Microsoft Announces Marketplace

As expected, Microsoft has announced their Windows Mobile application marketplace at CTIA. I have no great interest in Windows Mobile other than to compare their approach to that taken by Google with the Android Market. Last week I wrote about some of the difficulties with Android and why they are important for commercial success.

I could say that Microsoft is doing a better marketing job than Google but, to be quite frank, everyone does a better marketing job than Google. Let's look at a few items that I believe demonstrate that Microsoft's approach is superior to that of Google, and possibly even to that of Apple and the iPhone application market.

• Carrier billing: Applications can be purchased and billed to a credit card or to their phone bill. This is a tremendous advantage in that it lowers the barriers for a consumer to pay. There is no need to sign up for (another) payment system, no added layer of verification, and utter simplicity. There is a price for Microsoft in this, which is my next point.
• Carrier partnership: Microsoft shares a portion of their 30% cut of the application sale (seemingly a now standard percentage) with the carrier. That money pays for marketing leverage and cooperation. Not only will the carrier be disinclined to compete with Microsoft in future with their own app store, Microsoft and, importantly, the 3rd party developers get the leverage of the carrier's own superlative marketing organizations. Apple may be able to go their own way due to their strong brand, but for all the rest this can be a very wise move.
• Favourable returns policy: If a user returns a product, the developer suffers no net cost; Microsoft absorbs the transaction costs. Unlike Apple and Google, Microsoft is hereby promising to treat their developer community with respect rather than as a cow to be milked for every last drop.
  

I do hope that Google is paying attention to these developments. The success of paid apps in the Android Market is simply pitiful to date - there is far too much friction in every transaction, and the technology is full of bugs that they are very slow to fix. There are lessons to be learned and I hope they learn them. Fast.

Getting Off Fossil Fuels

I have no fantastical insights about just how we're going to get ourselves off fossil fuels, or even any certainty of the costs of not doing so. The matter of Earth Hour this past weekend is one I wrote about, demonstrating a view that, if not the new mainstream opinion, is at least in agreement with the lack of action of others - there was only a 6% dip in electrical power consumption during that hour, even less than what I, a non-participant, expected.

This article in Cosmic Variance certainly stirred some deeply-held feelings among what is arguably a scientifically-astute audience. The referenced New York Times article on Freeman Dyson (warning: it's very long) is also a worthwhile read about an eminent scientist with skeptical views and a eye on a broader cost-benefit analysis of carbon emissions.

As I opened with, it isn't my intention to get into an argument for one side of the other. What I do want to say is that, like it or not, we will have to adopt alternatives regardless of our individual views and knowledge. It is simply because fossil fuels are a finite resource; there will be an end to it.

It is true that there's an enormous amount of coal, centuries worth, but we can't use it for transportation without even more expensive processing than for the tar sands to convert it into usable liquids. As production declines and the costs of new sources rise there will be a secular and permanent upward tilt to energy prices. This will happen regardless of how clean we can burn the fuel; environmental impacts (or lack of them) won't change this outcome.

To me it makes good sense to ramp up exploration and basic research for alternatives. Even if everyone were to turn hard-core environmentalist overnight, there is today no good alternative other than simply doing without. That will wreak havoc with our standard of living. Some would happily accept that while others would not. My point is that, regardless of individual views on global warming, pollution and consumerism, we will have to change, and it would be best if we start working very hard now so that we can get to a position where we can make the change - a non-disruptive change - to alternative energy sources.

Fossil fuels are certainly finite and dirty, yet still very affordable. Yes, even at $150 per barrel. The bigger issue is the opportunity cost of not preparing for the transition. If we wait until the dollar cost forces us, one by one, to make hard decisions in our individual lives, we will have irretrievably lost time we could have put to developing new energy technologies.

Today I do not see a sufficiently broad commitment to doing the necessary work; not among politicians and not among the population. Turning out the lights for one hour, lights that aren't powered by fossil fuels, may make people feel good enough about themselves that they forget about the challenge for another year. That doesn't help.

Unfortunately it looks like it will be awhile until there is a strong enough turn in the public mood, or fear, for us to get serious about steering our economy in a new direction.

Leaving the Lights On

From all indications a lot more households than last year will turn their lights off for one hour this evening - the so-called Earth Hour. This event is being promoted as a way for everyone to show their solidarity with at least the idea of energy reduction and conservation, with a particular emphasis on reduction of carbon emissions as part of the fight against global warming.

