Put on Hold: Why Telecoms Can’t Get Consumers to Bond More with Their Cell Phones

As the price of wireless transmissions drops, telecom carriers need to focus on new applications to engage consumers more deeply with their mobile devices — and encourage them to pay a premium for wireless services, according to speakers at the recent Wharton Business Technology Conference, whose theme was “Enterprise Agility: Lead with Speed.” 


Amol Sharma, who covers telecom for the Wall Street Journal, moderated a telecom panel titled, The Business of Wireless: When Everything Connects.” He began the discussion with an overview of key issues shaping the industry. One issue is convergence, as major technology companies — such as Apple and Google — enter the communications business along with startups and established media companies in music, video and broadcasting.


Another theme is openness, especially in the wake of Google’s participation in Android, a freely-available mobile platform. “The giant cell phone companies are reinventing their business models,” said Sharma. He asked panelist Derrick Oien, cofounder and president of Intercasting Corp., which focuses on mobile social networking, how the wireless industry can make it easier for consumers to use the Internet with their mobile devices. Oien, noting that mobile phones operate on six different platforms, said the industry needs tighter integration between devices and applications in order to provide the same kind of Internet speed and usability that consumers have become accustomed to with their personal computers.


Despite the industry focus on openness, it remains mostly a marketing term, Oien said. Nokia has a phone that supports 150 applications, he added, “but you can’t find them.” In addition, the industry has been shaped by a “geek hacker mentality” that has emphasized smaller phones over usability and service.


Russ McGuire, director of corporate strategy at Sprint Nextel, pointed to three reasons why consumers — who still use their devices primarily to make telephone calls — have been slow to embrace new applications. The first is that cell phone users are afraid of running up a huge bill if they try a new feature. “Every time you do something on your phone, you’re worried, ‘Am I going to get a surprise on the next bill?’ We have to take away that mental barrier,” said McGuire, suggesting that Sprint Nextel’s new $99 a month unlimited plan — called Simply Everything — is an attempt to ease those concerns. Verizon and other carriers have also been emphasizing flat-rate deals.


The second issue is what McGuire called discoverability. “Consumers are asking, ‘How do I find all the cool stuff available? How do I find new applications?’” said McGuire. “The ability to personalize this device is hard, given the user interface we have. The industry has to do better at that.”


Third, he warned that when new technologies come along, the industry typically tries to use them in old ways rather than adapting them specifically for the mobile platform. “There are things that are inherently different about mobility,” said McGuire. He held up his own wireless device and said, “This is me. It’s not my company. It’s not my home. It’s not my location. Those aspects of mobility are now just beginning to show up in applications.”


Demands for More Openness


Sharma asked the panelists about Android, the Linux-based mobile phone operating system announced in November by Google and a coalition of more than 30 other technology companies. Android includes a freely available software development kit (SDK) which, Google and the other companies hope, will encourage development of new wireless applications.


According to McGuire, the concepts behind Android are in line with marketplace demands for carriers, such as Sprint Nextel and Verizon, to open their networks to other companies selling software for new applications, devices, services or access to their own networks.


McGuire prefers to think of openness as “freedom.” He said carriers’ current models require other companies offering new software applications or other services to gain permission to participate in the carriers’ networks. “When I talk to people in the industry about openness, it means not having to ask permission and that’s not the way we as carriers operate,” said McGuire. “We force them to ask permission. Android is clearly a push away from that from the development side, but the question is: Is it a push away from the consumer side?”


Sprint Nextel, he adds, is attempting to build a business model based on openness. “Everybody develops first for Sprint Nextel because we’re the most open, but we’re not yet open enough,” he said. “Freedom translates into value for the consumer and more choice.”


Scott Snyder, CEO of the consulting firm Design Strategies International and a senior fellow in the Wharton management department, said wireless carriers are experiencing a repeat of what happened when Global Crossing and other companies built vast networks that drove down the price of broadband on fixed lines. As a result, telecom providers are now trying to compete with “triple play” phone, Internet and television packages — or by bundling other services such as home management and security — to maintain pricing power. “The same will happen in mobile,” he predicted.


One option to improve margins, he said, is for carriers to own information and entertainment content. A second path is to develop services around mobile technology to manage security. Third, wireless firms can build business by creating a mobile ecosystem and collect revenue on a share basis for participation in the system. But, he adds, that would require opening networks and allowing the development of new applications. “Ultimately, the carrier that wins will have service differentiation and will bring the best network. And you will pay more for it,” Snyder told the conference audience. “Service may be the silver bullet for the carriers to extract a premium.”


Lee McKnight, CEO and founder of Wireless Grids and a professor of information studies in the iSchool at Syracuse University, was asked about criticism from Internet companies that the mobile industry is closed to outsiders and, as a result, lacks innovation.


McKnight said that as an entrepreneur, he sees how the advent of the personal computer and an open Internet completely disrupted value chains and created new markets and niches. The mobile industry has not experienced this yet. “That’s partly because mobile was closed to outside innovation. There was no way to get into the network.” Increasingly, however, the system is opening up. “It’s just not there yet.”


Tracking Down the Kids


Panelists debated the future of location-based services for wireless devices, which are built on GPS technology and can be used to help with many different tasks, from locating the nearest ATM machine to tracking missing children.


Oien noted that his company started out heavily focused on location, but came up against challenges to the business model, including privacy concerns and problems monetizing services. He cited a generational divide in accepting location-based wireless services: Young people, who have grown up displaying themselves on MySpace and Facebook, are more willing than their parents to forego privacy for services developed out of location-based technology.


According to Snyder, large wireless operators are beginning to take steps toward monitoring user locations, although not with associated identities, to better understand how and where people are using cell phones. He, too, said young people are more comfortable than older people with others knowing where they are through their wireless devices.


“If consumers think they can get value and benefit, there is a different perception,” said Snyder, who noted that OnStar has been widely accepted in the auto industry. “The value exchange has to be there, whether for safety or convenience. Location is a dangerous slope, but I think ultimately consumers will vote and sort it out.”


Sharma asked the panelists if the Federal Communications Commission’s current auction of spectrum will lead to new entrants into wireless telecom that might revolutionize the industry. In the most recent auction, companies bid more than $2.4 billion in the first round.


That’s not exactly the type of environment where revolutionary startups can get in the door, McKnight pointed out. The identities of the bidders are not yet known, in keeping with FCC rules, but companies that have indicated an interest include Verizon, AT&T and Google. Former FCC chairman Reed Hundt put together a new company, Frontier Wireless, to bid on the spectrum, according to McKnight, but even Hundt and his partners dropped out because they could not come up with enough money to win.


Oien suggested that the auction model should be re-evaluated because when companies pay the government billions to own spectrum, they simply pass those costs on to customers.


Low-tech Breakthrough Needed


When it comes to new breakthrough applications that will advance the capabilities of cell phones and other wireless devices, carriers still have clout with their control over networks, according to Snyder. “The best way to [achieve] success is for applications to be marketed through the carrier, which allows fairly healthy margins. I would expect, over time, that there [will be] opportunity for the entire market to grow.”


In the future, according to Oien, there will be fewer applications developers, dropping from more than a thousand today down to several hundred.


At the end of the discussion — which focused on advanced high-tech solutions to forging a new world of telecommunications with Internet Protocol and increasing connectivity — Snyder raised one last concern: battery life. While companies are spending billions to develop new forms of connectivity, battery life is only increasing at a rate of 5% a year. “What we have is untenable,” he said. “We need a breakthrough in batteries.”

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