The Truth about the Wireless Bandwidth "Crisis"

(Part 2 of "Who Will Pay for Mobile Data?")

There's a big nasty dilemma hidden at the heart of mobile computing: No one knows how we'll pay for all that mobile data we're supposed to use in the next few years. The question doesn't get much publicity, but it drives some of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

This is the second of a three-part series on the issue. In Part 1 (link), I talked about the tech industry's unlimited vision for the growth of mobile data, and why I think it won't come true because we'll run out of people willing to pay at the current rates for data service

In this part, I will talk about the alternate scenario, in which most people are willing to pay for mobile data and adoption of it continues to accelerate. In this case, the mobile operators will need to invest urgently in increased capacity, and even with that investment I think we'll eventually run out of cellular bandwidth.

This means the operators face two conflicting possible futures. In one, growth is about to slow down and they don't need to invest in a bigger network. In the other, they need to invest urgently in additional network capacity. For telecom execs, it's a bet-your-career choice with no clear winner. So, naturally, they are trying to get someone else to pay for the investment. That's the real cause of the rhetoric about a wireless "crisis," and it's driving much of the net neutrality debate.

To understand why this is happening, let's start with a look at the physics and economics of a cellular data network...


Mobile data doesn't scale like fixed-line broadband

When mobile operators in the US and Europe first built out their 3G networks, they miscalculated what people would do with them. They expected that new, relatively low-bandwidth mobile services like a simplified version of the Internet (called WAP) and picture messaging (MMS) would be the dominant source of data traffic on the network, and they structured it accordingly. But those new data services failed to take off, and the operators were left with a ton of excess capacity. Desperate to generate any revenue from their new networks, they offered fire-sale data plans for the newly-emerging smartphones. It didn't matter if the operator made a good profit off a smartphone data plan -- with the network already built and sitting idle, any data revenue was better than none at all.

So the operators in many regions gave us low-cost or unlimited data plans. Those plans set customer expectations for how they should use mobile data and what it would cost in the future.

Overcapacity continued on most mobile networks until the launch of the iPhone in 2007. We tend to forget about it today, but the iPhone was the first smartphone to make PC-style browsing practical and attractive for most smartphone users. The result was an explosion of mobile browsing, and almost overnight mobile data networks supporting the iPhone started to go from overcapacity to overload.

The reason for the overload was simple -- people in the developed world learned to browse first on their PCs, most of which have high-speed wired connections to the Internet. Bandwidth on these connections isn't infinite, but it's large enough that activities like file sharing and watching videos are mainstream.

When people started doing PC-style browsing with their smartphones, they brought their PC browsing habits with them. Unfortunately, the cellular wireless networks don't have nearly the same data capacity as the wired networks. So mainstream browsing behavior on a PC turns out to be excessive browsing on a smartphone, especially if you use a lot of YouTube.

Even if you're not a big video user, the normal sorts of messaging and web traffic created by a PC can overload a wireless network. A typical PC has a more or less continuous connection to the web, so instant messages and web app updates can ping back and forth constantly. But to conserve battery life and stretch network resources, a smartphone doesn't talk to a cellular network continuously; it basically says hello to the network, sends a message or a bit of data, and then says goodbye. Each little message and each app ping creates its own set of hellos and goodbyes. Send too many and they can overwhelm an operator's servers. Web apps send too many.

The operators, of course, can add additional wireless capacity to cope with the increased traffic, and they have been doing so. Cisco estimates that the total capacity of the world's wireless networks will increase by about 10x from 2010 to 2015. But these additions eventually run into physics problems. There's only so much information you can squeeze into a certain amount of wireless spectrum. At some point the cellular infrastructure overloads, and as an operator you have some ugly choices:

--You can add a lot more cell towers, reducing the size of each radio cell and therefore increasing the number of devices you can support. Unfortunately, this is extremely expensive -- not just to build the towers themselves, but for the fiber optic cables connecting them, the servers to manage them, and for the lobbying you must do to overcome political opposition to additional towers.

--You can offload data traffic to local wired connections. The operators are already pushing this hard, via WiFi. Some are also encouraging the installation of femtocells in individual homes and businesses. (A femtocell is basically a micro cell tower in a box the size of a wifi router. It gives you cellular service inside a building or business, using wired broadband to communicate back to the cellular network.) But that too is expensive: at around $200 a pop (link), it would cost about $13 billion to attach a femtocell to every one of the 67 million consumer broadband lines in the US. Plus there's the support cost for installing them, and the expense to put millions more cells in businesses, and the cost to buy the back-end servers necessary to support them. Nevertheless, some very smart people watching the mobile data market believe that femtocells are essential to the future of mobile data (link). Cisco estimates that offloading of some sort will handle about 20% of mobile traffic by 2015, and up to 40% in some countries.

--You can buy more spectrum, but there are huge licensing costs associated with that, not to mention the cost of retrofitting your cell towers for the new frequencies and replacing all of the phones in the installed base.

Unfortunately, even if you make all of the changes above, there are some very convincing arguments that it won't be enough, quickly enough, to head off a capacity crunch if current trends continue. The growth rate of smartphones, tablets, and wireless notebooks will swamp the cellular infrastructure no matter what. Folks in the mobile industry have taken to calling this the "Moore's Law vs. Shannon's Law" problem, with Moore's Law representing the exponential growth of computing power, and Shannon's Law the fundamental limits on how much data you can push over a particular chunk of spectrum. Reinforcing the Shannon bandwidth limits is the fact that some other critical elements in the mobile data infrastructure can't keep up with Moore's Law. The number of cell sites can't increase exponentially, and handset battery capacity is barely growing at all. A crunch is inevitable at some point.

So the people who tell you that cellular wireless will replace wired broadband just don't understand the physics involved. An outstanding summary of the situation was written by Martyn Roetter, a telecom consultant (link).

Here's the key paragraph:

"Until and unless the current laws of physics are invalidated in ways that remove current limits on spectrum capacity such as are embodied in Shannon’s Law, the future will see: (a) The vast majority of broadband traffic (as distinct from numbers of broadband subscriptions) continuing to be carried (delivered and transmitted) over fixed access networks; and (b) Demands for broadband traffic from wireless or mobile subscribers outstrip the capacity of all the bandwidth available for radio access networks to handle it, even with the use of the new spectrum that can be allocated and the deployment of more spectrally efficient technologies... Bandwidth within one optical fiber is vastly greater than all the bandwidth that might theoretically be made available for mobile communications, even if every megahertz were to be refarmed for mobile services. A single mode fiber has a bandwidth of as much as 100,000 GHz, or 100 terahertz, whereas total valuable spectrum for mobile communications provides bandwidth of no more than at most 3 GHz."

Got it? What he's saying is that wired broadband traffic can continue to grow exponentially, which will create demand for mobilizing that traffic through cellular wireless -- which the cellular networks can't handle.

If data traffic continues to grow at its current pace, we're headed for a situation in which the cellular networks will be overloaded no matter what we do.