I agree with the sentiment while being ambivalent about Earth Hour itself. Of course, as even the promoters admit, the real impact on energy production of this event is negligible; after that one hour of reduced consumption (Hydro One is expecting a dip of over 10%) we all go back to our typical wasteful ways. The objective, however, is one of raising consciousness about the problem even if the immediate impact is nil, and in that I expect Earth Hour will be successful.

My problem is that we are wasting an opportunity to better understand the energy problem. What gets lost in the celebration is that carbon emissions will increase during Earth Hour here in Ontario. The reason is that most of our electrical power generation is nuclear and hydro-electric. Since it is still the heating season, when you turn off all your electrical appliances, including the lights, you lose this carbon-free source of home heating and your fossil-fuel burning furnace will work a little harder. It isn't often understood that pretty much all your electrical power consumption heats your home as a byproduct of running electric appliances and lighting.

This is hardly a novel thought (it's certainly well understood by any expert in the field) but it is not thought about by the general population. This is hardly surprising since few people are conversant with the science, and even those who could understand it do not usually think it through. I believe getting this point across as part of Earth Hour could make the event more useful and educational.

In addition to turning off the lights (especially those outdoors that contribute nothing to home heating), how about parking the car for a day and setting the thermostat to 19 degrees. People need to think a little bit more about all sources of energy. In regions where electrical generation is from fossil fuels (coal, natural gas, oil), there it makes sense to cut the juice. That, too, is a useful lesson.

The lights in my home will stay on Saturday evening. That is how I will be reducing my carbon footprint.

Android Market Continues to Fail

Last week I played a what if scenario of what might be going on within Google regarding the tie-up between Android Market and Google Checkout. I did this while keeping one eye on the goings on with Apple's iPhone app store, and fretted that Google is missing out. This article tells me the grass on the other side is not so green, both in colour and in regards to money.

It isn't surprising that a large corporation would give less than individual care to a large body of customers, both users and merchants (merchants are the app developers). For them it is a consequence of the "benefits" of scale. I have no problem with that. What I do have a problem with is when that corporation crosses the line from minimal or automated service to neglect or even abuse of its customers. App developers are customers. If the comments in the TechCrunch article are to be believed, Apple may have crossed that line.

Meanwhile back in the Android universe things are different but not much better. Google has been getting more communicative with the developer community although not much has yet changed. Google Checkout remains a problem that is likely to continue. An expansion of Google Checkout, and the Android Market, to more countries and currencies has been promised by Google for the near future, but there is no indication that any of the existing problems will be addressed.

One thing I learned from working with the world's largest telephone companies is how fine the line is between a mass-market phenomenon and a small niche. To achieve high penetration with a new service or feature the path for the customer must be near frictionless. One grain of sand on that teflon slide and you can over 90% of your prospects. As they say with regard to phone features, if you so much as require the user to press one button to use the service you will lose 3/4 of them. As the complexity of the user interface increases, numbers plummit even further.

Let's apply this thinking to Android:

1. Sign up with T-Mobile: Small player in the US market and a secondary operator in most markets outside of Germany. This is the first grain of sand.
2. Sign a contract to get the fancy new G1 smart phone: Ok, this one isn't too onerous once the carrier has been selected so let's give this a pass.
3. Learn to deal with the unreliable Android Market and all of its growing pains. The friction to begin playing with the market is low but when they get burned by problems with either free or paid apps many will never return.
4. Sign up with Google Checkout: There is clearly resistance from users to sign up for yet another and lesser-known payment system. This is more like a large pebble than a sand grain. Results in the Android Market seem to bear this out.
5. Navigate foreign currency exchange: Google Checkout's insistence on posting pricing in the merchant's home currency is another grain of sand. This is especially a problem in the US where most people never deal with other currencies and have never held a passport.
   

As a prospective merchant on the Android Market and with a fairly-successful free app, I am losing patience. Even the best paid apps on the Android Market have sold no more than a few thousand units. The majority have sold far fewer than that. Android Market is a sandbox for hobbyists not businesses. Those grains of sand have added up and scared off the vast majority of T-Mobile's approximately 1 million G1 users. Despite its faults this is one thing Apple got right with iPhone: the payment path for apps is near frictionless, and therefore lucrative.

In my own company we continue to play with the Android platform since it enables certain classes of applications that cannot be done with its rivals. However for the present we have shelved all plans to make a business of it.

