Nokia Continues to Spin Its Wheels

Two months ago I (and many, many others) speculated or hoped that the changes in Nokia's top management augured well for a change in strategy. In particular, I wondered how they might now respond to the challenge from iPhone and Android. The choice is stark: Symbian is old and difficult to upgrade to compete on features in a timely fashion or switch to Android. Those aren't the only choices since even Windows is now showing some promise. However they haven't diverged too far from their previous trajectory by banking on MeeGo.

The question I have to ask is how exactly does this decision help them? They know they have to do something, and fast, but I suspect that pursuing MeeGo will only delay their ability to effectively compete. MeeGo remains feature poor in comparison to iOS and Android, and those platforms continue on a fast development pace. Yet their stated reason for sticking with a unique platform is to differentiate themselves from others.


There was an interesting article in the Wall Street Journal this week on Nokia's current direction that is well worth reading. I'll quote a few lines from that article in this post.

Though the go-it-alone strategy puts Nokia in competition with an increasingly powerful Google, the rise of smartphones has forced cellphone makers to differentiate their products and generate profits increasingly through the software they offer. Using Android or another platform would likely leave Nokia in the steadily lower margin business of hardware.

Alberto Torres, Nokia's executive vice president for MeeGo computers, argues it also would tie its hands in distinguishing its smartphones with new innovations, ultimately benefitting Google's search business at Nokia's expense.

Referring to other handset makers that have adopted Android, he said in an interview at the Dublin developers meeting this week: "Frankly, some of these alternatives in the market are not necessarily providing a lot of opportunity for innovation, and that is what we hear from people who are using those platforms at the moment."

Nokia has said this before and I still don't buy it since they are not at all clear at stating just what it is that will demonstrate their innovation. That is, what will MeeGo allow them to do that Android cannot? Innovation does not just mean different, it has to mean something unique or better. Instead we hear again about the Ovi store, their developer community and proprietary applications.

Nokia also has spent heavily to catch up to the iPhone and Android with its own platform and set of software services, under the brand Ovi. Those investments include its $8.1 billion acquisition of digital map maker Navteq in 2007, which competes directly with Google Maps.

Pairing with Google at this point would mean negating all of those investments, said Roberta Cozza, an analyst with Gartner. "Putting everything into Google's hands would mean all the work on Ovi would be gone, and I am not sure what that would change for them," she added.

This is misleading since it is certainly possible to put their maps applications onto Android and still keep their Ovi brand. They can even negotiate with carriers to choose their proprietary apps over Google's for the Android devices they market. I am left wondering if they are feeling uncertain about competing head-to-head with Google and prefer to use platform lock-in to promote their apps while also barring others.

The danger is that they could lose both the phone and software business if Nokia smart phone products continue to lag and the carriers simply go with the platforms, and device vendors, that give their customers what they want. As time goes on, that list is less likely to include Nokia, with or without MeeGo and Ovi. App developers will continue to make the same decision, leaving Ovi with a growing application gap.

Nokia's decision to push MeeGo over Android stems in part MeeGo's capability to support not only smartphones, but a variety of products consumers use including tablets, televisions and even automobiles, [Gartner] says.

This is obviously false, and I am astonished to hear it from anyone, especially an analyst that follows the industry. By next year the market will be awash in Android tablets and a growing list of other devices. In contrast, MeeGo is still in catch-up mode.

Nokia has to seriously -- and I do mean seriously -- determine how they can be different with a compelling platform and portfolio of products and services. One can only hope that they do know and are choosing to play it close in their public statements for the present. Nokia is a good company so when the new management team comes to a point where they are able to implement major changes, they may do so. To succeed they need good hardware, user interfaces and a few innovative apps and services, all of which are within their ability. However none of this requires Symbian or MeeGo.

Economic Impacts of Spectrum Auctions

Radio spectrum is a peculiar asset. It exists, it is continuously renewable, under certain circumstances it can even be shared. If its use is uncontrolled there is ample opportunity for impairment of services which exploit the resource. There is good reason to believe that eventually -- but not anytime soon -- that with more agile and intelligent technology, sharing and optimization can be largely automated. For the present we need regulations and licensing to allocate spectrum to specific users and how it's used.

Up until the mid-1990s the commercial and technological requirements for mobile phone spectrum was quite modest. The number of users was comparatively small and analogue voice technology was amenable to fairly uncomplicated channel management protocols. Governments tended to assign spectrum licenses to a select group of companies, and used those licenses as a tool to either further strengthen incumbent carriers -- some that were owned in part by the same governments -- or to foster competition by splitting spectrum among several companies with the demonstrated wherewithal to build a sustainable business.

Then came the idea that spectrum is a national asset that can be assigned a market price and can therefore be leased to competing entities by means of open auctions. Always ready to open the treasuries to new revenue streams, especially revenue not derived from broad-based taxes, the politicians listened and made it so. This idea was implemented with enthusiasm in the US, where they raised many billions of dollars. Canada and other countries picked up on the idea and spectrum auctions spread across the globe. Governments enjoyed the windfall of the wild bidding wars that ensued, and their populations liked the idea that taxes could be avoided even while expanding public services with this new revenue source. Of course nothing is ever that clean and simple: there is a public cost, even though it is sufficiently disguised to fool many people.

Besides the specific problems that they raise, spectrum fees share one big problem with auctions: They can too easily be used as cash cows. Experience shows that the government always needs more money, in booms and in recessions. Nearly $6-billion has already been earned by the federal government in auction proceeds, and $130-million is paid in annual spectrum fees at current rates.

Even at $130M annually these annual spectrum fees are not onerous. If we assume 24M mobile phone users in Canada, that works out to about $0.50/month/subscriber. That isn't much, even if it is annoying, and it is hidden in the price of service. Yes, you and I are paying those spectrum fees indirectly since, as with all input expenses, they are calculated into the price of the service.

This is fair; the carriers are businesses and they should be free to recover their expenses and earn a profit. Except that what we have here is a type of hidden government tax, where the government charges the carrier that then recovers the cost from subscribers. Unlike the fake fees the carriers are so fond of loading onto phone bills, this is a real cost of doing business that is imposed by the government. Unlike manufacturers and excise taxes that were replaced by the GST two decades ago, in part to make explicit to consumers those previously "hidden" taxes, spectrum fees are a current hidden tax on us.

While the annual spectrum license fees are small, that is not true of the basic licenses themselves. As the article pointed out, this amounted to a one-time fee of $6B. That works out to $250/subscriber (this is a grossly simplified model, though sufficient for the present discussion). This is amortized over a longer term than the annual fees so that, assuming a 10-year term (for planning purposes), it works out to $2/month/subscriber. This is beginning to become a significant portion of the prices we pay, and it get worse. First, the $6B must be paid up front once the auction is concluded (or sometimes in payments over a year or two) and in most cases the winning carriers must borrow to pay for the licenses. Just like with mortgages, the final cost can be substantially more than the original spectrum license fee. This is accounted for in the carriers' actuarial calculations so that the prices they charge us also cover their borrowing costs.

There is more. The way in which the government conducts the auction affects the development of competition, or the lack of it. This happens in two distinct ways, which I'll cover in turn. First up, which companies can bid for spectrum.

Rogers Communications Inc. chief executive Nadir Mohamed urged Ottawa to speed up plans on a key auction for new airwaves while saying federal officials must ensure the bidding does not disadvantage "made-in-Canada companies" like Rogers.

"In the last spectrum auction, the government restricted who could bid . . . existing customers were disadvantaged and unable to bid on certain blocks of this spectrum. This can't happen again," he told business leaders during an address to the Economic Club of Canada on Wednesday.

Here we see how governments restrict which companies can bid in spectrum auctions in order to enable competition. Unlike with wired telecommunications where incumbents have a dreadful advantage over new entrants, the playing field in wireless is fairly amenable to policies of this sort. An additional benefit of restricted auctions of this type is that the winning bid is likely to be lower. When the financially-stronger incumbents are kept out, the new companies are less likely to run up the price in a bidding frenzy; they all have somewhat similar financial realities and can be expected to bid in accordance with that reality. This keeps the spectrum license fees lower and, at least in theory, allows the new entrants to keep their prices lower than older companies that may have paid more in open auctions.