Rock, meet hard place

So we have two possible scenarios for the future of mobile data. In the segmented scenario I discussed in part 1, we run out of customers willing to pay for mobile data plans, and the growth of mobile data slows down. In the consensus scenario, customer demand continues to increase, and we run out of cellular network capacity.

These conflicting scenarios are terrifying to the mobile operators because there's no way to tell for sure which one will happen. If you knew for sure that demand was going to continue to grow, you'd invest heavily in capacity, and also start raising data prices to restrain the growth in demand to something you can actually deliver. But if demand is about to stop growing, investing in capacity and raising prices is exactly the wrong thing to do. You'll end up with excess capacity, and the price hikes will make demand stop growing even faster.

This table summarizes the dilemma (click on it to see a larger version):



An economist would tell you that this will all sort itself out in the long term, and I'm sure it will in 20 years or so. But in the meantime, in the real world, the operators have to invest in infrastructure years before the demand arrives. If you're an executive at a major operator, it is almost impossible to get the forecast right. That means you will probably either overbuild the network, wasting billions of dollars and putting your career at risk; or you will underbuild, losing share to competitors and putting your career at risk.

You can't win. It's like one of those Star Trek episodes where Captain Kirk destroys the rogue computer by putting it in a logical loop (link). If you watch closely at tech conferences, you can see the smoke seeping out of the ears of telecom execs.

Faced with this dilemma, those telecom execs naturally are trying to find a third option: Get someone else to pay for mobile data. There are a couple of options:


Option 1: Have the government pay for mobile data

I doubt that most governments would pay to make wireless data completely free for everyone, but I was surprised when I found out how much governments are already paying for mobile. For example, the US government subsidizes mobile phone service for millions of unemployed people (because it helps with their job searches; they need phone numbers so employers can all to offer them jobs). I could easily imagine that benefit being extended to include mobile data, on the assumption that poor people need access to job boards (how we'll avoid paying for their YouTube and Kongregate usage I don't know).

Governments are also being lobbied to give special regulatory treatment to wireless data. The rhetoric around a "wireless spectrum crisis" is being used to influence governments. The focus of this lobbying in the US is on taking spectrum away from the TV networks and supplying it to the mobile operators. Effectively that is a financial subsidy for the operators -- if the government forces the transfer the operators will have to pay less, and will get the spectrum faster, than if they were to purchase it on the open market.

Here's how the lobbying works. This is an excerpt from an e-mail sent to me recently by a PR firm working for a group called the Internet Innovation Alliance:

"IIA's Blog: The Spectrum Clock is Ticking
Writing for Forbes, Lawrence J. Spiwak, President of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, warns Congress that more spectrum needs to be freed up for mobile broadband and it needs to be freed up soon: Like it or not, the clock is ticking on spectrum exhaustion, both for consumers and our public safety professionals. Unless we want a market characterized by higher prices, failed data sessions, dropped calls and stifled innovation, policymakers need to implement a cohesive spectrum policy with a large degree of urgency."

At first glance, that reads like a standard plea from a bunch of web companies worried about the mobile network getting overloaded. But the backstory is that both IIA and the Phoenix Center are reportedly funded by the mobile operators (link, link). So this isn't an independent assessment of the situation, it's the operators sending us a message. And the message is: "Give us more bandwidth or we'll trash your phone service." I think that's a bit disingenuous -- unless the operators seriously mismanage their networks, we won't end up with both bad service and higher prices. But they're right that without more spectrum we'll definitely get one or the other.


Option 2: Make web companies pay for mobile data

Several of the leading operators in Europe recently argued that big tech companies like Apple and Google should be forced to pay to use the wireless networks. Although they don't put it this way, they're asking the big Internet companies to subsidize mobile data plans for users (link).

The CEO of Telefonica said the web companies "use Telefonica’s networks for free, which is good news for them and a tragedy for us. That can’t continue."

Here's the CEO of France Telecom (link):

"The real risk of everything is collapse. Nobody utters this loudly enough, but the real issue for the world is a collapse of the network or some local collapses. We are the people with pipes. We are supposed to invest heavily in pipes in order to bring the capacity which is necessary to sustain the explosion of consumption and usage and data traffic in our networks. At the same time, the people that create this traffic…are not really incentivized to manage properly, globally, the traffic. There is an unbalance in the overall system, which in our view is a major problem. It is totally impossible to absorb such an explosion in traffic without first, clearly investing massively in spectrum and equipment, and second, without introducing some new pricing approaches."

This is the heart of the whole debate about net neutrality. I believe it's not really about mobile operators trying to give an advantage to their own services, it's mostly about the operators trying to open up a second revenue stream because they're afraid they can't get enough revenue from users to support future growth.

For the operators, charging web companies a fee seems intensely attractive because the fee could be scaled to the amount of traffic they generate (unlike the flat-rate data plans that users prefer), forcing the web companies to use bandwidth more efficiently. It also would let operators increase their revenue without directly reducing user demand. Basically, the web companies would subsidize a shift from wired to wireless computing.


The third option

I can see why the operators are pushing on both of these options. They're in a difficult situation, and it would be very helpful to them if somebody bailed them out (link). I might be trying the same things if I worked for an operator. But there is a third option for managing cellular data overload, and it deserves to get a lot more attention:

Raise prices.

In almost every other industry in the world, you're responsible for charging enough money to support your business. Yes, sometimes you have to make investments before you know how much demand there will be, and yes, sometimes that creates a lot of risk for your company. But that's why they pay you the big bucks, Mr. or Ms. CEO.

I don't understand how we as a society came to the conclusion that wireless data should be different. Is there some religious commandment that people must be allowed to stream Netflix on the subway? Or maybe those big Cisco growth forecasts have led us to think that endless growth of mobile data is a ravenous beast that will cause immense suffering if it's not fed more bandwidth.

Baloney. If the network is overloaded, raise your prices until you either get enough money to expand the network, or you force people to use less data. If you want network bandwidth used more efficiently, show users the cost of the data they use and they'll demand more efficient apps and devices on their own.

I bet a price increase from $50 a month to $80 a month for mobile data would end the bandwidth crisis overnight.

Not only is higher pricing the simplest way to manage network overload, it's going to happen no matter what we do. Even if we give the operators all the bandwidth from the TV networks, and get the web companies to subsidize wireless service, all that will do is delay the crunch for a few years. More traffic will switch from fixed-line to wireless until once again the network saturates and prices go up. It is inevitable.


What it means

When we plan for the future of mobile, we need to be realistic, and a little bit humble, about what we can change and what we can't. We need to learn to live with the things we can't change, and focus on doing a good job of managing the things we can.