Controlling The Phone - Article Index

Controlling the Phone - Part 1: Demarcation
Controlling the Phone - Part 2: Residential Signalling
Controlling the Phone - Part 3: Stupid vs. Intelligent Networks
Controlling the Phone - Part 4: Intelligent Networks
Controlling The Phone - Part 5: Wireless
Controlling The Phone - Part 6: Smart Phones
Controlling The Phone - Part 7: Inside the Smart Phone
Controlling The Phone - Part 8: SMS
Controlling The Phone - Part 9: VoIP
Controlling The Phone - Part 10: Standards

Controlling The Phone - Part 10: Standards

In the final installment of this series I need to talk about standards. At first glance this may seem an odd topic for this series since standards, one might think, are a consumer benefit, whereby you can go into a store and choose from among many competitive products that support some prevailing standard. Examples include telephones, modems, routers, Wi-Fi and Bluetooth devices, televisions, DVD drives, and so on. These are indeed good things for the consumer, and all are enabled by standards which enable competition in the product marketplace. However, standards do have a dark side.

In most cases, standards are followers, not leaders. By this I mean that, first, a new technology rolls out, then there is increasing chaos in the market as competing manufacturers produce variants with differentiating features. Finally sanity is restored by narrowing the field to one or at most a few acceptable variants. These final versions are the result of sometimes ugly negotiations that necessarily disadvantage most of the players in the industry. These negotiations can only succeed when the plethora of non-interoperable products causes consumers to stop spending. In other words, when there is money to be made, the industry will normalize.

There are endless examples of the above, from video tape to DVD, from low-speed data over phone lines to DSL and optical fibre, CMDA to GSM, and even cars and gasoline grades. The common thread is that when the initial market acceptance of a new technology is choked by incompatibility, and therefore stalled sales growth, the stakeholders will negotiate standards.

Sometimes standards lead market success. Examples include TCP/IP, email, and the web. More often, it is a sign of doom when this occurs. Consider ISDN, IN, and the Clipper chip. The reason is that when the industry is playing at the standards game at the start of a technological initiative it indicates that they are not innovating and rolling out products to market. Money must come first. When there is no market, you will find that the major manufacturers only participate in order to placate their major customers, who are typically the drivers of the standardization drive. I personally spent some time doing this with ISDN and IN, and let me tell you it was a hopeless affair. The amount of time and energy wasted on non-product standards was considerable and ultimately wasted.

In contrast consider V.90, the 56,000 bps dial-up data standard that got done in months when the market was crying for the increase in speed. Customers were waving money in the air, ready to spend at the first sign of a standards-based product that would work for all ISPs. Manufacturers were even selling pre-standard products with the promise that the modems would be upgraded for no charge once the standard was settled, all to lock in customers. That is how standards work when they work well.

Let's now take a walk on the dark side. In telecom, both service providers and manufacturers see distinct advantages to proprietary products and services in a competitive environment. It is a way to lock in customers. For example, if you have a feature-phone that works on a Mitel PBX system you can bet that it will not work on any Nortel or Lucent business system. To switch to a competitor's PBX requires replacing all of the phones.

This cost of switching is so high that there is a lock-in effect. Cellular service providers try to do the same with the phones they sell, by incorporating components that ensure the phone will only work with their network. The pricier the phone, the greater the lock in. The same has held true in the telecommunications infrastructure market where manufacturers like Siemens and Nortel would aggressively market switching and transport equipment that is non-standard, with the aim of locking in the carriers once they have investment millions or billions of dollars in the initial roll out.

Carriers, for their part, would then attempt to intimidate their suppliers to comply with new standards for future sales. The losing suppliers would, naturally, enthusiastically embrace the standards in the hope of displacing their competitors. Siemens played this role with ISDN back in the early 1990s, as Lucent did with IN throughout the 1990s. SONET, ATM, DSL among others had their own battles. The competitive and dirty tactics that can be witnessed by sitting in on these standards meetings are quite eye-opening. It is a nasty and dirty business, and not for the faint-hearted.

Similar tactics are pursued by governments and their agencies, the telecommunications regulators. The countries that were home to the major multi-national equipment manufacturers regularly enshrined standards in the guise of regulations, and which unsurprisingly reflected the specifications of those same manufacturers' equipment. Thus we saw things like 4B3T line coding in Germany (Siemens) rather than 2B1Q for ISDN, T1 and E1 for digital carrier systems, and BTUP in the UK rather than ISUP for telephony signalling. There was the old joke within Nortel about the international telephone gateway product, DMS-300, being little more than a giant protocol converter for all the incompatible national trunk systems.

