Smartphones Are Sucking Wireless Networks Dry

There are currently two different realities we have to wrestle with if we are a customer of either AT&T or Verizon Wireless. Walk into any of their wireless stores, and they will happily tell you everything the wonderful and futuristic 4G phones can do. They’ll sweep you off your feet with excitement, and you’ll buy, buy, buy.

However, when you get home and take your phone out of the box and turn it on, reality will hit you right between the eyes. Your new 4G phone might do all the wonderful things promised if there were enough wireless data spectrum — but there just isn’t.

So, you’ll be limited in how much you can use. Use more, and your data speed will be throttled down, defeating the entire purpose of your purchase. It sure seems that the carrier’s right hand doesn’t know what its left hand is doing.

That is why 3G phones are still selling well, even as we enter this 4G world. They may not run as fast, but there are fewer speed traps and customers experience fewer problems and are often happier.

My Pick of the Week is Time Warner Cable, which I want to congratulate for taking the right path.

The All-You-Can-Eat Data Buffet

We can feel bad for all the problems the wireless carriers are now experiencing with their shortage of wireless data capacity. Their shortage of spectrum makes it difficult for customers to use their data services.

This is a terrible dilemma for such an important and rapidly growing industry. Who would have done such a despicable thing to these companies? Would you believe the companies themselves?

It’s absolutely true. In the 1990s, cellphones were analog devices that made wireless phone calls, period. Back then, there were plenty of small cellphone networks in the country.

They saw how quickly they were selling phones and realized if things didn’t change, their rapid growth would end in the next few years since there would be no new customers to market to.

So what did they do? They decided wireless data was the place to be. Sell more services to existing customers.

Toward the latter part of the 1990s, they started to transform their networks from analog to digital. At that point, digital was slow, but it was still capable of handling wireless data. That meant email, text messages, pages and so on.

If you recall, that was Motorola’s last big hurrah. It led the wireless handset business and was riding the StarTac to the heavens, but it was an analog device in what was quickly becoming a digital world. Nokia took the lead from Motorola at that point.

Carriers were steering the ship, telling the handset makers what to manufacture. They all wanted wireless data apps to explode in the marketplace, but it just didn’t happen.

Two carriers led the wireless data charge. First came RIM with its BlackBerry. Palm was right behind it. And a bunch of smaller manufacturers tried as well. The segment was growing, but slowly.

The carriers started to get worried. They didn’t understand why customers weren’t warming to this wireless data world. Why couldn’t they drive the race car any faster?

Then, a few years ago, the world changed. Apple announced the first iPhone, which went on sale five years ago this summer. Next Google did the same thing with the debut of its Android OS running on a phone offered by T-Mobile.

That moment changed the industry. All of a sudden, two non-wireless companies became kings in the wireless space. Users wanted the iPhone and Android phones and started buying them like crazy.

Until that point, the carriers steered what the handset makers brought to market. That was apparently a flawed model, because when Apple and Google took the helm, demand suddenly skyrocketed.

To grease the skids, carriers introduced unlimited plans so customers didn’t have to pay attention to how much data they used. They just used — and it worked.

Desperately Seeking Spectrum

The carriers suddenly found they were no longer driving this fast-moving wireless data car but were being dragged along for the ride. In fact, AT&T, the first to offer the iPhone, was hanging on for dear life, as it couldn’t keep up with the demand.

Apps suddenly exploded. There were a few hundred until Apple and Google jumped in. Today there are hundreds of thousands of apps, and the number is continuing to rapidly grow.

Networks started working like crazy to meet the demand, but they have had a hard time keeping up. This was a good problem — they cried all the way to the bank. Still, it was a problem.

Carriers can either focus on the investor or the customer. Those who focused on the investor were doing very well. Those who were focused on the customer had a harder job keeping the customer happy. Today that may be reversing.

This is the problem I have written about so many times over the years. I warned that if carriers focused on the wrong target, they would eventually be hurt. Unfortunately, they are starting to feel the pinch right now.

I was asked to give presentations and speeches to small groups of executives and boards of directors, as well as large groups of workers and customers, to explain what was going on in the industry.

At the time, no one believed my dire warnings — and even I wished that I were wrong. Unfortunately, it is all coming true right now.

Just look at what is occurring in the industry today. Carriers like AT&T and Verizon Wireless are desperately trying to acquire as much wireless data spectrum as they can. That is what the failed merger between AT&T and T-Mobile was all about.

While this new path may serve AT&T and Verizon for the next few years, it a) won’t solve the long-term problem; b) will hurt the competitive marketplace; and c) will change the benefits of competition that we have enjoyed over the last few decades.

We have a choice of two futures, so we must choose carefully going forward. The question is simple: What do we want the wireless industry to look like 10 years from now?

One, step aside and let the carriers fight it out and kill the weaker competitors. If that is the case, we will have two big wireless carriers in the next five years. AT&T and Verizon will control the vast majority of the wireless marketplace.

Two, we can pool all the wireless data spectrum together into one place and let every carrier buy access to it. That way all the wireless carriers would have an equal opportunity to serve the marketplace. That would let them all compete on price and service. That would be a healthy place. The carriers that own the spectrum would be compensated for its use, giving them more revenue.

The choice is simple.

Preserving Competition

Will the carriers go for the right decision? Of course not. They don’t like to share — they want to own. They want to put their competitors out of business. They want to lead.

That’s what most companies want, and when there are plenty of competitors, that’s fine. But with so few players, we must be careful with next steps, or we will hurt the competitive marketplace.

Remember, wireless data is growing very rapidly. Ten years ago, the vast majority of wireless usage was voice. Five years ago, when the smartphone revolution started, it sped up the transformation. A few short years ago, we passed the 50/50 split. And in the next few years, we expect 97 percent of usage to be wireless data services or apps, and only 3 percent voice calls.

That’s a complete reversal of marketplace dynamics.

So what choice will we make to save our competitive marketplace and keep all carriers and customers happy?

Unfortunately, we cannot pay attention to the desires of the big players, because all they want to do is win and put the small players out of business. Plus, we have to remember that this dire situation the big carriers are now in was created by the big carriers themselves.

Are they the ones to steer this big ship called the wireless industry through these dangerous waters? I would have thought so, but it just doesn’t look that way right now.

That is the question we must think about and act upon. However, we do have to make a decision before every customer is throttled back in speed, defeating the entire last 10 years of progress and casting a murky shadow over the industry.

The choice is ours. Instead of just looking at today’s marketplace, we have to pick up our heads and look down the road. Going forward, where do we want the industry to be — in sunshine or in shadows?

Jeff Kagan

E-Commerce Times columnist Jeff Kagan is a tech analyst and consultant who enjoys sharing his colorful perspectives on the changing industry he's been watching for 25 years. Email him at [email protected].

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