Here's my list of the things I think we can't change about mobile data because they are driven by economics and physics:

--Most data traffic will be wireless only for the last 100 feet (30 meters) that it travels from your device to the nearest hotspot (whether it's WiFi, femtocell, or something else). So we need to be careful about our terminology. Most data could well be technically "wireless" in the sense that it passes through WiFi at the end, but that is a meaningless distinction for the purposes of this article; most of it won't pass through the cellular data network.
--Most of us will continue to have some sort of broadband cable connecting to our homes and offices, or to a point very close by (like the lamp post in the street outside your window). Forget those visions of cellular replacing the wired broadband network; in the developed world it can't happen.
--The cost per-byte of cellular data will be significantly higher than the cost per-byte of wired data. The difference will be large enough that we'll be aware of it and it will alter the way we use our devices.
--Flat rate unlimited cellular data contracts will go up in cost, or will be replaced by much more variable pricing for most users. This is already underway at some operators. For example, Verizon is rumored to be about to move from $30 per month for unlimited data to a tiered plan that ranges from $30 per month for two gigabytes to $80/month for 10 gigs (link). I don't usually like consumer price hikes, but in this case the change is long overdue.
--As the relative cost of mobile data rises, most of us will use cellular data primarily as a supplement to the wired network when we're on the go. We'll become religious about turning on WiFi in our smartphones and tablets, and making sure it can connect at home and at work. Because cellular data is more expensive, many of us will try to avoid using very data-heavy apps on the cellular network.

This means cellular data use won't be carefree. That may not sound like a big difference, but in consumer terms I think it is. We've been making the assumption that cellular data can directly replace fixed-line data, just as cellular phones replaced fixed line phones for many people. "Go ahead! Use it anywhere! Be free!" But for an aggressive user of mobile data, that can't happen. Our use of cellular data is going to be much more nuanced, managed, and carefully thought out than our use of cellular voice. I think many of us will look at our cellular data budgets the same way we look at our automobile budgets. Some people will spend more, some less, but I think most of us will be aware of the cost and manage it actively.

The wired Internet will continue to set the tune. The ongoing role of fixed-line broadband means that many leading-edge web apps will continue to be designed around the capacity and responsiveness of fixed-line networks. This is another subtle but very important difference, because it means the mobile operators will continue to play catch-up to customer expectations set on the wired networks. There will be exceptions; some features of cellular data (such as location) will drive unique mobile apps. But in most application categories, rather than shaping the future of the Internet, mobile operators in the developed world will be pushed to deliver an Internet experience that evolved on fixed-line networks.


Here are the things I think we can change about cellular data:

--We can alter the share of total data traffic that moves through the cellular networks. By transferring spectrum and giving the operators other favorable treatment, we can make the overall capacity of the cellular data networks higher than it would have been otherwise. Basically, we can make the mobile operators bigger. That may delay the onset of mobile network congestion, and enable some classes of web applications to be more successful in cellular (for example, low-res video streaming). That can have a big impact on individual users and app companies. It will also have a big impact on the ultimate revenue and profitability of the mobile operators, which is why they are lobbying so hard.
--We can probably change the size of the average mobile data bill, but only temporarily. The more revenue streams we give to the operators, the more mobile data we'll probably get for a given user price. However, as I mentioned above, keep in mind that if mobile data is made cheaper, people will use more of it, which will eventually saturate the network and cause prices to rise. So any money we save on our mobile data bills will probably be temporary.
--The decisions we make in the next few years will profoundly change the economic structure of the wireless data industry. Changes in regulations and pricing rules will have a huge impact on the ability of small companies to compete with large ones in mobile, and will determine who pays for the whole thing. This could decide whether the mobile internet looks more like the wired Internet (low barriers to entry, lots of companies) or cable television (high barriers to entry, dominated by a few big players).

I think the most important thing about the three points above is that they're all driven by government regulation. The rules we set for the mobile Internet are going to determine the ultimate size of the mobile operators, how they are funded, how competition works in mobile data, and how much power is held by the various players.

That scares me. I prefer to have winners and losers in a market chosen by customer decisions, not government ones. You can't blame the mobile operators, or the big web companies like Google, for lobbying the government on these issues. But I don't think their interests are necessarily the same as the rest of the industry, let alone consumers. Also, most of the big players are driven by quarterly revenue, and in some cases they are pushing for changes that I think will help them in the short term but would actually hurt them in the long run.

I wish there were some scenario in which we could tell governments just to butt out and let the market decide, but governments are already deeply involved in allocating spectrum, and there's no practical way to undo that. So I think it's important that we all have a very thorough, open discussion of the government decisions to be made and the sort of wireless industry they'll produce.

That's what I'll cover tomorrow.

_____

In part 3, which I'll post tomorrow (link), I'll give my ideas on how we should structure the mobile data market. I'll also talk about the opportunities this new world of mobile data will create for companies in mobile. In the meantime, I welcome your comments and questions. This is a big, complex issue, and I don't pretend to have it all figured out.

Who Will Pay for Mobile Data?

(Part 1: The End is Nearer Than You Think)

The most important question in mobile computing is who's going to pay for all that mobile data we're supposed to use in the next few years.  The question doesn't get much discussion online, but it's at the heart of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

How many users will pay for their own mobile data service?  Will web companies also pay?  Will the government step in?  And most important, how much money are any of them willing to pay?  The answers will shape the future of every company involved in mobile, and will have a profound effect on everyone who uses a mobile phone.

Here's a quick summary of my answers:
     --Because of economics and user psychology, I think we're headed for a slowdown in the growth of mobile data.  The unlimited, exponential growth forecasts are wrong.  I believe the ultimate mobile data market will be smaller, and much more segmented, than most people expect.
     --Even if I'm wrong about user demand, we're still headed for a slowdown in growth because the cellular networks can't grow fast enough to handle all the traffic being forecasted.  This is due to physics and can't be changed; you could just as easily change the phases of the moon. 
     --Many of the proposals to "fix" the problem would probably make it far, far worse.  We could end up with a cellular data network that resembles American cable TV: slow to innovate, dominated by a few players, and subject to intense politics, with users caught in the middle.
     --In the future, cellular data for the majority of users will likely be metered, and the majority of people will need to be enticed into using it.  That creates some excellent unaddressed opportunities for everyone from handset companies to app developers. 

This is a very complicated issue, so I'm going to cover it in three posts this week:

Today's post talks about the forecasted growth of wireless data, and why I think growth won't continue the way most people are expecting.  That creates some big challenges for mobile data companies, but also some fantastic opportunities.

Tomorrow I'll talk about the alternate scenario, in which mobile data growth continues at the same rate, eventually colliding with natural limits on the amount of data that can travel over a cellular network.  I'll discuss how that collision drives the rhetoric about a bandwidth "crisis" and the debate about net neutrality.

In the third part, I'll discuss what it all means for the industry, and give my take on what we should do about it.

To start today's post, let's look at the predicted growth of mobile data...


The forecasts for mobile data growth are so sunny they could burn your skin

Every mobile phone will be a smartphone.  Smartphones are already used by about a third of the US mobile population (link, link), and ownership rates are similar in parts of Europe (link).  Horace Dediu says half of US phone users will be on smartphones by the end of 2011 (link), and non-smarthones will be virtually extinct a year later (link). 