The ability to lock down protocols to continue this practice today is much lessened because of the obsolescence of the older generations of technology, the growing need for reciprocate to protect export markets, and the rise of TCP/IP and the internet. There are today fewer means and reasons for regulators to step into the fray. Carriers do still play their games but to lesser effect.

For example, anyone who has attempted to sell VoIP equipment to a telephone company knows that they have abdicated any role in setting standards. Instead they demand that your product demonstrate compatibility with other equipments they have already selected and installed. They do this knowing that the VoIP market is fast-moving and innovative, and there is no benefit for them to dictate terms - it would only impair their ability to change in the future. This has led to ecosystems of suppliers, usually led by a major player like Cisco, with a certification process for interoperability testing. There are also loosely-coupled industry associations that do the same, and in one case a centrally-controlled and operator funded institution for one industry sector: CableLabs for the cable industry (PacketCable).

What standards really come down to in the end is simply a matter of compatibility and predictability. These days there is far less slack in the telecom product pipeline to allow the gamesmanship that typified the standards process in the past. Delay means lost opportunity, which can make or break many companies. This is a healthy development. Of course it is possible that at some time in the future the industry will again reach a plateau with operator-supplier market stasis, but for now the need to make money dominates. Today, standards promote rather than impede business and delivering innovative telecommunications services to consumers. This is as it should be.

Creating Confidence

The back-and-forth among political and business journalists about whether Harper or Dodge are right about the prospects for the Canadian economy has been interesting. I believe there are elements of truth in both of their stances and arguments. I also believe that both are correct to take the positions they have.

Former Bank of Canada Governor Dodge may very well be right that our recovery will be slow and weak. He points out that certain sectors, in particular motor vehicles, may never recover. This is likely true, but has little to do with the downturn; the current economic weakness merely sped up the decline of the weakest companies. For this reason I do not see a subsequent non-resurgence in especially weak sectors as a justification for a weak recovery. This also goes for media and newsprint, and other sectors and companies. Other weakened sectors like aerospace, commodities and technology will recover as the economy recovers. Dodge is right to point out that this is very much dependent on the pace of the recovery in the US.

Prime Minister Harper is finally getting on the right path after some worrying bouts of denial and waffling. He could very well be wrong that our economy will see recovery sooner rather than later, but he has an important role to play in reversing the broad-based loss of confidence. As long as too many people are worried about their jobs, incomes and retirement savings, we are not in control of our own destiny. If left to fester this attitude will guarantee that the scenario Dodge lays out will come to pass: that our recovery will lag that of the US and other consumers of our exports, and that we are wholly dependent on external triggers to begin the recovery.

Let the (justified) sniping over Harper's unexpected voice of optimism continue. Even so it will have an effect if he does it in measured tones and without let-up for the next several months. The 92% of people that are employed need some help from our political leaders to take a deep breath and renew their previous patterns of consumption and investing. That alone should do the trick. It's a matter of confidence about the future, and hearing a few more optimistic voices. Optimism is justified.

AIG Bonus Silliness

Here is the bandwagon of the day: writing pointless articles about the huge bonuses AIG paid out to many of its executives, even some that no longer work there. In addition to the outrage being spurred on by camera-hungry politicians we have journalists and bloggers jumping in, arguing on one side or the other of this issue. I am going to do neither in this post. My opinion is that, regardless of legal and ethical questions, this issue of the bonuses is neither material nor unusual.

Mr. McConnell: “It’s shocking that they would — the administration would come to us now and act surprised about these contracts. Why didn’t they ask the question two weeks ago, before they gave them $30 billion?”

It is not material to the bigger picture - that of avoiding wholesale systemic failure in the insurance counter-party market. The amount of money represented by the bonuses is about 0.1% of the public funds injected in this aspect of AIG's business commitments. To almost everyone, the numbers involved in the individual and total bonus amounts are insanely high. While emotional responses may range from envy to questions of 'fairness', this has always been true when the majority view the rich minority. There is no fairness in our capitalist economy; you don't get what you deserve, you get what you can.

Remember that what regulators were most worried about at the time was systemic risk. Whether or not AIG deserved the money was pretty much beside the point: the key thing was that if it didn't get the money, the entire global financial system would be put at risk of collapse. In which light, the cost of the AIG bailout looks positively modest, compared to its benefit.

