etc., and on a much more transparent, granular, real-time, and geographically specific basis. Network capability will become an even more important criterion of why a customer has a relationship with a particular operator. Some customers might have multiple operator relationships, depending on their requirements, device portfolio, travel patterns and so on.

Fourth, operators are becoming much more open and solicitous with respect to companies that can help them improve network performance--across a broad spectrum of parameters. AT&T has been significantly more aggressive in this area, and publicly so, in light of the stress that smartphone growth has put on its network. Verizon last week broke ground on a Technology Innovation Center in the Boston area. As important to demoing apps will be seeing how they perform on--and impact--a wireless network.

Finally, as stated in my March column, "The new world of the wireless operator," wireless operators will increasingly leverage their network assets (albeit cautiously), such as location information, billing relationships for micro-transactions, and the treasure-trove of information related to their subscribers and how their networks are being used.

An example of this change in mindset is Verizon's about-face with respect to Skype. Two years ago, Verizon viewed Skype as a threat to voice revenues, similar to how operators used to feel about WiFi with respect to data. Now, Skype is viewed as simply another application on its network, and if Verizon can get the bulk of its subscriber base to ante up an extra $20-30 for a data plan, they'd rather have subs Skype-ing than Sling-ing over their network, anyway. Verizon has even gone a step further, working closely with Skype to deliver a differentiated Skype experience over its network, and marketing it as such--particularly around a long-standing customer cellular pain point, international wireless calling. Clearly, the "pipe" is going to mean a lot more things in 3-5 years than it does today.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter.

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