Mobile data traffic will explode.  Cisco says global mobile data traffic will increase 26X from 2010 to 2015 (link).  The growth will be driven by increased use of smartphones, and also a rise in the number of notebook PCs connected to the cellular networks.  Notebook computers generate an order of magnitude more data traffic than smartphones, so even a small number of cellular notebooks drives a huge increase in traffic.

Mobile app shipments are off the chart.  Apple says iOS users download 62 apps per device on average, for a total download rate of 206 apps every second (link). 

The big tech companies are focused on mobile.  Many of the hottest tech companies, most recently Facebook, say their biggest focus for this year and beyond is nailing the mobile opportunity (link). 

PCs will be replaced by smartphones.  A Google vice president says smartphones will render PCs irrelevant by 2013 (link).

The growing consensus is that our current cabled, PC-centric computing world will soon be replaced by an untethered world in which everyone uses smartphones and tablets to do their computing on the go.  The mobile network we all envision will be just as flexible and carefree to use as today's wired Internet, but with the added benefit that you can use it anywhere, anytime, with a wide variety of different devices. 

It sounds cool, but unfortunately no one has ever asked users if we're all willing to pay for that mobile data service.  I think most of us aren't.


We won't pay for all the mobile data we want

We'll all carry smartphones, but...  The forecast for mobile data growth is based in part on the assumption that in the near future most or all mobile phones will be smartphones.  You can make a good case for that assumption.  The price of smartphone components is continually decreasing, so at some point the parts cost a smartphone will be the same as a feature phone is today.  Even if prices aren't completely equal, once they get close, it's more cost efficient for a mobile phone company to base its phones on a smartphone OS because it requires less rewriting of apps and support software for each new phone.  The handset companies have an incentive to switch to smartphone hardware.

So I have no doubt that in the next couple of years most phones sold in the developed world will technically be smartphones.  However, I think it's not reasonable to assume that they'll all be used as smartphones, because many users won't be willing to pay the data charges.

As I've written before (link), when I was at Palm we did a lot of research on mobile phone users in the US and Europe, and we found that about a third of them were willing to pay extra for new mobile data features in addition to voice and texting.  Some of them were more interested in entertainment, some in business communication, and some in information management.  These are the people who have been buying iPhones and BlackBerries. 

The other two thirds of phone users were not willing to pay extra for any new sort of mobile data.  Some of them didn't have enough income, some of them just weren't interested, but they all flat-out refused to consider spending extra.  The Palm surveys were conducted several years ago, but since then I have seen no evidence to suggest the basic situation has changed.  On the contrary, the most recent research I've seen was done by Forrester in 2009, and it suggested the unwilling-to-pay share of the population may have dropped from 66% to about 60%.  So there is movement toward more willingness to pay, but it's very gradual.

It's hard for me to believe that most of those 60% will be willing to add about $400 a year to their mobile phone bills just for the privilege of checking their e-mail on the bus or streaming songs from Pandora onto their phones.  And remember, that research data is based on people in some of the richest countries in the world.  It may map fairly well to other rich countries like Japan and South Korea.  But in the developing world, average personal incomes can't possibly support big mobile data bills.  Most people there will need to sip data through a straw rather than gulping it from a mug.

So I have a fundamental disagreement with many industry analysts about how the mobile data market will develop.  A graphic would help explain...



This has a huge impact on what will happen next.  The consensus view says that with only a third of the population in the US and Europe owning smartphones today, the prospects for growth are fantastic -- we can still sell to the other two thirds!  And after that we'll move on to the rest of the world.  The segmented view says that with a third of the population using smartphones in the US and Europe, we've already sold to most of the world's population willing to pay for big data plans.  In this view, data plan growth will start to slow in the US and Europe by sometime in 2012.

The best way to check which scenario is right would be to conduct some market research on user willingness to pay for data plans.  If you work in a mobile tech company, you should be doing that, urgently.  For those of us without six-figure market research budgets, there are some warning signs to look for.  If the segmented view is correct, we should start seeing more price sensitivity as we use up the late adopters of data plans.  One sign would be price promotions on smartphones...


AT&T's most recent iPhone advertising (link).


Another sign would be a shift in the mix toward lower-cost data plans...


Growth in data plans, 2010 vs. 2009.  In all five countries, growth is higher in mid to low-tier plans (under 50 euros / 35 pounds a month).  Source: Comscore (link)

This isn't conclusive evidence, but you don't get conclusive evidence until something has already happened.  There's enough evidence that we should be talking very seriously about possible saturation of the user segment willing to pay for mobile data.


What it means

So to recap, in a few years I think the majority of phone users will have smartphones but won't necessarily pay for today's data plans.  Some of the phones will connect to the web by WiFi only, while others will be on pay-as-you-go plans and won't be used for much data at all.  The situation is analogous to what happened with cameraphones.  Almost all of us have cameras in our phones, but most of us don't send picture messages because of the cost. 

This stratification of data use will have some pretty profound impacts on the mobile market:

A change in the crisis.  The first effect will be that we'd hear a lot less about the wireless bandwidth "crisis."  Operators will all of a sudden feel a lot less pressure to expand their networks and get more spectrum.  However, they will not be happy.  Slowing data growth will probably make them miss their revenue forecasts, hurting their stock prices.  Some operators may end up with excess capacity, resulting in renewed price competition in data plans, and putting more pressure on earnings.  So instead of a bandwidth crisis we'll suddenly have an overcapacity crisis.

Pressure on mobile startups.  Right now mobile apps are seen as a hot investment area because there's so much growth.  There's a lot of venture capital available.  If growth of mobile data slows, the rate of investment will slow also, as investors look for the next hot thing.  This won't be a disaster for today's mobile app companies, but it would make life harder for new entrants.  Also, companies that are investing on the assumption of endless growth might find themselves overextended.

Data will go a la carte.  But the biggest change is that to make mobile data grow further, we'll need to entice people into using it.  The challenge will be getting them to pay for little bits of data service, one app or one occasion at a time.  This requires a different sort of data plan, different apps, and a different user experience on the phone...


Enticement becomes job one

A mobile data slowdown will create an enormous opportunity for smartphone companies and app developers to create a different sort of relationship with phone users.  Most users will be perfectly willing to use data; they just won't want to pay for the plans.  The single most important task for driving mobile data growth will be to gradually entice these people into using data a bit at a time.  This creates several big business opportunities:

"Toll free" applications.  Just as we enable toll-free phone numbers in which the recipient of the call pays, we should enable toll-free apps and websites in which the app or site vendor pays for the cellular data charge.  I can picture several uses for this:
     --Some sites or apps might be willing to pay the data charge because they earn enough from ads to cover the cost.  For example, I am willing to bet that Google and Bing would both pay the data charges for a mobile search on their sites. 
     --Some sites or apps might be mobile supplements to paid PC web apps whose monthly service fee is large enough to cover the mobile data cost.  This might apply to a music streaming service or a file storage service.
     --Some third parties might be willing to cover the service fees for an app or website.  For example, the movie Rio sponsored a version of Angry Birds.  Picture them doing the same thing with a web app that transfers data.  They don't want the users hesitating to use their app, so they will pay the data charges.