Yet even so not all is well, as we discovered back in the 1990s. New entrants such as Microcell (the original Fido) were eventually acquired by the incumbents, and the same can occur again. Lower spectrum license fees due to a restricted auctions are only relatively lower; they are still very expensive for a company starting with no revenue and about to embark on an expensive network construction project. All of this must be financed and it leaves these companies vulnerable to business hiccups, increasing interest rates and revenue downturns due to price competition.

If the incumbents are allowed to bid on new spectrum, the new entrants will typically find themselves paying more for the licenses they do win. We should expect that the hungry and stronger incumbents will bid aggressively. They win whether they win or lose the auctions: if they win the auction, competition is avoided and they can raise prices to their captive market to recover the cost of the newly-acquired licenses; if they lose the auction, they have driven up the license fees by participating in the auctions so that their competitors are thus more likely to fail or to fail sooner due to the increased financial burden. We lose because, no matter which carrier wins the auctions, we will be charged higher prices to compensate for their spectrum costs.

[Pierre Peladeau, CEO of Quebecor says,] Predictably, the same incumbent voices that opposed an equitable distribution of spectrum in the last auction can once again be heard calling for an auction devoid of any rules that could hamper their dominant role in the market.

The second impact of spectrum auctions is a little more subtle, but just a little. Although the carriers must pass on their license fees to customers, there is also a limit to how much they can load our bills in a competitive market. Higher costs due these auctions led to higher prices and, importantly I think, slower network builds. There is only so much capital intensity a company can withstand before compromises must be made. If you can't raise prices you must slow network investment. If you do raise prices, you slow the pace of customer acquisition or you market service more toward business subscribers. Gaining subscribers when you are new to market and are in the midst of building a network is never easy as, for example, Wind Mobile and Quebecor are discovering.

I believe this is one of the reasons why Europe, Japan and some other countries were able to grow their wireless markets faster than the US and Canada in the previous decade and a half. Saddled with heavy debt from both capital expenditures and spectrum licenses, new carriers here have a disadvantage to create competition. In the absence of healthy competitors, the incumbents can keep prices high and not particularly care about rapid innovation or expansion.

As far as public policy goes on spectrum auctions, the government is sacrificing telecommunications infrastructure and the economic activity it would create for the immediate gratification of money in the treasury. As citizens, we have largely bought into this bad bargain, and we are paying the price. Except that the price is extracted from us in the form of high mobile phone bills rather than direct taxation.

I recall one time, many years ago, I inadvertently stumbled into this debate in a meeting with senior FCC staff. It turned out that the most senior person there had been deeply involved in selling the idea of spectrum auctions to Congress. Let's just say that I quickly discovered the political investment that the government had put into this policy instrument and that they didn't take kindly to criticism. The thing is that at first blush it really does seem like a good policy, but I believe as fervently now as I did then that it is a bad policy that costs all of us more money and poorer services and choices than alternatives.

Rural Broadband: CRTC Decision 2010-805

With the number of articles I've written recently on CRTC actions you might imagine that I follow them quite closely. In actuality I don't. Typically I peruse the major online news media and trade publications on a regular basis, and if I notice an article related to Canadian telecommunications (an interest of mine) I may then skim it for any potentially interesting content. If it's interesting enough I may search for related material, and if it looks worth commenting on I will go to the source -- the CRTC documents -- to see what they're up to. (The CRTC does have a what's new page but I don't read it and, as far as I can see, they don't supply an RSS feed.)

It was in this fashion that I came across CRTC Decision 2010-805 on rural broadband last week. Although this is an important topic in its own right, it isn't one that especially interests me; it was something else about the decision that caught my eye since it said something about how the CRTC operates.

I'll come to that in a moment, but first let's briefly look at what the decision itself is about. Much of rural Canada is (using CRTC parlance) in high-cost serving areas (HCSA). The density is low, the wires are long and even wireless captures fewer customers per tower. Once you leave towns and cities, and are not on a major transportation corridor, not only do you often not have access to broadband service or cable, you are also very often without cell phone service. This is quite a challenge to any objective to extend broadband services to these areas. In light of this, and a pool of over $300M that was slated be rebated to overcharged Bell Canada customers, the CRTC would like to see this used to extend broadband service to 112 rural communities in Ontario and Quebec.

9.      In Telecom Decision 2010-637, the Commission indicated that the Bell companies’ original proposal to use HSPA wireless technology to provide broadband services in the approved communities (the original proposal) did not satisfy the Commission's requirements as set out in the deferral account decisions. Specifically, the Commission indicated that the original proposal did not offer features comparable to broadband service in urban areas such as (i) a variety of service options, including various speeds and usage caps, (ii) an option for a greater than 2 gigabyte (GB) monthly usage allowance, and (iii) an insurance option that would provide an extra 40 GBs of usage for $5 per month. The Commission also considered that the original proposal would not represent the use of least-cost technology. The Commission therefore approved the use of wireline DSL technology and fixed the amount of funds available for broadband expansion at $306.3 million to serve all of the approved communities.

This is in fact our money (if you're a Bell Canada telephony customer in these provinces) since it should never have gone to Bell Canada in the first place. However that doesn't terribly concern me since, while it sounds like a lot of money, that $306.3M is only about $15 per person or perhaps $40 per average household. Despite the modest amount of money involved, it does worry me that the CRTC would use their power over the telcos to decide that money (our money) should be used to further a broader policy objective. This ought to be a political policy decision rather than a regulatory directive to Bell Canada to invest it elsewhere. Even if we concede that the initiative is worthy of this use of our money, it is still only a fraction of what it will cost to truly extend broadband throughout rural Canada.

Mr. Garneau's remarks before the commission are important mainly because significant broadband policy, from the regulator or from Parliament, would require hundreds of millions of dollars, possibly billions, from the federal government...MTS Allstream, a Winnipeg-based service provider, suggested during the hearing last week that this could cost upwards of $7-billion.
...
“If telecom providers are permitted to pick and choose customers and areas they want to serve, all efforts to achieve universal, affordable broadband are doomed,” said John Lawford, counsel with the Public Interest Advocacy Centre, an Ottawa-based consumer advocacy group.

The carriers will, quite reasonably, target service for areas and customers where there is profit to be made. Where it isn't profitable or insufficiently profitable in comparison to making the same investment elsewhere, it is good business to not invest in rural broadband. If the government decides, for policy reasons, that rural broadband is desirable, it should be funded from the public purse -- the general tax base -- like any other program. That is, the government pays the carriers to deploy rural broadband. These types of programs can easily turn into a morass if not handled properly, as evidenced by the corruption-plagued USF (universal service fund) in the US. We don't want to repeat that here.

By now you are thinking that this is what caught my interest about CRTC Decision 2010-805, but it isn't. Instead it is an inconsistency between this decision and an earlier one on high-speed wholesale: CRTC Decision 2010-632, which I wrote an article on, and another on the comments of one of the commissioners. Here is the passage of that earlier decision that I found contradictory to the present one:

Competition drives innovation and provides consumers with a choice of service providers and service characteristics. The Commission notes that ILECs and cable carriers are offering their retail Internet services at increasingly higher speeds. The Commission considers that, at present, retail Internet service competition results primarily from services provisioned using wireline facilities. Other retail Internet services, such as those offered using wireless and satellite facilities, are not generally substitutes for wireline facilities at this time.

In that decision, CRTC said that wireless was not a suitable alternative for wired broadband service, cable or DSL. This was a point of contention in 2010-805, where Bell Canada pushed for HSPA+ (wireless) service as the appropriate technology to extend broadband for those 112 communities. The CRTC agreed! Not only did they agree, they further departed from their earlier decision by requiring third-party ISPs access to that technology using GAS.

11.  Bell Canada indicated that it would also file a tariff to provide access to wholesale HSPA+ wireless broadband services under similar terms of service characteristics as the Bell companies’ existing Gateway Access Service (GAS),[5] in order to allow competitive providers the ability to offer retail broadband services to end-users.[6]

The reasoning presented by the CRTC in 2010-805 does not make clear why wireless is appropriate for these rural communities and for GAS and, further, they make no reference to 2010-632. This is quite interesting. What it really exemplifies to me is the CRTC latitude to make poorly-reasoned and inconsistent decisions without any political consequences. The situation is very different in the US where FCC decisions are frequently and vociferously criticized by members of Congress and even other branches of the government, and their rulings often end up in federal court. It is not surprising that the FCC employs many lawyers to carefully argue their decisions on the basis of legal statutes.