The second matter is the whole concept of corporations paying bonuses in the face of non-performance. Has no one ever worked in a large corporation before? This is standard practice. Bonuses for individual performance (however measured) are often small compared to broad distribution of options and cash when the profits are rolling in. If the corporation is doing poorly, bonuses for individual performance are reduced and restricted to a select few. In other words, individual contribution typically has little to do with the size of bonuses but a lot to do with the overall profitability of the corporation.

I saw this myself in local companies like Mitel and Nortel. When times were great, we employees were like pigs at the trough. Management kept pouring in the cash and we took it. When times were bad, we got nothing. In between these extremes was when games were played over individual performance. Senior management allocated the pool and it was dispersed to each succeeding level of of the corporate hierarchy according to some shifting notion of performance. In reality, management and employees knew it was all a charade. The differences paid out to high and low performers was rarely substantial. It was never about performance.

Barney Frank: ‘No, I’m not paying you the bonus. You didn’t perform. You didn’t live up to this contract.’

AIG is no different. Times were good and employment contracts set the terms for bonuses for senior staff. That the profits came to a sudden stop means little. They were paid on the corporate numbers over the period during which the bonuses were calculated.

There is some talk now of amounts paid to retain talent. However as many commentators have noted, if they wanted to leave AIG where would they go? Maybe the representatives of AIG's new stockholders, the government, can focus on that instead. If they don't like the quality of the talent, fire them. That's the proper, corporate, way to reward poor performance, and not by debating bonuses.

Google Checkout vs. Android

I wrote recently about some of the problems that Google is having with paid apps on the Android Market. Not much has changed except that at least one head has popped out of the Google foxhole to provide some assurance that the problems are being addressed. A number of the issues are due to limitations of Google Checkout, including poor geographic coverage, return policies, and currency for posted prices. The exclusive arrangement that Google Checkout has with Android is what I will look at in this post.

First, I need to say that what follows is purely speculation; I have no evidence that anything in the scenario I'm about to paint is factual. I am presenting this scenario since it appeals to me as one that has a strong likelihood as being at least a part of the truth. I base this on my experience of having worked in large corporations, and having experience first-hand conflicts between business units with incompatible needs. With that said, let's proceed.

Google Checkout is not very successful in comparison to its more-established competitors, especially PayPal. As Google continues to introduce products that are sold directly to consumers or that provide a market wherein consumers and businesses buy and sell among themselves, it is perfectly reasonable that Google would prefer to promote their own payment and settlement product. It is, after all, more profitable than using other, non-Google services, and they can better tune its features and operation to the needs of its own businesses.

One reason it is not gaining more market share is that its competitors are well established. It takes a lot to convince consumers to sign up for another payment service or to switch entirely from the ones they already patronize. First movers like PayPal had the advantage of no competitors when they first came on the scene. Provided they don't make any big mistakes, their continued dominance is assured.

If I were in a position of responsibility within Google Checkout I would be increasingly concerned by my inability to grow the business. Failure has a price, sometimes quite personal. I would therefore be looking for "friendly" clients to win over, the so-called low-hanging fruit. Other Google business units would fall into this category. Even though it is a bit incestuous it nevertheless does help to establish the credibility of Checkout in their attempts to win over more clients.

Imagine, if you will, a meeting where the head of Checkout meets with the CEO and makes the proposal that the Android Market use Checkout as its sole payment provider. There are already plans afoot to aggressively market Android and the Android Market, which have many inherent strengths, and with its supposedly strong momentum would not be overly burdened by carrying Checkout along for the ride. Or so it would be claimed. If the CEO finds this intriguing, the head of Android Market would be put on the defensive, having to prove why this is perhaps not such a good idea, and try to compromise by allowing a non-exclusive deal. After a series of meetings with some give and take among the parties there is a decision to go with Checkout in an exclusive arrangement for at least a trial period once the market is launched.

At this time, some weeks after launch of the Android Market, I can imagine that its head is gathering evidence to show how Checkout is performing, and perhaps to prove how it is holding back success of the new and promising Android business. At the same time the Checkout team is working hard to improve their product to show that they deserve to keep their exclusivity with the Android Market.

At some point a decision will be made based on the evidence and analysis of the contending parties, and possibly on internal corporate politics (Google is not immune to this). Android Market will attempt to show that Checkout is causing them to fail to meet objectives for revenue, user adoption, and developer commitment. Checkout will attempt to show that the faults are more with the missteps of the Android Market and would have occurred with any payment service.