Although it's easy to talk in the abstract about toll-free data apps and websites, it will be hard to implement them.  We'll need a payment clearinghouse that standardizes and manages the transfer payments between developers and mobile operators.  That was done for toll-free numbers, so I assume it should be straightforward, but there's still a lot of work to do. 

We'll also need a way to let the users know about toll-free apps and websites.  I think this is a task for the operating system -- it should identify the toll-free apps and sites automatically and enable them on phones that don't have data plans.  The operators also have work to do, because they'll need to track the data used by the toll-free apps and make sure it's not charged to the user.

It might also be good to have a top-level web domain for toll-free mobile sites.  I think .up (for "unpaid") is available.

There is also an important role for government here: Don't screw this up.  We need to be sure that any net neutrality regulations don't accidentally ban toll-free sites and apps.  It's possible that toll-free apps and sites will end up being the main way most people access mobile data, and it's critical not to cut off that possibility.  (I'll discuss net neutrality in a lot more detail in the second and third parts of this post.)

After-sales billing is critical.  Mobile and web developers have already figured this out: In many cases, your best chance of making money is to give away your base product and charge for upgrades and add-ons.  That business model becomes even more important in a world where most users don't have a mobile data plan.  How do you gradually get people hooked on your product when they're not willing to even pay for the cost of connecting to your website?

For some developers the answer will be that you just ignore those customers (and in that case you'd better base your forecast on selling to only a third of the population).  But for other developers, there will be an art in figuring out how to write a very data-efficient app or website that delivers enough value to hook a user with a data charge so low that you can pay it, at least during a trial period.  That sort of art is a great opportunity for differentiation.

Micropayment is critical as well.  Because developers need to experiment in incremental billing, it's critically important that they be able to easily bill customers in very small amounts.  The best system for doing that looks to be Google's recently-announced In-App Payments system, which is supposed to launch this summer.  Google will charge a flat 5% of your revenue no matter how small the transaction.  This is a huge improvement over PayPal and Amazon FPS, both of which charge 5% plus 5 cents per transaction (in other words, they take 40% of a 25-cent transaction). 

If the operators want to facilitate this sort of billing through their own infrastructure, they'll need to match Google's terms.  Operators that are wise enough to enable this may be able to build tight alliances with the most innovative websites and apps, but my guess is that most operators won't be able to get comfortable with a cut as small as 5%.  In that case, they should just get out of the way and let Google (and its competitors) operate.

Smartphones must entice.  This is a huge opportunity for companies that make handsets and mobile operating systems.  Smartphones today are designed for unlimited data plans -- here's the browser, click away; here's the app store, download something.  Those apps will be ignored by a user who has a limited data plan.  Instead, the phone itself will need to show the user individual functions and apps they can use for small bits of money.  Want directions?  That'll cost you 25 cents.  Want to download an ebook?  That's a buck.  Folks in Europe already understand this sort of world well, because so many users there are on pay-as-you-go plans.  But to most Americans it's a new concept.  Get used to it.  Think of mobile data like an a la carte menu in a restaurant, except that for data the options are almost infinite -- so the phone will need to learn about the user and customize the offers to his or her particular interests.

This model of infinite customization and a la carte ordering requires a fundamental redesign of the user experience of the smartphone.  That means it is a huge opportunity for differentiation, maybe the biggest single opportunity in mobile computing.  Apple is the leading vendor in smartphones for people with large data plans.  Although Android is catching up on many countries, often it seems to be selling to the more price-sensitive end of the market (note the lower sales of paid apps on Android compared to iPhone).   So it makes sense that the "enticement phone" would be built on Android.  I'd like to think Google would do it, but intuitive and well-integrated user experience is not its strong suit.  So maybe it'll be an Android vendor.  Or maybe Nokia will do it.  Or even Microsoft.  Whoever gets it right first has a very good chance to be the other dominant smartphone vendor.

Or maybe Apple will do it first, and end up the leader in all smartphone price bands.  It wouldn't surprise me.


What if I'm wrong?

So that's what I think is going to happen: there will be a natural slowdown in the growth of mobile data as we use up the customers willing to pay for it, and the most critical task for mobile data companies will be enticing people to use their services a bit at a time.  But what if I'm wrong?  What if the whole population is so excited about smartphones that everyone is willing to pay for big mobile data plans?  How does the world look then?

I'll cover that tomorrow, in part 2 (link).  In the meantime, please post comments and questions.  This is a huge, complex issue, and I don't pretend to have it all figured out.

Will the mobile phone really eat the PC?

It's long been an article of faith for many mobile enthusiasts that mobile phones are going to become the dominant means by which the human race deals with the internet. Lately that idea has been echoed by more mainstream voices:

"There are over one billion people in emerging markets who will never access the Internet using a PC."
-- Adobe CEO Shantanu Narayen, on stage at CTIA, September 2008

"Most new internet users will be in developing countries and will use mobile phones."
--The Economist, September 2008 (link)

"Mobile phones are the future of computing, and they are ideally suited for accessing Web services....(The mobile phone will be:)
-the device most likely to subsume the PC's computing and informational dominance
-the most functional and accessible device for conducting Web search
-the natural gateway to Web 2.0 platform applications and services"
--E-Week, October 2008 (link)

I have a lot of respect for those sources, but in their enthusiasm for mobile technology, I think they have made two big mistakes:

--They've assumed the internet is a thing, and
--They have forgotten about Moore's law.


The internet is not a thing

It's a collection of standards for data transport, storage, presentation and so on. People do an incredible range of tasks that take advantage of the internet, some of them well suited to a mobile phone and some of them not. Creating documents and graphics that you want to share online, browsing content, and writing online comments all are moderately to enormously easier when you're using a PC with a keyboard, mouse, and larger screen. They also benefit from having large amounts of local storage, which you don't have on a mobile phone.

The idea that people in the developing world won't want or need the benefits of a larger screen and keyboard is patronizing. It assumes that they'll be content to be second class citizens for many Internet services permanently.

If they can't afford a PC, of course they'll do what they can with a mobile phone. But that brings us to the second assumption -- who says they'll never be able to afford a PC?


Moore's Law lives

As I've written in the past, some people in Silicon Valley worry that we're starting to run up against physical limits on the growth of computing performance (link). Although that may or may not turn out to be an issue at the high end of the market, at the low end no such barrier exists.

I'm told by friends on the manufacturing side of things that the production cost of a fully-equipped ultra-mobile PC or netbook (what we used to call a mini-notebook) is now around $200. The street price for basic models is $282-299, a drop of about 17% in the last four months (see here, and here). Many of the key components in UMPCs, such as the screens and optical drives, are also used in DVD players, which means they're being manufactured in large volumes, driving rapid price erosion.