Unlike is another recent decision, this time the cable companies were very critical of Bell Canada proposal to use HSPA+ for rural broadband.

13.  Barrett, EastLink, RCI, and Videotron opposed the revised proposal. These parties submitted that, while they supported the principle of technological neutrality, the Bell companies should deploy a wireline DSL solution as originally directed by the Commission.

14.  RCI and Videotron submitted that HSPA services are now, or are expected to be, available from Bell Canada, RCI, and Videotron in most of the approved communities. As such, they argued that it would be inconsistent with the deferral account decisions to approve the revised proposal in order to fund broadband service where such services are already offered.

15.  Barrett also argued that the Bell companies should be required to provide access to individual components of the wholesale HSPA+ service, rather than the proposed aggregated solution.

16.  EastLink and Videotron argued that approving the revised proposal would result in the subsidization of Bell Canada’s mobile voice service. They indicated that it would be inconsistent with the Policy Direction[7] to distort the competitive market for mobile voice services in the approved communities by funding a technology that could provide both voice and data services.

17.  Barrett, RCI, and Videotron submitted that the revised proposal does not adhere to other principles in the deferral account decisions, as it does not represent the use of least-cost technology to deploy broadband services. These parties argued that alternative broadband service providers could provide a comparable service at significantly less cost than Bell Canada, and submitted that if the Commission approves the revised proposal, it should allow for competitive bidding to see whether other companies could provide the HSPA+ service at less cost.

I suspect they are right to level these criticisms. It does seem unfair that Bell Canada can, with money that ought to be rebated to customer, fund the deployment of network equipment that competes with cable and mobile services from other carriers. It is also interesting that Commissioner Katz, a former executive of Rogers, wrote a dissenting opinion in CRTC Decision 2010-637 to argue in favour of wireless for these rural communities, which was subsequently accepted in 2010-805.

I fail to see the logic in limiting the Bell companies' ability to use alternative technologies that meet or exceed the requirements imposed in the deferral account decisions.

Although I applaud Commissioner Katz's view that the CRTC should focus on service objectives and not specific technologies, I believe the cable companies have a valid argument that DSL could be just as cost-effective for these rural communities. For both DSL and HSPA+ there is a need to back-haul the traffic, from either the central office or tower, respectively, to their core network. Locally, the copper already exists, so the primary economic comparison is between DSLAMs and HSPA+ base stations (towers). Unfortunately, as is routine in these matters, Bell Canada's network costing figures are confidential. All we know is that the CRTC reviewed the submitted material, but not how persuasive it was or if it bore any resemblance to the true costs.

23.  With respect to the proposals to allow for competitive bidding in order to ensure the use of least-cost technology, the Commission notes that it rejected this idea both in Telecom Decisions 2006-9 and 2007-50, since it would add a significant layer of complexity, delay the implementation of broadband expansion, and result in substantial administrative and regulatory burden. The Commission considers that these reasons continue to be valid.

24.  In light of all of the above, the Commission finds that Bell Canada’s HSPA+ wireless broadband proposal is consistent with its determinations in the deferral account decisions. The Commission therefore approves the revised proposal.

Once again we see the capriciousness of an opaque regulator in our telecommunications market. We all need to keep a close eye on the CRTC and similar regulatory bodies if we are to ever see an end to invasive and poorly-justified distortions of the free market. This should worry everyone, including those individuals and companies that benefitted from these recent decisions; today's winners could easily become the losers in CRTC's next decision.

Rogers, the Telecom Cannibal

One of the most difficult choices that an established and very profitable company must make when faced with a small and nimble competitor, one that has everything to gain and nothing to lose, is lowering their prices or investing in new technology to address the new competition. They quite sensibly will put off these decisions for as long as possible. The delay will be criticized, and even ridiculed by the competition, yet it is still the right choice. Rarely is the decision so urgent that a company will forgo current profits to chase what may turn out to be a mirage. That is, they will strive to avoid cannibalizing profitable businesses -- by lowering prices, offering new services or investing in new technology -- until it becomes unavoidable.

The reasons why delay if often the best business decision are several:

• The new competitors, especially in the telecom business, must invest heavily to deploy a new network. The massive debt load when combined with lower prices (to differentiate from the incumbents) and what may turn out to be a slow acquisition of customers can derail or destroy the competition, even when the incumbents make no changes to their prices or products. Time is often on the side of the incumbents.
• It is not unusual that new technology, while dazzling to customers and the media, is not adopted rapidly by customers. Consider VoIP as a good example of this phenomenon. Rapid investment in the new technology that competitors are also deploying can often be done at a slower pace when combined with good marketing. In effect, telling the market that the technology is being deployed (which is true) while doing so quite gradually.
• Lowering prices does not guarantee customer retention. First, even if prices are held steady, many customers will no switch since they will be more conservative in their choice, opting to go with, for example, good wireless coverage and service dependability. Second, customers preparing to switch will often do so even if the incumbent lowers their prices since there are other factors in their decision, such as escaping poor customer service.
• Investors may rebel or will at least defect (sell their shares) as the incumbent damages short-term profitability by lowering prices and increasing capital expenditures, even though they may understand the reasons for the company's decision. It is no certainty that the competitors will be irreparably harmed by the company's actions, or how long it will take. Yet for the present they must tolerate a lower company valuation, due to lower profits, and therefore lower share prices; the company's share price in part reflects investor expectation that company profitability be sustained or increased.

With this background, let's look at yesterday's quarterly results from Rogers. As recently as this summer I wrote that Rogers was still looking good since there was unlikely to be any near-term impacts on their financial state due to new competitors such as Wind and Mobilicity. It would take time for them to build out their networks to become a credible alternative and take a significant bite out of Rogers' subscriber base. This appears to be the case, despite some analyst warnings to the contrary.

The new landscape includes a handful of upstart wireless firms, such as Wind Mobile and Mobilicity, that are building traction with consumers through discounted pricing, simplified agreements and aggressive marketing campaigns.

And this one:

...Dvai Ghose, a telecom analyst with Canaccord Genuity, in a research note earlier this month. “In our view, the market is ignoring reprice pressure in Canadian wireless, both from new entrants and incumbents.”

Nevertheless, Rogers did respond with their flank brand, chatr, to mimic Wind's pricing to compete with them without threatening their core wireless business. That has, in part, had an impact on their quarterly results.

The modest year-over-year increase in net subscriber additions for the quarter primarily reflects increased prepaid subscriber additions offset by an increase in the level of postpaid churn associated with heightened competitive intensity. The increase in prepaid subscriber additions was the result of Wireless' launch of its urban zone-based unlimited voice and text 'chatr' product and also its continued offering from earlier in the summer of prepaid wireless service plans for Apple's recently introduced touch screen tablet computer, the iPad. In addition, Wireless introduced prepaid Rocket stick wireless data plans that offer the same speed and reliability as existing postpaid plans but designed for customers seeking the convenience of prepaid online credit card activation.

Although Rogers has taken steps to restrict new chatr plans to the areas when competition is now ongoing, they are to some extent -- thought it is not really possible to say how much -- cannibalizing their own business when their existing customers switch to chatr. It is also interesting that their subscriber growth is slowing despite the additional services they are offering for new devices such as the iPad and internet access for PCs and netbooks.

The number of new Smartphone subscribers was the second highest ever in a quarter. This resulted in subscribers with smartphones, who typically generate ARPU nearly twice that of voice only subscribers, representing 37% of the overall postpaid subscriber base as at September 30, 2010, up from 28% as at September 30, 2009.

This is another impact on their results which is not only a sign of future growth and not at all related to competition. When you buy a smartphone from Rogers -- iPhone, Android or BlackBerry -- they must purchase the phone from the supplier at full price while selling it to you at a heavy discount. They make it up over the contract term(including data plan), but account for the expense in the current quarter. Yet these subsidies, and current quarter losses, indicate future revenue and profit.

Some analysts feel that smart phone upgrades, as opposed to pure subscriber growth, is a more important indicator of success in the industry as wireless data revenue – which was up 28 per cent in the quarter – becomes more important than revenues from voice services.