How the matter is decided will come down in large part to whether it is Android or Checkout that Google most wants to succeed from the perspective of its overall corporate objectives. My bet is that Android is the priority and that after several months someone is going to be authorized to make a phone call to the folks at PayPal. Unfortunately this point has not yet been reached and so everyone must continue to suffer the deficiencies of Checkout, or abandon Android. I don't believe Google will let this latter outcome become reality. We'll have to wait to see if I'm right.

Capacity to Invest

It has long been argued back and forth whether it is possible to time the market. What this means is the ability to successfully pick the time when a stock is at a low and sell at a high. This can never be done reliably though many try and even succeed at getting it right enough of the time to be profitable.

The alternative is to buy on low valuation and sell at a high valuation, by whatever metric makes sense to the investor. This is the essential difference between investing on fundamental and technical analysis. There is more to it than this, but I'll leave all that aside since it's timing in particular I want to address.

Recently, we had the leaders of both Canada and the US talk about "buying opportunities" in the market. Harper talked about this during last fall's election and Obama in the past few days. Perhaps they are right, though in both cases the markets continued to fall after their pronouncements. Clearly the markets take their cues from elsewhere.

Why do the markets keep falling? Selling. What will cause the markets to rise? Buying. That is so basic it is hardly worth mentioning, except that it is worth mentioning. It matters now in particular since to see buying in the market we need a few things:

• Willingness to buy;
• Confidence in the outcome; and
• Capacity to buy.

There is some willingness to buy, maybe even a lot though it is hard to know. Confidence is low, as it tends to be when our portfolios take a hit and there are substantial fears of imminent unemployment. Perhaps more important is the capacity to buy - it isn't there.

Governments play a role in renewing confidence by acting to re-establish a stable equilibrium in the financial markets and in social safety programs. If they can do it right, 2009 could spell the end of the crisis, and the public cost of managing the crisis will be affordable. What the government can't do is rebuild people's capacity to take advantage of market opportunities.

That capacity is largely in the form of each person's asset base: savings, property and investments. Property is fairly illiquid and savings are typically small in comparison to investments. Which leaves us with investments as the source of most people's capacity to, um, invest. That's where the problem lies.

For most people their financial capacity to invest is already invested in stocks that have suffered massive declines very quickly. It is pointless to sell those investments to buy others if the intention is to create a net increase in buying pressure. The best one can do is move money from, one hopes, poor investments to better ones. However this is never guaranteed.

I do not think we'll see any substantial recovery in the markets until enough people regain their confidence in their livelihoods and retirements plans to begin once more to spend, including allocating a portion of that money into new investments. Of course by then, pretty much by definition, the markets will have recovered to a degree and so all those once-in-a-lifetime buying opportunities will no longer be quite so attractive. So it goes in the markets.

Controlling The Phone - Part 9: VoIP

It is no surprise that VoIP has become a battleground on which telcos are actively protecting their business interests. Simply on the basis of VoIP as a technology, and despite an adoption rate slower than has been promised by many who have touted it, VoIP is the future of voice communications. And it is a slow evolution; very few people connect using VoIP at the user appliance, and even fewer use VoIP end-to-end, although it has seen better penetration in international carriage.

Until now the main business driver behind VoIP has been rate and regulatory arbitrage. This has become far less of a differentiator as all voice prices have come down, and because regulators have gradually increased their oversight, and demands, on the pure-play VoIP providers. The VoIP providers themselves have further eroded their competitive position by added in mislabeled fees on their bills, making their business practices far more like that of the telcos.

Even while the telcos did their best to slow the progress of the VoIP providers, including lobbying to get those providers covered by the same jungle of regulations they were burdened with, they also made money from VoIP. The primary revenue stream for them is interconnection fees. Since the vast majority of phone users are not on VoIP, the VoIP providers have to interconnect with the telcos' networks, and pay for the privilege of doing so, if their users are to achieve the universality they expect from any phone. This is one reason why Skype is free, but SkypeIn and SkypeOut are not.

With price largely off the table, the battle now is about subscriber control. As I've talked about in the past, no telco willingly allows themselves to become a dumb pipe, ceding the lucrative and highly-marketable vertical services built on those pipes. That absolutely means the making and receiving of phone calls. While some may wonder if the web and its various services are yet to be seen as a passing fad, no one doubts that for so long as human beings exist they will pay to talk to each other. With phone calls migrating to VoIP, telcos know that the legacy networks are dead and that they, too, must make the move. In time that will be the only game in town.

It isn't easy for the telcos to assert control over VoIP. Being software based and available to anyone with an IP connection, it is very simple today for the most technology-unaware consumer to use and benefit from VoIP. Therefore, a key arena in which telcos are wrestling for control is that of of network neutrality.

