Tales of the Sausage Facotry: Will WiFi Phones Displace Cell Phones?

Esme Vos comments on a WSJ article suggesting that WiFi and cell phones are mortal enemies. Sorry, but such a simplistic view of the world doesn’t hold water for me. Sadly, I think the cell phone companies believe it.

I do not doubt that the cell phone companies of the world see this as a competitor. They are right, in that if they charge so much or charge such awful service unlicensed spectrum becomes better. But this does not make a real competitor in the marketplace.

1) Consumers and businesses are inherently conservative. Most people overpay for minutes, for example, because they do not want to risk paying extra for the occassional overage. Similarly, most people will not switch to a wifi phone over a cell phone. When your car breaks down in the snowstorm, you want to know you will reach 911 or your family or whoever.

1a) A caveat to that is those employers who buy NexTel phones primarily for “push to talk.” There may be a few businesses where all conversation happens inside corporate intranets, so that wifi phones make sense. But this is a relatively niche market and “push to talk” does not count against minutes anyway.

2) Creating sustainable municpal networks is hard work. We are at the beginning stages. It will be years before you have the ubiquity of unlicensed open spectrum you would need to displace cell phones even in urban areas.

Could it happen someday, tho? Sure. If the cell phone companies are betting on a free ride from monopoly services, they are in big trouble. They will actually have to hustle for customers and deliver good service. But we will still see a Verizon wireless or its descendent 10 years down the road, offering something clearly descended from today’s cell service.

But cell phone companies want monopoly (surprise!). Hence such news items as the proposed merger of Sprint and Nextel. But monopoly turns out tobe appallingly inefficient in terms of innovation and actually fostering deployment, unless you indulge in massive subsidies such as we did for AT&T under the rubrik of “universal service.”

There is an intuitive sense to monopoly. If I controlled everything, all the calls made on other services would go through me. But this view fails to appreciate how markets actually work. People’s behavior changes based on what’s in the market. If cell calls are expensive, people will make fewer of them. And, as a consequence, it will cost more to service the fewer people who are using the service, as you will no longer have economies of scale.

Not all markets are the same of course, and the above is horribly simple. But it illustrates what I hope is the point. Simplistic arguments about how unlicensed spectrum will displace licensed services, so that the two should be locked in mortal comnbat, don’t reflect the reality. Sadly, however, they seem to drive the reality by producing a struggle for regulatory dominance.

stay tuned . . .

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  1. Stearns says:

    All generalizations are bad!

    One very common mistake is to try to perform analysis without a time component. Not only do technologies evolve, but so do businesses. A market analysis that assumes a steady state may have a very narrow purpose and usefulness. It isn’t made explicit: are all the writers in this discussion talking about today’s infrastructure, business plans, consumer habbits, perceptions of value in the stock market, etc.? Or are diffferent authors picking out one area of change — different from other authors — and keeping the rest constant?

    Another common mistake is to look at two components as if they form a complete system. In the current market, TV is a threat to cell phone networks: each minute spent watching television is a minute that could have been a revenue producing phone call. Unemployment is a threat. Why on earth would someone look only pairwise at VoIP and cellular? It shouldn’t be because they’re “in the same industry.” What does that mean?

    By the way, see my 12/2 entry on digital convergence (http://www.wetmachine.com/i…), where I make the same bad hand-wavy speculation about modes of operation. But one thing to take away from that is that there are other things at work that will push the dynamics. In my entry, I also assert (without justification) that people will want MOBILE always-on connectivity for computing. In that world, the “pipe business” will be about delivering that connectivity. The implementation of the network, and the way in which the bits are used will not be relevent. In other words, it could be current cellular companies as easilly as current WiFi operators, but it won’t be “phones.”

  2. mc says:

    Stearn wrote:

    “Not only do technologies evolve, but so do businesses”

    that’s been hard to see in any represented by the riaa or mpaa – quite the opposite.

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