That is, a ramp in these subsidies is a good indicator of future profits and corporate health. We should also note that they are not only on the receiving side of competitive pressures, they are taking telephony market share from Bell Canada and other incumbent telcos.

Cable telephony lines in service grew 9% from September 30, 2009 to September 30, 2010. At September 30, 2010, cable telephony lines represented 27% of the homes passed by our cable networks and 43% of television subscribers.

Although Rogers B-class shares lost 7.7% on Tuesday in response to their quarterly results, I do wonder if this is either an overreaction or a overly-negative interpretation of their earnings decline. I don't like Rogers as a customer, and I am not currently either a customer of theirs or a shareholder, but I would not write them off just yet. I would also suggest that they may be too aggressive in cannibalizing their wireless business, even though they've segregated budget pricing to the chatr brand. Perhaps they really are running scared, though that does not seem likely to me. More likely is that they hope to hurt the competition now while they're still at the critical market-entry phase and very sensitive to meeting subscriber and revenue objectives.

As consumers, not shareholders, we do have some choices even if their coverage and options are still limited. That can't be bad. There is even good news for Rogers shareholders since, if my guess is right, this drop in share price could turn into a buying opportunity for those willing to hold for another quarter or two.

Digging Nokia Out of a Hole

Can a company regain its dominant position by changing its CEO? This is a common theme in business, with new examples nearly every day, although we usually only notice those companies that are especially prominent (or if they are in our investment portfolios). Nokia is now trying the same trick.

I have to wonder if the frequent fixation we have on the person at the top of a hierarchy is deeply-rooted in the human psyche. Whether it be president, CEO, dictator, general or heroic action figure, the fixation of our attention on the archetypal alpha male (or female) figure distracts us from the many thousands or millions of individuals in the hierarchy that contribute to the organization success or failure. This does not mean that a CEO change is unimportant, in fact it can be crucial, but whether it can have a positive impact depends on many, many factors. We sometimes have an almost comic book view of power and power structures since the majority of people, as employees, have rarely wielded real power in an organization. Those that have done so know just how difficult it can truly be.

A CEO often has substantial power, but it is never unlimited. When anyone is give the responsibility and accountability to achieve a lofty goal it is incumbent on those assigning the objective to give the person the necessary tools to get it done. When that person is the CEO, the giver of the tools is the board of directors. The toolkit includes capital and authority. The CEO combines those tools with his or her own skills, connections and other assets to do the job.

One immediate challenge is that business operations cannot be changed quickly. That alone is responsible for the company's existence -- its customers and revenue -- and provides a base, and the time, for the CEO to redirect and invigorate the business. Nokia is blessed in this respect since it has a strong base business, although one that is losing share in the high-end, high-margin, high-growing smart phone market. More importantly, its product pipeline appears to be running on inertia with little coming to market that is likely to change the situation. Elop, the new CEO, has quite the challenge on his hands.

To give an example of how an ailing, large technology company can fail even with a new, capable CEO, we need look no further than Nortel. By all accounts Mike Zafirovski is a talented and capable CEO. Yet he failed utterly at the task of renewing Nortel. There were many reasons for this but to my mind there were a couple that stand out: the product and technology decline had gone on for so long that not only were customers abandoning the company, there was nothing substantial in the product pipeline; and, the culture in senior management was out of touch and internally-focused on its own difficulties, not those of customers. There is also some question as to whether the board gave Zafirovski the authority he needed to solve these monumental problems or if they impeded his attempts to change management and inject capital into the areas where it was needed. Big holes like the ones that Nortel and Nokia have dug themselves into took a lot of digging by many hands, not only that of the CEOs.

One thing that a company's investors can fixate on, especially those that come on board when the pain is most acute, is that if the new CEO achieves any measure of success the returns will be enormous. One extraordinary example is Apple: looks what Steve Jobs accomplished, and how far they've come from the $7 share price before iPod and iTunes began to conquer the world. Any investor in a sick but formerly great company can dream of such out-sized returns. However the reason that share prices go down to such depths is that it is uncommon for the turnaround to succeed; often the shares either go to $0 (like Nortel) or the company is liquidated.

Apart from its still-dominant global position in the mobile phone market, Nokia has some definite talents when it come to phone technology and design. Unfortunately their typically excellent radio performance is not recognized by customers, who will often not notice or overlook if the product draw is strong. The recent very public airing of Apple's difficulties in this regard demonstrate that very nicely. Assuming that Nokia's design talent hasn't all left the company, there is an opportunity for the new CEO to empower their designers to take some chances, to make a few mistakes in the hope that they can come up with phones and other mobile or portable devices that are unique, attractive and can inspire.

As many have noted, however, a deeper technology problem is their dependence on Symbian as the platform OS. It is old and difficult to modernize, with next generation versions coming too late and lagging in features. There are also the business structures and partnerships that are dependent on Symbian, where if they make drastic changes they stand to risk disrupting their ongoing business by alienating the carriers, users and app developers. However if they don't change all of them will abandon Symbian, and therefore Nokia as well, if they do not make a bold move.

This is another critical area where the new CEO can have a major and positive impact. I believe that they will have little choice in their corporate renewal in leaving Symbian behind since they stand to gain more than they will lose. In my opinion it is very likely that within several months Nokia will announce their shift to Android for their future high-end phones. They may delay publicizing the fact until the first phone is closer to release. I just don't see any other way they can move quickly to become a contender in the smart phone market. Symbian can continue to be used for the other, lower-end products for some time, so that the move is not too disruptive, but it is likely that a strategy shift of this magnitude will ultimately doom Symbian.

What I now want to see is whether Nokia board is ready for this degree of change and risk, and whether Elop can successfully steer this large company and its culture onto a new trajectory. Unlike Nortel, I think Nokia has an excellent chance of pulling this off, by exploiting their many strengths, if they make the necessary commitment. If they don't do it, I fear they will soon be relegated to selling low-margin $25 phones (but lots of them!) to new users in developing countries.

Update: An opposing viewpoint regarding Nokia switching to Android, but agreeing on other points.

Apple Offers App Developers Some Certainty

As someone involved in mobile application development, Apple's policies and practices regarding app development have always made me uncomfortable, as it has many, many others. One of the most unacceptable from a purely business perspective has been their app approval process. Not only has been little certainty whether, after you've put in your investment, they will permit your app onto their market (the only legitimate way to distribute to iPod and iPhone owners), you can never be sure it's due to some unwritten policy, the reviewer being in a particularly bad mood that day, or because your app may competitive with a current or future strategic initiative of their own.

Despite this dreadful uncertainty, Apple has been enormously successful in attracting a large stable of app developers, both small shops (including individual hobbyists) and some of the world's largest companies, many of whom are making a decent business of it. In other words, despite the criticism Apple had lots of reason not to make changes since their policy to this point has worked very well indeed.

Yet Apple is now officially loosening some of their more restrictive policies and coming clean on their app approval criteria. Uncertainty is one of those terrible things that can scare off any investor or businessman, so the change can only be a good thing. Less uncertainty means more predictability and less arbitrariness in those that might choose to develop apps for iOS products. As John Gruber says in his Daring Fireball blog:

**The existence of this document is a very welcome change, and it goes a long way to answering much of the criticism regarding prior controversial App Store rejections, by putting in writing the rules that are actually used by the reviewers.**

Regrettably the new policy is not public, only becoming available after you've paid your money and signed up to their developer agreement, which is not really as transparent as they ought to be. Of course this does not mean that it will not end up becoming widely available (there are far too many potential points of leakage), and in fact it already has. Apple's non-legalistic summary language is a fun read:

• We have over 250,000 apps in the App Store. We don’t need any more Fart apps.
• If your app doesn’t do something useful or provide some form of lasting entertainment, it may not be accepted.
• If your App looks like it was cobbled together in a few days, or you’re trying to get your first practice App into the store to impress your friends, please brace yourself for rejection. We have lots of serious developers who don’t want their quality Apps to be surrounded by amateur hour.
• We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.
• If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

Of course the actual agreement text (including the above summary) goes into lengthy specifics, which you can find on the Wired site (hopefully this link remains valid for a while). Despite the disclosure of these criteria, Apple retains a great deal of latitude in rejecting apps, so there is no reason to believe that the situation will now be much different for many developers.