It is amusing to read that the telcos are trying to escape regulatory oversight using VoIP, even while they lobby the same regulators to increase the oversight of their competition. This particular tactic can only succeed if they can hobble competitors, the pure-play VoIP providers, by being less than neutral towards users of their data pipes. This further assumes they continue to exercise market dominance, or even a monopoly, on data access, both wired and wireless. Their key competition in this space is the cable companies, but since they and the telcos have the same objectives (and tactics) we face a market-dominant oligopoly, which is as bad or worse than a monopoly.

Anti-neutrality tactics between the telco's wired and wireless networks are different despite their sameness when it comes to IP communications. The reasons for this are technical and also related to regulatory latitude. First, let's quote from an article by Michael Geist, which summarizes in stark terms how one presenter, Pelmorex, put the matter to the CRTC:

wireless reseller blocking ads from a mobile site

wireless carriers stripping out tracking codes embedded in web pages, thereby limiting ability to deliver ads

wireless carriers establishing “walled gardens” that provide preferential access that reduces data charges for sites within the walled garden

forcing users through wireless carrier homepage when accessing the Internet on feature phones

prior approval of applications for use on smart phones

extra fees for text messages that include ads

wireless carriers limiting to whom ads in text messages may be sold

All of the same points could apply to wired broadband, but do not for some important reasons. First, wireless spectrum is still considered a finite and limited resource that regulators (rightly or wrongly) understand must be closely managed by the telco. Second, users expect a somewhat different experience from mobile, in part due to the peculiarities of the devices, availability constraints and in part due to a history of WAP and other low-bandwidth walled-garden services. Third, and with particular respect to VoIP, VoIP is technically impaired on mobile phones for the reasons I covered in the previous article on SMS.

This last reason is why I realized I ought to cover SMS first. VoIP is easily installed as an application on smart phones, but it isn't. First there is the false reason given of excess network usage (recall the earlier point about spectrum conservation). In actuality, VoIP is less of a burden that a great deal of web surfing, especially when it comes to transmitting photos, video, music, and even live mapping/navigation views. Second, VoIP requires a persistent connection to a remote server (SIP server in most cases) to keep an active connection through the network's NAT and firewall so that there is immediate presentation of incoming phone calls. As described in the previous article, this quickly drains the battery. The technical requirement is the same for wired broadband, except that there is no power shortage and the firewall is owned and operated by the user. Wi-Fi can be used from most mobile devices but that would mostly limit VoIP to the home, office and a few other locations.

Even with its technical limitations, the telcos are active in controlling VoIP use on smart phones. Where they can exercise control, they disallow VoIP applications, either directly or in cahoots with the manufacturer or app store. This strategy works well with Symbian, Windows and iPhone devices, but I have to wonder how they can control VoIP on Android phones. Perhaps this is where network neutrality raises its head, with the telcos defending the use of deep packet inspection (DPI) and application filtering. They cannot use this tactic against VoIP on wired broadband, but they are still able to do so with a lot of freedom on wireless networks.

These reasons are why the so-called VoIP apps that are available on smart phones do not in fact use VoIP on the phone itself. Usually they involve ordinary cell phone calls to VoIP carrier POPs (points of presence), to access cheaper long distance rates, and forwarding of incoming calls to a VoIP number to the cell phone number.

Ultimately I believe the status quo is unsustainable. Two key reasons I see are:

• Services: With no prospect of new or enticing services on the legacy network, and the competitive offering of those new services with VoIP, if they are to offer the same services themselves they must allow VoIP on smart phones. Once they do so they will no longer be able to maintain the charade of VoIP harming their network. They will continue to try, however, and that is one reason why they are working so hard against network neutrality: they want to have their cake and eat it, too.
• Wireless Data Marketing: In time, the regulators will get the message that VoIP is not a burden on the network. Sure, it may continue to be a burden on the phones themselves for a while longer, but when they advertise quantities like 5 GB per month of data usage, and VoIP is shown to consume only a small part of that amount, it will be increasingly obvious that it isn't a problem. Even if it were, with a volume-based data plan, surely it's up to the user to decide how the volume is allocated, not the telco. This reasonable argument and the increasing capabilities of wireless networks and the telcos' relentless marketing of those capabilities will subvert their own campaign against VoIP. It will also damage their fight on the broader issue of network neutrality. Battery life is a separate matter, one that is between the users, app developers and manufacturers; but not the telcos.

