Is Microsoft trying to end the reign of mobile carriers? (MSFT+Skype+Nokia)
Tuesday, May 17, 2011

Are Microsoft, Apple and Google quietly preparing for war with mobile carriers? I think so.

With all the advancements made to mobile phones in the past ten years, the part that’s been woefully slow to improve is the act of calling. Making calls, placing calls, searching for signal and scrimping minutes hasn’t changed much since the mobile phone came out, because carriers have little incentive to innovate. Mobile carriers make their money either way, and ‘innovation’ comes down to increasing the bottom line, whether it's charging $1,300/megabyte for text messages or adding 20 seconds of instructions on how to leave a voicemail so that the carrier might get an extra minute’s revenue.

If technology or product companies were in control of the full telecom stack, you’d be able to get caller ID data for incoming cellphone calls. You’d be able to see someone’s availability before you call them, and that availability could be controlled by the user or automatically by time of day, location, current calling status (“Kevin is currently on the phone.”) You'd see robust competition producing a hundred other innovations to make calling a reasonable mode of communications again.

Sure, a few middleware services like Google Voice (and Grand Central before them) have offered some innovation, but they’ve been hobbled by spotty levels of OS integration across platforms and even more limited access to carrier services. They don’t let you ping a phone for status before you call, or a dozen other features that can be found in IM or email clients. Even the iPhone's visual voicemail was only implemented because it was a dealbreaking feature Apple insisted upon in its negotiations with AT&T. Remember, carriers have a disincentive to make calls more efficient because they get paid by the minute.

Then there’s the cell network. Recent innovation in cell networks has been driven almost exclusively by skyrocketing mobile data needs. Most 4G-capable phones can’t even use 4G for voice calls, falling back to their secondary 3G (or 2G) chipsets and cell networks when placing or receiving calls. At present, 4G is just for data on these phones and voice calls happen in a completely different way. SMS messages are similarly distinct from data. (Think a backup tricycle in the trunk of your sports car.) Your phone's Wi-Fi capable? Tough, you can’t use that for calls either, unless you buy a microcell for your home network. That microcell creates a mini 3G network that plugs in to your home internet, but you'll still pay your mobile carrier for the minutes on calls you pipe through your own internet connection because they go from there to your mobile carrier's central computers and back out again.

That’s the preamble for what’s broken, and I could go on, but I’ll get to the point: What if Microsoft’s plan is to fix it?

To create a new full mobile pipeline you’d need to control the mobile phone hardware, the mobile OS, and the carrier. It’s incredibly hard to start a new cellular network because placing cell towers all over the country is extremely expensive and permits for individual towers can take years to obtain, so most small carriers lease capacity from one of the major mobile carriers, which gives small carriers a disadvantage when it comes to pricing. Also, leasing access from a primary carrier doesn't let you bring much new technology to the table. The data is still going through their limited systems using their stagnant protocols, which leaves Wi-Fi and cellular data as the ways to go. Our phones already use Wi-Fi for data access, falling back seamlessly to the cellular network when Wi-Fi isn’t available. Wi-Fi usage is essentially free, so a ‘soft carrier’ could drastically lower their costs by routing calls over wi-fi when available, and buying data access from a primary mobile carrier's network when Wi-Fi isn't available.

If over half of a soft carrier’s airtime minutes were carried over Wi-Fi rather than a leased cellular network, that carrier could beat a traditional mobile carrier on price even if the traditional carrier doubled their costs when they leased access to the soft carrier, and for every customer who only has 3G access there’s another who has almost exclusively Wi-Fi access, and over time the scales continue to tip toward the latter, steadily lowering soft-carrier costs. Rates could either be flat regardless of transport, averaging out the benefit to all customers, or discounts could be given to those who use Wi-Fi more often.

Going back to the three ingredients: Microsoft has a good mobile OS, they just bought a soft carrier in Skype, and whether the rumors of a potential acquisition of Nokia pan out or not, Microsoft’s recent deal with Nokia seems to go beyond a simple OS licensing agreement. If Microsoft is trying to turn the cellular industry on end, it’ll start out with Nokia hardware built to Microsoft specifications. No other hardware manufacturer would likely risk pissing off their major customers (AT&T, Verizon, etc.) with a move that so directly challenges the entire mobile industry.

And of course Microsoft isn’t alone in this ambition. Apple and Google each appear to have been moving to the same destination by different paths. Apple’s integration of FaceTime, first into the iPhone, then the iPod Touch, iPad 2, and Mac OS, is a clear move toward carrier independence. In a limited sense, the iPod Touch is already a wi-fi phone. It would take very little for Apple to build its own Facetime-to-POTS gateway and roll out a voice-only version to create an experience almost identical to a cellular carrier but living entirely in the data stack, using Wi-Fi when available. In fact, I’d be amazed if such software wasn't already running inside Apple. Mix in Apple’s recent deals with voice recognition leader Nuance and we’re several steps closer to what former Nuance licensee TellMe (acquired by Microsoft in 2007, by the way) calls ‘Dialtone 2.0,’ where phone conversations start simply by lifting the receiver to your ear and talking to the computer.

Google Voice and Google’s long-time interest in the FCC spectrum auctions are clear indications of their ambition in this area, and their recent moves to tighten their control on the design and feature sets of Android handsets may be another indication that changes are afoot. Add Amazon in as a wild-card and you have four new mobile telephone creators and carriers, all with ample experience with routing large amounts of data, passion for bringing new capability to their customers, and a consistent resentment of working with partners who get paid beyond what they bring to the table. And if any one of these companies moves to cut out the carrier, the others will race to compete at the same level.

The next five years are going to see as much innovation in the way we make and take calls as the last five have seen in how we use our phone for data. It’s about damned time.

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Hi, I'm Kevin Fox.
I've been blogging at since 1998.
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