Still, it’s an important step. By publishing the guidelines, Apple mobile customers will be able to know what they can and can’t get on an iOS device versus, say, an Android phone. Also, third-party programmers will have a clearer sense of whether or not to invest in developing an app, whereas before they were subject to rejection without knowing what they weren’t allowed to do. However, some developers think parts of the guidelines could be more clear.

“By no means is what they put out today perfect,” said Justin Williams, developer of Second Gear software, who quit iPhone development last year. “There are some vague areas. But compared to where we were yesterday, it’s a big improvement.”

As some of the commenters on this Techcrunch article correctly note, the terms of service regarding use of user data continue to be a bone of contention. Privacy sounds good, and in general it is, there does have to be a balance between user privacy and reasonable commercial practices. This is an area where Google and other mobile ad companies had concerns with Apple since much of the sellable value of ad space is lost if the advertisers can't know as much about users as they can on other mobile platforms or on traditional web browsers.

I've gone and lost the link now, but Google did issue a statement that they can work with Apple's new policy on user data privacy. Presumably they believe that they have enough access to non-identifying user data to meet advertisers' needs.

Apart from my concerns about the practice as a user, I have also had concerns as a developer because of the personal data that mobile ad companies demand that Android app developers such as myself get from their users. For example, disclosing location and unique device identifiers to enable user tracking. I don't particularly care for this as either a user or as a developer, though I also know that most smart phone users are simply not concerned about it. The qualms come from not knowing how the advertisers or mobile ad distributers are using this data, while having to take responsibility for asking users to give their permission to disclose this data.

It is interesting to watch the different approaches taken on iOS and Android on user privacy and app approvals. I can't say that Apple is really out to protect users with their stronger stance on app and ad content. They have their own commercial interests in exploiting their control over the entire eco-system they control, but they also know that they must treat their customers better than they treat developers and advertisers if they are to retain their still dominant position in smart phones.

I have to wonder how much of their policy changes on app approvals, mobile ad services and 3rd-party app development tools has to do with their increasing comfort with the reins of control they enjoy or with the increasing thunder of the advancing Android army. The battle continues.

RIM and Cisco Pursue Lateral Expansion

One of the more fascinating things I like to watch is large, established technology companies attempting to branch out into lines of business in which they have no history. I prefer to do this as a spectator, at some remove, since it so often goes so spectacularly wrong. Acquiring or merging with a company is never for the faint of heart even when both operate in the same space and have truly complementary products and services. I still remember how Nortel stumbled from one ill-conceived acquisition to another in management's attempt to transform Nortel into an "IP company".

There are two recent, though still rumoured and unconfirmed examples that caught my attention: RIM is allegedly in talks to acquire a mobile advertising firm, Millenial Media, and Cisco may be pursuing Skype. The former rumour is better substantiated in the press, and the story also passes the credibility test since RIM's key competitors -- Apple and Google -- are moving aggressively into mobile ads as a potential future revenue source. It is a stretch for Apple, but perhaps even more so for RIM which does not yet have much consumer sector success in either its products or services, especially expertise in consumer marketing and design. I was nevertheless amused to hear this rumour the day after posting my article describing RIM's challenge to finding a new recurring revenue source.

In Cisco's case the driver behind their move is less clear to me. It is no secret that they've wanted to get into people's homes for some time now, and that supposedly drove their acquisition of Linksys several years ago. Regardless of how successful that move may have been to revenue growth or profitability, it would be a stretch to claim that their brand awareness in the consumer space is much improved. Skype would change that situation dramatically. Of course Cisco has had a presence in consumer VoIP services for some time, starting years ago when their ATA products were distributed by Vonage and others to couple analogue phones to home broadband services, but Skype would be a big, big step up from that.

Unlike RIM, Cisco has a track record of making many successful acquisitions, and doing so at a rapid pace. They seem to have the practice down to a fine art. However, integrating Skype into their operations will be less routine because of its size and, most importantly, Skype's business being so very different from what Cisco now does. This is no small matter since it is one that has ground down many companies. Can Cisco do better? Perhaps. They should at least be able to do better at it than Ebay managed.

The reasons why many companies fail at this sort of lateral expansion into new businesses and market sectors are many. Unless there is a good strategic vision to justify the acquisition that is also executed exceptionally well, the acquisition usually just disrupts the operations and successes of both parties. In the end the company may once again be sold, passed onto a hopefully better parent, or kept and operated at arm's length as a separate subsidiary. The latter is fine if that is the original intent, but if not then it can be a distraction to senior management and confusing to shareholders even if the acquired company continues to grow and be profitable.

I would very much like to hear what Cisco would propose to do with Skype if they are really interested in the company, to somehow integrate it into their operations for some synergies (that was Ebay's stated reason, though they failed to even convince anyone that it made any sense), or simple as a marketing tool to raise their profile with consumers and drive sales of their current and future consumer products. That's the best justification I can come up with right now, and it is one that I do not find compelling. I eagerly await further news regarding this rumour.

Is RIM Getting Torch'd?

RIM's stock price took a bit of a dive the past several days, although as you can see in the chart that it isn't, yet, a broken stock. As with any high profile technology stock there are always people willing to trot out problem after problem, most of which are just so much noise, though occasionally the problem proves significant. The most recent issues include: RIM's hold on the enterprise market and the latest foray into the consumer market with Torch, both with respect to competition from iPhone and Android (both of which are taking market share); whether Torch is a failure or if it's too soon to say; and, the caving in on government access to their enterprise customer email.

It does have to be said that BlackBerry is still growing its customer base, it's just that their market share versus other smart phones is declining. That is, they're winning a small share of a larger market. This is being taken as a sign by some that there is future trouble ahead. In the horse race mentality that prevails there can be only one winner, and if that winner isn't going to be RIM then you must sell your shares right now. In reality there can be more than one winner so this style of analysis is too simplistic. BlackBerry doesn't even have to have the panache of Apple's iPhone; Android, for example, has overtaken iPhone in the US and a lot of Android phone owners don't even know or care that their phones are Android based. Dull but competent can do very well.

Although it is impossible to know why RIM's stock is going down without asking every investor in the market for their reasons to buy, sell or short the stock, the sense I get is that it is due to Torch failing to excite either investors or potential customers. Apparently 150,000 units sold in the first three days is now a failure, if you compare these number to iPhone or even a few of the hotter Android models. With OS6 features at best catching up with iPhone and Android, and qualms about OS6 and Torch catching on and reversing BlackBerry's slide in market share, and analysts weighing in with their own doubts, a short term drop in the stock price is understandable. The question now is whether it bounces or breaks to new lows.

The other recent issue is RIM supplying some degree of access by various governments (perhaps not the same access in all cases) to their email servers so that enterprise email can be monitored for national security and other purposes. While there is widespread concern, for the most part it seems that no one is really quite sure if this is good or bad for RIM's future business prospects. On the one hand most people will accept (if reluctantly) that this is necessary.

While free-speech advocates have criticized the crackdowns, a number of BlackBerry users say they understand the governments' concerns.

“It's important for things to be traceable,” said Brad Kollur, 33, an IT consultant who lives in Rockaway, New Jersey, and often travels to India on business. “It's one of those things where you give up certain comforts for the greater good.”
...

These other devices, however, don't rely on the same type of sophisticated encryption that appears to have raised concerns, meaning they also don't offer the same level of security that many businesses find crucial.

On the other hand...well, what is on the other hand? After all, it isn't as if most people with other smart phones have any idea whether their email, corporate or email, can be monitored by governments or more local law enforcement agencies. This makes it difficult to know how RIM's competitive position is being impacted.

I can't say that I know the answer, however I do have an idea about how to formulate the question. Let's consider the smart phone business structures of Apple, Google and RIM. In all cases there are two broad categories of revenue for each of them: one-time revenue (the phone itself and related accessories) and recurring revenue (all types of follow-on sales of products and services that are dependent on the device sale). Ideally you want both in your business, with preference for recurring revenue since this is generally much more profitable over the long term, while high margins on hardware are unsustainable. Let's compare the three companies, doing so only qualitatively rather than quantitatively.