When all is said and done, the telcos will have to take VoIP seriously, both as legitimate competition and as an opportunity to deliver new and hopefully attractive services. VoIP is here to stay and the telcos are in gradual retreat on all fronts. The most interesting times are yet to come, and VoIP's day may be come sooner than expected.

I have at least one more article in this series that I want to write, on the role of standards in the matter of controlling the phone. Time permitting I'll get to it by next week. With my schedule being a bit more full I have less time to write blog entries. So we'll see.

Going From Buggy Whips to Carburators

There's been a lot of news lately about newspaper business failures. It's dire though not unexpected; dead-tree publications have been in a steady decline for years, ever since the web came into its own in the 1990s. Many top-tier dailies are bleeding money. This is certainly not sustainable and it isn't likely to reverse. It's a textbook example of secular change, in contrast to the ebb and flow of the business cycle you find in sectors like commodities. All that's different now is that when the economy is weak the weakest companies are doomed; and that describes newspapers very well indeed.

Does it have to end this way? Perhaps it doesn't but there are reasons why it is going to be difficult for newspapers to find a new and effective business model. First they need to accept that the newspaper business is dying. Then they need to take a good, close look at their assets and decide on a better way of making a new business out of those assets. It isn't easy. For one thing, the persistence of corporate culture that makes it difficult to accept that the old ways no longer work. Their revenue sources are drying up: subscribers are moving to the web where news is more timely, more diverse, and cheaper, and advertisers are following since they must go to where an audience can be found.

Newspaper have some important assets, including brand, news gathering and reporting, and local presence. They also do not have the assets they need, including effective web presence and marketing. Tactics which are proven to fail, such as online pay walls and delaying or abbreviating articles, only serve to encourage people to look elsewhere for their news. This diminishes the value of their brand, which could otherwise serve to preserve customer loyalty.

None of these facts is new, so I'm sure you've heard it all before. Let me suggest some reasons why they find this change so difficult. I don't know if I'm entirely right, though I do believe I can capture some elements of the truth.

• Advertising Charges: Newspaper ad rates are based on circulation (potential audience size), audience locale (people geographically near to the business), placement (front page, back page, placement near relevant content, etc.), size and colour, among other factors. With newspapers, these factors don't change much over time, so businesses tend to be regular advertisers and can track the effectiveness of their ads. In contrast, on the web this model doesn't work. The audience is less predictable: they are less local, averse to annoying ad placement, and transitory. Audience value is determined by unfamiliar metrics such as impressions and click-throughs. In contrast to the newspaper business, everything changes, and keeps changing, every day. There's a lot more to establishing a profitable web presence than hiring a web site development shop and subscribing to a ad delivery service.
• Unique Content: Before the web, newspapers had a near-monopoly on news: the trivial and the in-depth, and local and global, except for the breaking news phenomenon handled better by radio and television. The industry learned to share national and global news sources through article syndication from consortiums like the Associated Press and among the multiple newspapers owned by conglomerates. This lowered the cost of story production, and thus increased profits. It didn't matter to subscribers that much of the content of the newspaper was identical to that in newspapers elsewhere. With the web, all of this matters. AP is desperately trying to control how their stories are distributed, and paid for, while the online properties of conglomerates like Canwest all look much alike. It is apparent to everyone that the amount of unique content per newspaper web site is small. Aggregators like Google are a better fit to the web by making it easy to find a broad diversity of articles related to any given event, even those of mainly local significance. There isn't much that's unique to newspapers that enables them to carve out a loyal audience. If they resort to news aggregation, they find that the competition is fierce.
• Legacy Overhang: Unlike web-only properties, newspapers have to support two distinct and even competing properties: online and paper. Many periodicals have taken the plunge to scrap their printed editions to go web-only, ejecting the dying model and leaping into the unknown. Newspapers fear, and probably for good reason, that if they do that their audience will not follow, for the aforementioned reasons. Instead they plod along with dual products that have no clear distinction, except the artificial ones such as delaying news to the online property and restricting access to news archives. For them, the newspaper business continues to decline (and suffering financial losses) while the online business really isn't a business at all, but a holding space for...something, if they ever figure out what.

Newspapers will eventually have to decide once and for all what business they are in, then focus and execute aggressively. Sitting on the fence, teetering back and forth in response to crosswinds, can only be temporary. Like the old joke about transitioning from driving on the left to driving on the right, you have to do it all at once or chaos ensues. Buggy whip makers never did transition to making auto parts, and perhaps that is the fate of newspapers.