Controlling The Phone - Part 6: Smart Phones

In Part 5 I walked through the history of wireless (cellular) telephone service and how the telco has struggled to maintain control over that phone. One point I emphasized was that the line of demarcation, that imaginary or not-so-imaginary line, is where one side definitely belongs to you and the other side belongs to them. The nature of the phone itself makes the line a bit fuzzy. I suggested that the line is at the interface between the SIM card and the phone.

This works well enough for basic cell phones, those that do little more than make phone calls and support vertical features like Caller Id and voice mail, and a few simple phone-resident features like a directory, call log and ring tone selector. There is little question that in this situation the telco is very much in control. That situation changes with the smart phone.

To begin, let's go back about 10 years. At that time the smart phones were not very smart. It was still quite a challenge to pack enough computer and data communications hardware into a hand-held device. There was also the matter of the radio technology, both in the phone and over-the-air, that made data communications difficult, expensive and slow. Most of the wireless infrastructure was still analogue, not digital. If you had a phone back then you'll know what I mean.

Many of those early smart phones were Symbian-based from Nokia. The screens were still monochrome and low resolution, and almost all without keyboards. If you wanted computer technology in your pocket you used a PDA, a space which was ruled by Palm. As the technology evolved there were endless discussions about who would win the smart phone wars (though they weren't often called that at the time), the phone makers or the PDA makers. I would argue that the ultimate winner was neither, but rather a small Canadian firm that started with an email device that functioned like a 2-way pager. That of course was RIM. It didn't stop there, as next came Apple and ... well, so on to today.

Let's return again to 1999. To get the best use out of the technology it was necessary to customize the services and communications protocols to fit within the constraints of both low-bandwidth and low-computing capacity. This was the dot-com era yet it was not possible to give unfettered internet access to these devices; browser software was much too large to fit in the phones and the data networks could not handle the browsing traffic load, even though it was almost exclusively text plus static images. This was bad for users and an opportunity for the telcos.

Look at the diagram on the right. Even in 1999 voice minutes were only modestly profitable on the wired network, and accounted for most of the profit for wireless. They knew as well as anyone that voice minutes would decline in profitability so that if they were to sustain their profits they needed to replace that with something else. Vertical services were, and are, one important piece of the puzzle. If you didn't already know, the profit margin on vertical services like Caller Id, voice mail, call waiting, call forwarding and so on is close to 100%. About their only costs are service provisioning and marketing since the technology to provide those services is already in networks and the phones.

When it came to data services, it is no surprise that they envisioned a similar structure. At the time they charged very high prices for basic data transport to and from the phone (and regrettably still do in Canada), and expected a gradual decline in price, similar to what they were seeing for telephony. Vertical services were seen as the likely profit leaders. The leading service was email, but there was much more. Here is where they exploited the limitations of the technology. With open TCP/IP internet access out of the question they exploited the specialized software components and protocols that enable service access by becoming the gatekeeper to those services. This was the origin of the term walled garden.

The telco worked with some of the then high-flying tech start-ups that were at the forefront of the software and services specially-built for the wireless networks of the day. A couple of notable companies were Openwave (for WAP - Wireless Access Protocol - and gateways) and Infospace (service broker, payment processor and WAP-optimized user interfaces). For a time they were on top of the world as the the world's largest carriers pounded on their doors, practically begging to buy their stuff. Of those two, Infospace was the most fragile since, in true walled garden fashion, each of the carrier's had their own plans for services and payment systems. The services enabled ranged from the basics, like phone directories and restaurant listings, to the more valuable like travel schedules and reservations, email, even concert tickets, and, yes, all those popular and often-annoying ring tones.

Their idea was to get a piece of the action in each of these transactions, much like the credit card companies. Infospace collapsed as the telcos develop their own WAP-based services, but even those eventually went nowhere. Yet for a while they did have some success with this strategy.

Time marched on and very soon those phones really were becoming smart phones. Users were also chafing at the restricted offerings and limited choices that were painfully obvious when compared to what was available from any computer with an internet connection. The market pressures were strong. Once the PDAs became internet-enabled the carriers gradually opened TCP/IP gateways that opened the first trickle of internet traffic, and which soon threatened to become a torrent. Sure, they were charging a lot for data transport, but they were gradually losing control of the most valuable part, the vertical services. The sweep of technology-enabled change was faster and stronger than they could control.

Today it is common to use smart phones with large, high-resolution LCD displays, copious memory and fairly powerful computers and attendant software to access the internet much like from any desktop. Surprisingly there are still some remnants of those walled garden services here and there, but it is the internet that now rules. The telcos are back to charging for megabytes and minutes, which is exactly where they don't want to be.

Even these businesses are under threat. With phones that will preferentially select a Wi-Fi connection if one is available, more of the wireless data traffic is being diverted to other networks and services. VoIP and web-enabled voice IM are threatening the revenue from voice minutes. They can't stop use of Wi-Fi but they are still able to seriously impair competitive voice services.

The next article in this series look more closely at smart phones and competitive voice services. I'll show how the demarcation point is no longer a point but instead a coordinated set of distributed points within the phone and in the network.