• Apple - Initially high margins on the phones appear to be declining as competition heats up. Even so they are able to sustain premium prices (and margins) on the phones and accessories. They are also showing that they can repeat this success by getting customers to buy new iPhone versions. On the recurring revenue side they distribute a large portfolio of apps, tunes and other media content. It has often been said that Apple focuses on the pull through sales these downloadable products, where they make the bulk of the iPhone-related profit.
• Google - They essentially sell no hardware and, unlike Microsoft, they charge no royalties for the Android platform. Their Android-related revenue is recurring, which comes almost entirely from advertising (they take no cuts from app sales). This is a very different business model from the other companies', but it certainly work well for them.
• RIM - Like Apple they sell phone and related paraphernalia. The bulk of their recurring revenue is from enterprise email, not from either apps or media content. This is their differentiator, the one that contributed so much to their success since their earliest days.

The smart-phone derived recurring revenue streams of Apple and Google are at this time under no real threat. For RIM the situation is not so good, and I believe that this is where they are vulnerable due to the granting of email server access to various governments, even if the reasons are justifiable. BlackBerry enterprise email is now looking a lot more like other email services, be it Google Mail or any other, all of which are accessible from any modern smart phone.

As the pressure mounts on IT departments across the corporate worlds to allow use of employees' existing or preferred smart phone rather than always BlackBerry, this loss of email security will make the arguments to open up more persuasive. In an earlier article I speculated that the encryption dispute RIM has with various governments was positive PR, but that distinction from competitors is quickly weakening.

I will also say that the current concerns of some governments over Blackberry email security will not only not harm RIM but will help them; it's great (and free) advertising that their encryption and security perimeter are so strong that even governments can't break it.

When (not if) RIM begins to see real erosion of their hold of the enterprise email market they could be in real jeopardy unless they can pull a rabbit out of the hat. The rabbit will have to be something to replace email service revenue, and it will likely have to be done by taking recurring revenue market share from Apple and Google. That means apps, but especially media and advertising. If it does come to this I don't yet believe RIM is up to the task. They will certainly try but it may be just too far from their core competencies, and the catching up they will need to do is far more difficult than what they've accomplished to date on the platform software and hardware.

It's a little soon to be ringing the death knell for RIM, but it could turn out that the loosening of email security will hurt them far more in the long run than Torch going down in flames.

RIM's Hold on the Enterprise Mobile Phone Market

There is an enormous amount of angst among some Canadians regarding the future prospects of RIM. It seems that since the demise of Nortel they have been burdened with the title of Great Canadian Technology Hope. The worry goes further of course, since due to their size they have a large investor base and there are legitimate concerns with its ability to compete against technology darlings Apple and Google with their iPhone and Android mobile phones and eco-systems.

RIM does have a loyal market for Blackberry, and that market is growing. It's their market share that is at risk. Blackberry, iPhone and Android are each growing their market as they jockey for appeal to the disparate segments of the smart phone market. Blackberry primarily appeals to the enterprise market, and its attempts to become interesting to consumers have not always gone well.

But kids don’t want Blackberries. They want cheap phones that run instant messaging, SMS, and email. Need a keyboard? Get a MyTouch Slide. Want a big screen? Maybe an EVO 4G.

Perhaps the Torch and OS6 will get them there, or maybe not, but they will press on regardless. Similarly, Apple strives to reach out to enterprise market from the consumer market where they currently dominate so completely. They, too, have their challenges. Then there is Android which has a more diffuse base, though slanted more toward consumers; Google appears to be leaving it to the device manufacturers to decide which markets they want to address while they focus more on total numbers rather than who those users are.

Something I do feel confident predicting is that, ultimately, the smart phone market will be the same as the mobile device market, which is the expected end result of decreasing component prices and lower cost of fewer standard platforms; every phone will be a smart phone, and many mobile devices (tablets, netbooks, etc.) will utilize the same platforms. There is room in that future market for more than one platform, and indeed more than two, but perhaps not more than three (apart from niches). But for the present let's look at what it means that different platform appeal to different market segments.

Business users love their Blackberrys and they love their Blackberry email. I am not a Blackberry user so I always find it both fascinating and amusing to watch people in meetings constantly glancing at their devices. When they do pick up a message and respond, they do it with the speed and finesse of long experience. It is easy to see why even now when the platform is quite old as technologies go that Blackberry received the moniker Crackberry.

Another funny thing about dedicated Blackberry users, in particular those in the technology circles in which I operate, they love playing around with iPhones and Android phones. The touch screens, the colours, the apps, well most everything about them appeals to the engineer turned executive. But once they're done playing with a colleague's phone they feel a vibration or hear a quiet ping and they drop it, now completely forgotten, to check the latest incoming message on their Blackberry. It's almost uncanny how often I've witnessed this occur. These are not people that will easily abandon RIM products and services. To them, the newer generation smart phones are eye candy and nothing more.

Another aspect to this Blackberry attachment in the enterprise is its hold on the companies whose employees need email on the go, and its bizarre impact on their employees. Many times I have sat down to lunch or a coffee to discuss business with someone who will first pull their phones out and place on the table. This is done not only to watch for messages but because, light as they are, it is still a relief to detach the weight from their clothing when they can. However it's what often happens next that I find so interesting. After the Blackberry is on the table they pull out another phone and similarly place it on the table and, if you can believe, some will even pull out a third phone and do the same.

When this first starting happening I would stare at the person opposite with the unspoken question hanging in the air between us. They would then feel compelled to explain. The Blackberry is used only for email, not phone calls, since that is the mobile device approved by their IT department and integrated with the company's email system. While it can be used as a phone, and may indeed have a contract and number assigned, the person does not use it that way. Instead they have another phone for business calls. These are frequently sales people with a large network of contacts who feel a need to keep the same phone and number when they more among employers. To them it is vital that they keep their phone number sacrosanct so that everyone can always find them, and they often can't do this with the corporate Blackberry or, they worry, they may not be able to get their number back when they next change jobs.

The third phone, when there is one, is something like an iPhone which they use to play with and perhaps to stay in contact with friends and family. This isn't strictly necessary since smart phones can each do so much but they do it anyway. Perhaps it's the keyboard on the business phone (sometimes their first two phones are both Blackberrys) or perhaps it's the the social networking, apps and music on the personal phone that drives them to act this way. If you've ever watched a Blackberry user struggle to do something on their phones other than email you'll know why (at least pre-Torch and OS6) users do currently need another device for entertainment and general internet use. While I don't have a Blackberry I do carry two phone: a pretty basic feature phone that is just a phone, and an Android phone for internet, email, apps and much more.

The thing is that as smart phones become the norm and they all more-or-less support the same functionality there will be a change among enterprise users as they make use of the hardware varieties and new cloud phone services like Google Voice to eliminate the current ridiculous situation by reducing back down to one phone. That phone will have to support multiple numbers and possibly phone clients (including VoIP), and sport a keyboard for those unwilling to undertake the learning curve to become proficient on a soft keyboard. The big question is, which phone will that be?

Ponder that while RIM tries once more to make a splash with consumers. Will enterprise users drop their second and third phones if they can? Will enterprise IT departments loosen their choke hold on employees' phone and service choices, and in particular will they ever become truly comfortable with iPhone or Android devices? Until these questions are suitably resolved, many business people will continue to own more than one phone and dominance in the enterprise market will continue to be held by RIM.

Blackberry and RIM are a long, long way from becoming irrelevant. I will also say that the current concerns of some governments over Blackberry email security will not only not harm RIM but will help them; it's great (and free) advertising that their encryption and security perimeter are so strong that even governments can't break it. Users and their companies get the warm fuzzies just thinking about that fact.

Meaning of Signal Strength Bars

Apple's antennagate controversy is now growing old and a bit stale. The company has come out with a half-hearted response to dealing with the problem, but it appears increasingly likely that this will prove sufficiently satisfying to their customers, especially since most have not experienced the problem of fringe-area performance. There has even been some talk about the antenna being the reason for delaying release of the white iPhone 4, or then again maybe not.