UMPCs aren't perfect -- the keyboards are very cramped, and the screens display text so small that they can be uncomfortable to read. But they are far, far better than a smartphone for many computing and internet tasks.

I am not saying that PCs will become affordable for the world's poorest people anytime soon. But let Moore's Law continue to chew on the UMPC, and I think a PC will soon be within the reach of a working-class family in much of the developing world.


The most likely outcome is that most people who can afford a mobile phone and service plan will also be able to afford a small PC if they want one. My guess is that they'll use both devices in the same way you and I do -- the phone will be better for some tasks, the PC for others. The idea of using one to take over for the other will seem silly, kind of like using a hair dryer to cook dinner.

Someday in the distant future, of course, we'll have smartphones with flexible screens and fold-out keyboards that can fulfill all of the functions of a PC. At that point, the line between your PC and your phone will blur, and you'll be able to say that your phone has taken over your PC (you'll also be able to say that your PC has taken over your phone). But after watching the lethargic pace of change in mobiles over the last ten years, I think we've still got a long wait for the merger of phone and PC. Besides, integrating more features generally raises prices, so the merger of phone and PC will happen first at the high end of the smartphone market. PCs will be dirt cheap long before they merge physically with phones.

Announcing a new survey of iPhone users

I think it's safe to say that the iPhone is the most publicized new mobile product of the last several years, especially in the United States. But although there has been endless commentary on the iPhone, there hasn't been much solid data on how it's being used, and what impact it's having on the industry.

At Rubicon, we set out to fix that by conducting a quantitative study of US iPhone users last month. We released the results today at CTIA. You can read the full results on the Rubicon website (link). Here are a few highlights:

--iPhone users we surveyed are very satisfied overall with the product, and report that they're making heavy use of features like e-mail and browsing. This is driving higher mobile phone bills, producing about $2 billion a year in additional revenue for AT&T.

--Users are not universally satisfied with everything about the device -- about 40% report that it can't display all the websites they want to visit, and many also said they would like to see physical changes to the product, such as the addition of a bigger screen or a thumb keyboard.

--Users are young Apple veterans. Half of US iPhone users are under 30, and 75% are prior Apple customers.

--The iPhone is expanding the smartphone market. About 50% of iPhone users replaced conventional mobile phones, while 40% replaced other smartphones. The Motorola Razr was the conventional phone most often replaced, while Microsoft Windows Mobile devices and the RIM Blackberry were the smartphones most often replaced.

--Email is the #1 function. The most used data function on the iPhone is reading (but not writing) email, with about 70% of users doing that at least once a day. About 60% said they browse the web on the iPhone daily.

--The iPhone increases mobile browsing. Over 75% of iPhone users say they do a lot more mobile browsing on it than they did with their previous mobile phone.

--The iPhone drives carrier switching. About half of iPhone users switched carriers to AT&T when they obtained the iPhone.

Please note that although I usually post an April Fool's message today, this ain't it. The timing at CTIA made today the best day to release the study. It's completely genuine.

This is what happens in technology price cuts

I want to write some more about all the recent mobile product announcements when I get more time, but tonight I have a chance for only a brief comment on Apple. I can't speak for Apple's motivations, and I know they pride themselves on thinking different, but no one I know in the tech industry -- and I mean no one -- cuts the price of a consumer tech product two months after launch unless they're seriously worried about demand. It's just not done, because it pisses off your early buyers, trains customers to wait a few months before they buy, upsets the channel, produces a lot of returned products, and distracts people from your other announcements.

If current iPhone sales are okay, the only other reason I can think of to cut prices this soon would be if you're worried about a competitive situation. Let's see, what competitive announcement could have possibly spooked Apple? Could it be Nokia's announcement last week of a music phone priced at 225 euros ($306)? (Link)

Palm Foleo: It's a PC, dummy

Wow, what an interesting day this was in the mobile and web world:

--Apple hinted that it will allow third party developers to add applications to the iPhone, potentially overcoming one of the device's biggest shortcomings (link).

--Google announced Gears, an open source project to enable web apps to work offline -- injecting Google into the growing effort to make PC operating systems irrelevant, and linking Google with Adobe (link).

--Livescribe previewed its pen computing device, the latest in a long series of efforts to turn Anoto's pen sensing technology into a commercially viable product (Livescribe link, Anoto background).

And oh yeah, Palm finally announced Jeff Hawkins' secret project, the Foleo.

A lot of the online commentary on the Foleo hasn't been enthusiastic. Engadget called it the "Foolio" (link). Ars Technica's article was headlined, "Palm officially out of ideas, debuts 1990s palmtop concept" (link). The discussion on the Palm Entrepreneurs Forum (an e-mail list for Palm application developers) was more balanced between admirers and detractors, but even there a lot of people were very lukewarm.

I think a lot of this is Palm's fault. They're trying to position the Foleo as a "mobile companion,"* a device that smartphone users can carry with them when they need a keyboard and bigger screen. In other words, it's for a small subset of the smartphone market, which itself is a small subset of the phone market. A niche inside a niche. The Stowaway keyboard folks should worry.

But I don't think the Foleo really is a "mobile companion." Back when I started to work at Palm (before the turn of the century) one of the old veterans of the company pulled me aside and passed along a little wisdom. "Michael," he told me, "Ya gotta think in terms of real estate. If you're in another device's real estate, you're competing with that device. Palm lives in your pocket; it competes with other things that go in your pocket. If you get bigger than the pocket, you're living in the briefcase, and you're competing with the notebook computer."

Foleo lives in the briefcase. It's displacing the notebook computer from your bag. I don't care what they call it, I don't care if Palm fully realizes it yet, but the fact is that Foleo's a notebook computer.

More to the point, Foleo is the most significant new consumer PC platform introduced in the US since the Macintosh. All you Linux heads who have been asking for a true consumer Linux PC, you finally got your wish.

Wow. That's kind of cool. It may be crazy, but it's a craziness I like. Palm has reimagined the PC for the wireless Internet era, simplifying and stripping away everything they thought was no longer necessary. So since most people carry a phone, you use the phone as your wireless modem. The device also has no hard drive. Since everything is stored in flash RAM, you never actually shut it down -- you just turn off the power, and when you turn it on again all your data and apps are still there, waiting for you. This is normal in a handheld, but it's long overdue in a PC.

"Desktops and laptops were too large, expensive, complex. You're not going to build billions of these complex machines, you build mobile computers....But it became clear the smartphone wasn't going to fill that role....You need a full size screen and keyboard." --Jeff Hawkins, quoted in Engadget

How well will the Foleo sell?

