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Over the past five years, the way people communicate has drastically changed – from phone based voice calls to computer-based data, even for voice.

Five years ago, everyone used what are still known as “feature phones”, mobile phones optimized in their design for better call quality and longer battery life. The most prevalent standard for mobile connections was EDGE (Enhanced Data rates for Global Evolution), which provided internet access at dial-up speeds. But the phones were designed primarily as portable telephones, and data applications were an afterthought.

The adoption of 3G technology by cellular carriers allowed the design of early “smart phones”, now the term of art for phones designed first as a computer with a phone application for making calls. The first popular smartphone operating systems — Windows Mobile, BlackBerry OS, Qualcomm Brew, Symbian and others — allowed users to install applications, usually subject to the carriers approval and distribution in what was known as an on-deck program (now known as an app store).

When Apple introduced the iPhone and subsequently the iTunes App Store, developers began to fully harness the always-on data connection. Mobile applications like Facebook, Twitter, Instagram, Skype, Google Voice, and the mobile browser allowed people to always stay connected and to use the full potential of the internet from their pocket device.

The growth and broad adoption of mobile applications surprised everyone. Most important, it left carriers in a tough spot, one that calls into question what their role will be in the future: virtual monopolies with total control over their users’ experiences and capabilities or relatively expensive ISPs who have to compete on the price of their data service?

For the first time, people are now using their phones to access the internet are than they use their phones to talk to each other. In the past, carriers made all their money in voice calls and text messages. Charging for data usage was a new behavior, viewed originally as a supplement to the carriers core business. The carriers have experimented with different models for charging for data, including unlimited data plans and tiered pricing that costs more the more data you use. But what is becoming clear is that applications like Kik, GroupMe, Skype, Facetime and iMessage have gained rapid adoption: these apps use IP to give users the same communications function – text messages, phone calls, directory lookups, etc. – that used to be completed over the carrier’s proprietary networks. With the adoption of LTE (LongTerm Evolution, now provided in the U.S broadly by Verizon and AT&T), these kinds of data-heavy communications apps will accelerate. It is now possible to see a day, depending on how well LTE is provisioned, that the carriers proprietary networks wither and die from dis-use.

That will reduce the carriers to “mere” ISPs (Internet Service Providers). Mobile operators have the advantage of their infrastructure and spectrums, which allow them to provide data everywhere. People are no longer forced to only access the internet through the wired infrastructure in some areas and can stay connected to the internet wherever they are. As a result, applications like NessSocialCam, and Framehawk have taken advantage of this fact and creating ways to help people stay connected with their friends, enhance local discovery, and stay productive. What will happen to the mobile carriers ability to raise capital, deploy new cellular technologies and maintain their high-speed backhauls to the internet, when they can’t charge more than today’s wired or WiFi based ISPs?

Although government control over the wireless spectrum has allowed carriers to maintain control over the spectrum and avoid commodity pricing, the rising popularity of MVNO’s (Mobile Virtual Network Operators) like StraightTalk and Virgin Mobile, which cater to various niche markets and engage in pricing wars against each other has shown that the industry is on its way to commodity pricing. The primary barrier to consumer switching in America has been the two-year contract model, in which the carrier sells the phone for a below market price in return for the consumer signing a long term contract at a higher price. That contract has allowed carriers to maintain some control over pricing and slow down churn among their customers.

Mobile operators must find other areas to add value; in the U.S., that has been primarily accomplished by creating mega-carriers than can bundling services like the so-called Triple Play, which provides pricing incentives for customer to buy wireless plans along with television, internet and voice calling.  Other carriers are working with OS makers like Apple, Microsoft, and Google to provide new services such as GPS monitoring and bundling their cable services to allow users to take advantage of their services 24/7. This process is inevitable — just like during the PC era, the majority of the money shifted from internet providers and hardware manufacturers to software companies selling applications on the platform. Mobile carriers that create services and applications will have a chance to survive the transition from wired to wireless computing.

This post was authored by Rohit Turumella, a UC Berkeley associate of Alsop Louie Partners, who will be graduating in May 2013.

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