Although I've already touched on this issue, there is one aspect that I think is worthy of another blog post. It comes about from a few subsequent discussions I've had with people, including iPhone 4 users with the product in question. This has to do with a fundamental misunderstanding of how cell phones are internally engineered. I often take it for granted that in this modern age when it seems everyone is conversant with the high-tech products and services that they use every day, that there is also some basic understanding of that technology. This is frequently untrue. Rather than seeing the cell phone for what it is, internally -- a collection of modular building blocks that are essentially independent and communicate over interfaces -- some (most?) people see the cell phone as a monolithic device. That is the impression I get as to why there is still so much confusion between the dependence of the iPhone 4's antenna performance on how it's held and the number of bars on the signal strength display.

But touching the hot spot doesn’t always ruin the call, even if it lowers the number of bars. In several cases, when I was already on a call with three or four bars showing, I deliberately covered the hot spot with my hand, and the call continued normally, strong and clear, even though the bars dropped to one or two.

On that basis I decided to break down the problem into its component parts so that the relationship is more clearly illustrated, and in particular why the number of bars of signal that is displayed can be so distinct from fringe-area performance. Hopefully someone will benefit from this. To those who do understand the technology well, please forgive me for any errors due to my coarse description of the technology details.

First however, let's look more closely at weak-signal performance, where the received signal strength is close to the minimum for a usable signal. This is determined by the signal's field strength -- which is independent of the phone -- and the phone's antenna and radio module. As can be seen in the diagram, the gray area where performance is marginal is wider for the now-obsolete analogue technology (such as AMPS) than for digital. Degradation as an analogue signal weakens is more gradual, and is manifested with increasing noise and distortion until the other person's voice becomes completely unintelligible, and finally descends into silence and call termination.

With digital, degradation may not be noticed until the bit error rate is high enough to cause drop-outs. From there it takes only a little less signal to reach the condition where the bit stream cannot be decoded, resulting in silence and then call termination. In other words, the gray area of received signal strength where the signal is distorted or subject to drop-outs is narrower for modern digital phone transmission. As mentioned in my earlier article, this is one reason why the number of bars can be uncorrelated with reception quality: at any level above the minimum signal strength to achieve a low bit error rate, digital reception is pretty much perfect.

With that out of the way, let's return to the above diagram. The radio module is a self-contained unit, with reception dependent on no other component other than than the antenna system. If the antenna efficiency is impaired (or the signal from the carrier's base station is reduced by terrain or obstructions, or there is interference from another source) the signal that the receiver has to work with is reduced. There are differences among phone in their antenna designs and placement, and some variation in the performance of radio modules from component manufacturers, but for any one phone there are no other factors we need to be concerned about. The antenna plugs in one end, and audio in and out plugs in the other end, plus various control lines and power.

One thing the radio module produces is an indication of signal level (using an internal signal sampler) that can be read and used by other modules. This is typically to be interpreted on a relative scale where zero is approximately the level where communication with the network base station (or tower, if you like) is marginal or lost.  On the Nexus One phone, the relative scale goes from 0 to 31, where 0 is referenced to -113 dBm and 31 is -51 dBm. Below and above these signal strengths will produce 0 and 31, respectively. On other phones the granularity may be less (less than 32 values) and the interval between values may be non-constant (it's a constant 2 dB on Nexus One). However, these are at best nominal values and could vary, perhaps even quite a lot, since there is no real technical need to ensure accuracy.

Whatever the granularity and range, these values are mapped by software to something that is displayed for the convenience of the phone's user. The mapping can be linear (as shown) or any function at all that maps from the signal strength value to the indicator icon. The important part here is that the mapping is arbitrary. I've shown it as mapping the signal strength to one of 5 different displays -- 0 to 4 bars on the screen icon -- because that is a common format.

When Apple talked of making a software change, it was this mapping function they were discussing; they proposed changing one arbitrary mapping to another arbitrary mapping, one where the number of bars would be higher for lower signal strength values. If by chance this wasn't clear before, you should now be able to see that this mapping function has nothing whatsoever to do with the performance of the antenna system and radio module; the mapping function does not impact reception quality so modifying it does not solve the iPhone 4 antenna problem.

Of course changing the mapping function so that it shows more bars at lower signal strengths doesn't hurt. It may even be reassuring to those who worry that a call will be interrupted, or never begun, when there is just one bar displayed. This really isn't a terrible idea since, as described earlier and in the previous article, performance is probably just fine at that signal strength on a digital network so why not remove the source of worry. The thing Apple should not do is claim that this change solves the problem, since it clearly does no such thing.

There is also the matter of the phone's transmission performance since it, too, is equally dependent on the antenna; antennas are in general reciprocal in receive and transmit usage, so a reduction of antenna performance affects transmission (from the phone to the base station/tower) equally. Since that process is a story by itself, I'll stop here, having covered the reception issue which is the larger problem.

Catching the Smart Phone Market Wave

Antennagate is not hurting iPhone sales, nor should we expect that it will. Once the market decides that it loves a product it takes a lot of pain to sever that relationship. While Apple's release of quarterly results this week do not reflect loss of sales due to antenna problems -- the quarter ended before the issue became public -- there are ample indications that there is no business problem.

[Interviewer] Any changes in demand since antennagate?

Cook: “Let me be perfectly clear: We are selling every unit we can make, currently.”

Follow up: So you haven’t seen any slowdown in order rates, or any increase in returns?

Cook: “My phone is ringing off the hook with calls from people who want more supply.”

This is not unique to iPhone as even Toyota found out this year. When Toyota's sales dropped precipitously there was real concern that the company would suffer a blow it would not easily, or ever, recover from. Yet their sales have recovered quite nicely. Unfortunately I don't have the reference at hand, there was a survey of car shoppers done at the height of the public crisis over uncontrolled acceleration and Toyota's apparent malfeasance and negligence. What the survey found was that buyers that were considering Toyota before the crisis arose were still considering Toyota.

Rather than buying a vehicle from another manufacturer they were content to wait for Toyota to solve the problem and, importantly, for the recession to end: all vehicle manufacturers were deeply hurt by loss of consumer confidence and the resulting deferral of big-ticket purchases. If customer loyalty survived a product defect that could kill you, I imagine that a malfunctioning antenna and public relations missteps would not seriously hurt Apple.

A recent survey by IDC found that 66 percent of people who own older iPhones are holding off on upgrades, and 25 percent of new buyers are now delaying their [purchases].

...barring any other foul-ups with the iPhone or other products in the near future, Apple should escape this fiasco with its reputation intact. "The best defense against it is to have a strong cushion of good will already established. Apple has that," Bernstein said.

Apple is not unique with smart phone product defects. As I mentioned previously, the Nexus One built by HTC for Google has an almost identical problem. Then there's Droid X with its own problems. The fact is that all smart phones suffer from a host of defects, most small but some that are large: user interface peculiarities, speed, multi-tasking, networking, screen and camera glitches, and so forth.

The sad thing about this is that it is not unexpected; product releases with known defects is a necessary evil that manufacturers accept when there is a new market category -- smart phones -- that becomes enthusiastically adopted by consumers who can not buy the phones fast enough. Just consider all the new phones that have rapidly sold out or even had people lining up to buy them the first day, including every iPhone version, Droid X and HTC Evo.

There is money on the table right now, and only a foolish company would delay products to fix every last defect since gaining market share and riding the market wave demand that products are released early and often. If this is not done at the now critical phase of smart phone adoption, there is real risk of losing the market to competitors, not just this week or this quarter but forever. Not every smart phone platform will survive and survival requires maintaining market share and customer loyalty. Non-catastrophic defects can always be resolved in the next release (hardware defects, such as iPhone's antenna problem) or downloaded to customers' phones (software defects). Customer loyalty in this environment is sustained with a rapid release cycle that delivers new features and, we hope, defect resolution.

Get used to dealing with defects for some time to come, and even Android "fragmentation" for that matter. The nature of the smart phone market ensures that this mode of operation will continue for at least the next one to two years. Eventually the market will stabilize, the quantity of platforms and variants will settle down to a workable number, and the manufacturers will have some leisure -- but not much! -- to fix their products before you buy them.

Wireless Profits and Price Competition

The incumbent wireless carriers in Canada are doing very well indeed. Not only are they among the most profitable of all Canadian corporations, they rank exceptionally well among all major global carriers.