I don't know. It's not the product I would have built (my long wait for an info pad continues). The most successful mobile devices in the last decade have been specialized products that solve one problem for one type of customer -- iPod plays music for entertainment hounds, GameBoy plays games, BlackBerry does e-mail, Palm Pilot does your calendar, etc. The Foleo flies in the face of that. Although Palm talked a lot about e-mail today, the device also has a browser built in, and clearly has ambitions to be a general-purpose computer. I think we should judge Foleo on those terms, not by measuring it against other products we all imagined or wanted. Here are a couple of quick thoughts, and I'll probably post more in a few days after I've had more time to think about it...

Palm can now succeed even if Treo fails. Palm implied that the Foleo will be able to work with any smartphone, not just the Treo. This potentially gives Palm a larger market, and also sidesteps the operators, since Foleo can be sold through consumer electronics stores. Palm execs have been very public in saying that they are happier selling through retail rather than through operators, so today they must feel a little bit liberated.

Beware the Windows CE factor. I have seen many products very similar to Foleo fail over the years, and that worries me a lot. For years Microsoft and the Windows CE hardware companies produced a series of sub-notebooks that looked eerily like the Foleo. Like Foleo, you were supposed to use them to do light browsing and e-mail. They all died quickly, mostly because they looked so much like Windows that people expected them to run Windows apps. When people didn't get the full Windows experience, there was an immediate backlash.

Foleo's a little different because it doesn't pretend to be any flavor of Windows. But the hardware design looks an awful lot like a Windows PC, and that's going to create the wrong impression. Maybe Foleo looks nicer in person, but in the photos it looks like an anonymous gray box, disturbingly like a Dell subnotebook. It doesn't seem to have the lust-inducing look of the Treo 600, let alone the Palm V. I wish they'd made the case more distinctive, or at least a different color, because then people might expect different things from it.

Success probably depends on the apps. Like other PCs, Foleo doesn't do all that much out of the box. It apparently comes with Documents to Go (a well respected suite of Office apps, ported from Palm OS), an e-mail client, and a browser. That's all nice, but it's definitely not enough to make me put down my notebook computer. I think Foleo will eventually live or die based on whether it attracts a lot of third party applications that do interesting things you can't do with a notebook PC.

Palm has been evangelizing a number of developers to create apps for Foleo, but for some strange reason it excluded them from the Foleo announcement today. Instead, the announcements are going to be dribbled out one by one over the next few weeks and months. I presume the idea was that they'd create a sense of momentum, but I think instead what Palm did is make today's announcement less impactful than it could have been.

That means we haven't heard the full Foleo announcement yet. There's more to come from the third parties. We won't be able to really judge the device until we see the totality of what it'll do at launch.

My bottom line, based on what I know today: As a standalone mobile data device, the Foleo is uninspiring. As a potential challenger to the notebook PC, I want to believe, but the proof will be in the third party apps.

_______________

*By the way, the term "mobile companion" is perilously close to "PC Companion," one of Microsoft's early terms for Windows CE devices. The phrase gives me hives, but I think that's just me.

Understanding Palm: What Ed Colligan really said

I sympathize with reporters sometimes. If you attend an event, you're expected to write about it -- even if there isn't any news. That's what I think happened a few weeks ago when Palm CEO Ed Colligan did a breakfast Q&A for the Churchill Club, a local discussion forum here in Silicon Valley.

About 50 people attended, and while Colligan said some interesting things, an informal breakfast talk is not the sort of place where you deliver major news. But two reporters from the San Jose Mercury News were there, and they had to write about something. So they picked on Colligan's answer to a question about competition from Apple and others entering the mobile phone market. He pointed out that it's hard to make a successful phone product.

Unfortunately, there's no effective way to answer one of those theoretical competitive question when reporters are in the room. If you say, "we're very worried about the new competitors," the headlines will scream, "Palm CEO says company is doomed." If you say you're not concerned, the story will be, "Palm CEO overconfident." I've been there. You can't win.

Sure enough, the Mercury-News headline read, "An Apple phone? Palm CEO says, 'What, me worry?'"

Then, of course, the culture of Internet outrage ran with the story. The high-visibility Mac weblog Daring Fireball (#345 on Technorati's worldwide list) headlined its commentary, "Palm CEO Ed Colligan’s Head Seems to be Stuck Somewhere." No need to read the article; you can tell what it's going to say just from the headline.

There were three ironic things about all of this:

1. The question didn't actually focus on Apple. Colligan was asked about all of the new competitors who might be entering the market: Apple, Google talking about free phones and hiring Andy Rubin of Danger, and so on. "The phone market could look intensely crowded."

Colligan's response: "It's also intensely big, we just have to get our fair share." "Let me tell you this, it's not as easy as it looks." He cited the Motorola Q as an example -- it was supposed to take over the world but didn't. "I just would caution people that think they're going to walk in here and do these.... I don't think it'll be so easy as everybody thinks. It's a tough space...I'm not trying to be cocky about it. It is a tough business. We've really struggled through that." "We struggled for years figuring out how to make a decent phone."

He said making world-class radios that work consistently on world networks with all the right applications is very hard.

I thought that was a pretty nuanced, honest answer to the question. He didn't sound dismissive to me; he was just pointing out that it's hard to make a phone. He's right that until you've lived through the process of producing a phone, you have no idea how many little decisions have to be made, how many things can go wrong, and how many tweaky little features the operators will make you add. Although you might think phone features are standardized, in reality they often require all sorts of small customizations for every operator. That's incredibly expensive to do, the process is hard to learn, and if you fail on even a couple of small things the operator may refuse to sell your phone. It's several times more complex than creating a PC, and I believe no company can easily ace all of that stuff on the first try.

2. Even if that had been the question, it was the wrong question. The Treo is an e-mail phone for people who want business productivity. If Apple's making an iPhone, it'll be a music phone for people who want entertainment. Those are completely different markets. If you think there's a huge competitive overlap between them then you've got your head stuck someplace. (Colligan didn't say that, but I wish he had.)

3. The competitive comment was not the most interesting part of the talk. Not even close, in my opinion.

If you want to hear the whole speech, you can listen to it here. Or if you want to save an hour of MP3 time, below is my summary of what I heard, with some color on what I think it means. (Most of what follows is paraphrased. The text in quotes is pretty close to what he said, but I probably missed a few words here and there. My comments are in italics.)


My nomination for Colligan's most important quote. "We're not in the handset business, we're in the mobile computing business....Voice is a killer app of the future of mobile computing. That's how we look at the world."

Think about that for a while. It's not as newsy as an imaginary cheap shot at Apple, but that quote says everything you really need to know about Palm: Mobile computing first, voice telephony second, and if you don't want that you should buy something else. I can tell you from personal experience that's how most of the folks at Palm really think.


Technologies and trends

Eric Schmidt of Google says that in the future cell phones will be free and ad-supported. Do you believe it? "Everything in the world looks like an ad" to Eric because he's in the business of selling ads. Google sees a phone as a great way to target ads, but the phone is one of the few private spaces left. People may resist intrusions there. The ads will have to be incredibly creative in order to be accepted.