The Canadian industry leads the world in terms of average revenue per user (ARPU), earning an average of US $54.73 US per user per month. While Canadian carriers posted low per-minute revenue, value-added services such as caller ID and voice mail contributed to the high ARPU.

The average margin in the developed world was 38.3%, with U.K. firms posting the lowest result at 22.6%. The Canadian result was closer to the 42.2% average found among the 29 emerging economies in Europe, Asia and Latin America.

However this success does come with a cost, due to the high price of service.

Canada placed last among developed nations in penetration, at 69%, which was only three percentage points above the average penetration rate in the developing world, at 66%.

It is reasonable to conclude that there is more than mere correlation going on here, that the high margins and ARPU are directly responsible for the high profits of Rogers, Bell and Telus. Ideally, competition is the tool to prick the profit balloon, which by giving consumers more choice will push down prices and increase penetration. That is the idea behind the new spectrum licenses for Wind Mobile, Videotron, Shaw, Mobilicity and Public Mobile.

The market responded to the threat of competition, and therefore profitability, by (at least in part) driving down the share price of Rogers around the time that Wind entered the market and others announced plans to do so this year. This was a bit premature, as more recent price quotes show, with the reports that Wind was not winning large numbers of subscribers from the incumbents. This will indeed take time, not only for the new entrants to build their networks but also to convince the public that their service is reliable enough to make the switch.

There is also the matter of price, since the incumbents will not remain idle. They will have to be careful with how they counter the lower prices offered by incumbents, even if it is done under alternative brands such as Chatr by Rogers Wireless.

The first taste of that came Friday, as Mobilicity chairman John Bitove called reporters to his office and threatened to haul Rogers before the Competition Bureau or launch legal action. He sees the Chatr brand – specifically, talk of its too-close-for-comfort pricing plans – as an “abuse of power” that contravenes a section of the Competition Act dealing with temporary or targeted “fighting” brands. He said Rogers was trying to “destroy” his company.

Under the current federal government I am doubtful that the Competition Bureau or even the CRTC will be enthusiastic about getting involved unless the incumbents' prices become blatantly predatory by being set at levels well below cost. While the government has shown that it is willing to promote competition, even when it means overruling the CRTC and being "flexible" with regard to the Telecommunication Act, they are more relaxed about letting the market operate unfettered. There is also the matter of stock prices and employment: the incumbent carriers are major employers of Canadians and their shares are widely held in mutual funds and pension funds; the government will not want to open themselves to attack on either front.

A possible strategy that the incumbents could take would be to hide predatory prices among service bundles. If they lower a bundle of services (e.g. TV, broadband, wireline telephony and mobile), or offer to add wireless to an existing bundle for, say, $10 more a month, it will difficult to argue that it is the mobile component of the bundle that is getting its price cut rather than one of the other bundle components. However, if they go the route of separate brands for their cut-rate mobile services, such as Chatr, the bundling strategy does not work so well.

I suspect we will have to wait a while longer to find out what pricing strategies the incumbents ultimately settle on. They will not rush to lower prices until they believe they must -- to preserve high profits for as long as they can -- and this will not happen until the new entrants show some success at winning their customers' business. The pricing battle could become very interesting in the latter part of 2010 or early 2011.

Rogers Wireless Goes Down-market with Chatr

I hadn't intended to say anything more about Rogers Wireless' plans for their new Chatr brand, until I read this article. If these Rogers' executives are being honest in this interview about their marketing objectives, they believe that the new entrants are aiming at the budget end of the market.

This may be true of Public Mobile, which has stated they are after the urban, budget consumer, but it is less true of Wind Mobile. If this is indeed Rogers' competitive objective, I believe they are making a mistake. The mistake is in conflating two very different groups of consumers:

1. Those who can't afford to pay; and,
2. Those who want to pay less and get more.

Lower-priced plans, it is true, can appeal to both groups. However, the fact that the new entrants are offering lower prices and better terms does not mean they are all after the first group of consumers. For example, what may be true of Public Mobile is not true of Wind Mobile which is offering data plans and some higher-end phones. Wind is going after Rogers' bread and butter market, but with lower prices and better customer service. Both of these attributes appeal to the second group of consumers, but may also prove attractive to the first group.

While Rogers Wireless may be willing to compete on price with the Chatr brand, I have to wonder why they have not done so already under the Fido brand, and whether they will ever address the second problem area: customer service. Their current system (much to my own dismay and that of so many of their customers across all of their services, not just wireless) is focused more on avoiding customer service to reduce operating costs. I had a chuckle when I read this gem from the Globe and Mail interview:

[But] as we looked at some of the customers that left Roger to go to [new entrants], and it was a smaller number than we ever imagined it to be, but we still called them: Why would they leave us?

Rogers actually called a customer to ask them what they thought of Rogers' service? That's unbelievable. Perhaps they conducted a spot survey of a few defectors, but their time would be much better spent engaging with existing customers before they make the decision to leave.

Smart Phones and Signal Strength

Along with rest of the world, I have been looking on in stunned disbelief at how poorly Apple is dealing with the iPhone antenna problem. I am less troubled by the problem itself -- although it is not inconsequential -- since it has the smell of an unfortunate engineering compromise.

As this article indicates, signal attenuation is hardly unique to the iPhone. I can confirm that the Google (HTC) Nexus One does indeed have the same problem, as the article shows in its comparison. In a fringe reception area the problem can be severe, leading to the reported lost calls by iPhone users. Most urban users with an long-established carrier are unlikely to see the problem, or only intermittently when travelling. In my case the Nexus One is registered on Wind Mobile, and their coverage is poor, seemingly relying on fewer base stations ("towers") than Bell and Rogers to cover the city. Hopefully they are working on filling in those holes, but for now I am in a fringe area where the signal loss from simply holding the phone is catastrophic.

Fringe area performance is so noticable since with digital transmission technology there is a small signal strength interval between no signal and a perfectly clear signal. This wasn't the case back in the days of analogue technology (e.g. AMPS), where the degradation was more gradual rather than the modern phenomenon of sudden transitions between signal loss and acquisition. That is, you may not realize you are in a fringe area, and therefore prone to a dropped call, until it happens. This relates to the number of signal bars that are shown, and partly excuses Apple's reporting of more bars, since with digital transmission it isn't that big a deal provided there is enough signal to work with. In other words, if the phone works, for most people the number of bars is superfluous information.

Of course phone users do care about how many bars they get since it is one of the few ways they can judge how well their carrier is performing. In this respect, Apple's move to increase the number of bars reported (which has nothing at all to do with the phone's radio performance) annoys their customers. While not as serious as the speedometers in some early generation Japanese cars (early to mid-1970's Toyota Celicas are models that comes to mind) that consistently, and deliberately, read 10% higher than the true speed. The only purpose for cars and phones to do this is to mislead customers to an unwarranted favourable impression of the product.

CNET, for instance, ran some tests, and suggested that Apple might simply be juicing the signal display to make it look like its phone was getting good reception.

What I mentioned about an engineering compromise is worth comment. The insides of these big-screen smart phones are packed wall-to-wall with a lot of components. For best performance the antennas need to kept away from metal (many components and even the case) and coupling to or transmission through semiconducting objects (human body). The true situation is more complex than this short description, but it is enough to say that, under the many other constraints in place, placing the antennas around the outer edge of the phone is not unexpected. Avoiding coupling to the hand is best accomplished with distance, where even a few millimeters can make a difference, such as that provided by the rubber bumpers that Apple sells (I'm not aware of anything similar for the Nexus One).

Was Apple aware of this problem when they released the phone? I believe they were, and indeed it would have been extremely difficult for them not to know. But when it comes to large corporations and diverse priorities between engineering, marketing and management, it should surprise no one that engineering concerns about antenna performance would be acknowledged and set aside in favour of getting the phone into the market. After all, few people pay the slightest attention to the radio performance of a cell phone, preferring to focus on features such as camera megapixels, colour and song capacity, and the vendors respond accordingly. There are companies out there that do have a good reputation for radio performance: Motorola and even Nokia are examples that come to mind, but even they are inconsistent across the years and product lines so don't rush to them too quickly if that is what you want.

Apple will survive this road bump, probably even if they continue to obfuscate and mislead in their public relations. The brand is simply too strong and the majority of users won't even see the problem. However, a little dose of honestly wouldn't hurt them either.