Colligan then branched to a discussion of Google Maps on the Treo, which he says is a great application. He wants to use it to look up nearby pizza restaurants and then phone an order to one of them automatically. He was very enthusiastic about this sort of functionality.

On voice over IP. People don't want to give up the ability to use the phone anywhere. He's skeptical that there will be enough coverage to make WiFi phones a replacement for cellular anytime soon. "Maybe on college campuses." Mesh networks will take a long time to deploy.

What's the market for video on mobiles? Short clips, a la carte selection. I agree. I can picture people watching short YouTube-style content on a mobile a lot more readily than a half-hour TV show. It's bon-bons, not a full meal. Mobile games are the same way -- quick reward, nothing too involved. That's why Bejeweled has been so successful.

On 3G. He loves EVDO. It's very fast. Less enthusiastic about UMTS – it's more of an incremental bump in performance, but there are latency problems. You need HSDPA to get reasonable performance.

About the iPhone. The rumor mill says that Apple will produce an unlocked GSM/GPRS phone sold at retail, so users can buy phone service separately and slip their SIM card into the phone. Colligan said he thought that would be very difficult to sell, that the only approach in the US if you don't want to sell through the operators is to focus on WiFi only. Did he have some inside information on what Apple's doing? Was he trying to seed some skepticism about Apple's product? Was he talking about what a non-operator Palm product would be like? Or was he just trying to answer honestly? I don't know.

On the Motorola Q. (The general tone of rumors around the mobile industry is that the Q is a failure, with low sell-through and lots of returns. Colligan did nothing to contradict those rumors.) Integrating a whole mobile computer and OS is difficult. Also, it's nice to make a thin product, but not if you make the battery so small that the device can't get through a day's use. It's hard to balance all the features and user experience and get them all right. "I think they got some of those things wrong."

Are we in another tech bubble? Things are exuberant, but not irrationally so. There's not too much excess yet. But there is too much money chasing too few ideas. "I look at the traffic patterns" on Bay Area freeways, and traffic has been getting worse. That means the economy is heating up.


About the operators

On mobile phone subsidies paid by the operators. He wishes subsidies would go away. He would prefer to sell through retail rather than through operators. "I love retail. We have a huge retail presence. We'd love to have the retailers have more power." He wants to compete head to head with other device companies without the operators saying what features to put on the device.

But on the other hand, he said, the operators spend a lot of money advertising your products, which is a good thing.

European vs. US operators. Coverage is better in Europe. "In Europe, nobody says, 'how many bars do you have?'" In Europe there's one mobile technology, and more operators. The US is split between two phone technologies, and has fewer operators.

Will the operators lose control over the market? "The sentry breaks down over time." I thought that was a nice zen-like way of saying "yes." He avoided a Mercury-News headline screaming "Palm says carriers are doomed," which would not have helped him sell Treos.

He went on to contrast the PC model (open gardens) vs. the videogame platform model (apps controlled by the vendor). Who's to say which one will do better in phones long term, he asked.


Working with Microsoft

About Microsoft. Windows Mobile is "becoming a bigger and bigger part of our business." They are very good launch partners. "They are great the day you come out...beyond my wildest dreams." (He implied that Microsoft is a lot less helpful after you've launched.) The relationship has been difficult to develop because Palm actually partners with Microsoft at an engineering level, which most Microsoft customers don't do.

Do you worry about Microsoft being a monopolist in phones? "No. Not in this space. There are so many countervailing forces that they'll never get to that position."

Is Palm OS easier to use than Windows Mobile? "I think David Pogue is right" that Palm OS is easier. But it's a matter of customer choice; some people like the Start button. He wants to create a situation where a Windows user chooses the OS platform he wants, looks for the best device on that platform, and finds that "Palm makes the best Windows product."


On Palm and its future

Future Treo products. Palm is working on products that will combine WiFi and cellular. "Stay tuned." I took that to mean a Treo with WiFi built in. I hope the operators will be willing to sell it.

Beyond smartphones. "Are there are other segments of the market that we could go after with new designs and new form factors and are we going to do that? Sure. Absolutely."

"We're a mobile computing company...so you can expect us to do more products...that leverage the fact that every one of you is going to have a broadband modem in your pocket which is instantly accessible to the Internet and the outside world. We think that's a pretty cool thing and we're working on products that take advantage of that."

"They (users) have a high-speed connection...to their pocket...Boy, is there things we can deliver to them, and is there compelling experiences that we can deliver to them, that are going to help us differentiate our products? I think there are, and we're working on things like that."

Same vague hints that Palm has been giving for a year: Broadband modem, lots of local storage, think what we could do for that. What I think I'm hearing is: A mobile product with WiFi, which Palm pairs with Web services that deliver content and do other things for the user. I wish I knew what those things are -- that'll be the interesting part.

Do Palm PDAs (no phone built in) have a future? It's been shrinking, because we've been cannibalizing it with the Treo. But it's still a $300 million business. My translation: We'll keep offering them as long as people buy. But we're not putting a lot of energy into them.

On the LifeDrive: "Too big, too late to the game" compared to iPod. Wow, if they expected that thing to compete with the iPod, they were even more naive than I thought. They didn't have the iTunes-like service, and they tried to be all things to all people. I hoped they learned the right lessons for their next generation products.

Is Linux in Palm's future? We look at Linux as being an interesting community to leverage. (He then branched to a discussion of Palm OS.) There are a lot of users who have loyalty to Palm OS and love it. "We want to take the Palm OS forward." That little quote makes a lot more sense now that we know he was in the process of buying rights to Palm OS Garnet. But what does he mean by leveraging the Linux community?

Is Palm for sale? Companies don't get sold, they get bought. We're trying to execute against a brand, to build a great brand. I think the implication was: 'we're not trying actively to sell ourselves, but we're publicly traded and would have to listen if somebody offered a bunch of money over the market price.' I have heard companies be a lot more vehement about "we're not for sale." So I'd call this a non-denial denial. Or maybe he was just trying to be polite.

Required reading for Palm executives. Colligan is having the Palm executive team read the book "From Good to Great" because it focuses on execution and is very practical. "What we need to do better is disciplined execution." (Shortly after his talk, Palm announced that it would have an earnings shortfall because a product was coming to market late. So you can understand why he's focused on execution.)


That's it. Nothing revolutionary, but I think it does help you understand the company. Like it or hate it, they really don't see themselves as a mobile phone company. They are a mobile computing company, and telephony is just a part of mobile computing. A lot of my phone-centric friends in Europe are going to throw up all over that idea, but I kind of respect it. I think Palm is not big enough to win as a mobile phone company, but as a mobile computing company it's a world leader.

The question is whether they can develop mobile computing into something distinct enough to stand as its own category. The jury's still out on that. I think a lot will depend on what they release in 2007. If they can establish a new product line beyond phones, they'll have a much better chance. If they can't...well, we'll find out how patient their investors are.