Verizon and an open network

From Amit’s Thoughts

The Verizon announcement, and Kindle, are making me think we might actually see a revolution in wireless communication technology.

Back in the early days of electric companies, they were light companies. They sent electricity to your house just for lights, and later offered other services at different prices. They gave away light bulbs and made it back in monthly charges. But eventually they made electric outlets that would accept lots of things. Once lots of electric products were developed, people used electricity for a lot more things. And they stopped subsidizing light bulbs. The electric companies made more money not by charging more for the existing light bulbs but because people did more with electricity.

Cell phone companies have built a huge infrastructure that's only for cell phones. They sell a very small number of services (voice, SMS, web, GPS), all at different prices. They practically give away cell phones and then charge you monthly to make up for it. Just as with electric companies, there's no way the phone company's going to come up with all the possible things you'll want to do with wireless communications. If they open it up I think they'll make a lot more money, because there will be lots more products that work on their networks. I want my thermometer to send me data wirelessly. I want my microwave to read the current time wirelessly instead of me having to set it. I want my car to send a message to my air conditioning system to turn itself on when I'm getting close to home. I want the rain sensor in my yard to send a message to my car windows to close themselves. My cell phone company will never produce every product, but if they sell access to the network, someone will develop some cool products that use the network. Kindle is an example of such a device.

I've seen some complaints on the blogs that this is a big scam for Verizon to make more money by charging per byte. I think they should be charging by the byte. When they control the service, they are able to control the byte-to-service ratio. They average the cost of the bytes across customers and give you a single price for “unlimited” voice. But then they and the ISPs hate you if you use more than average. But I think consumers are better off in the long run paying by the byte. And I think consumers are better off if the phone companies stop giving away the cell phones, and instead lower the monthly charges. I think voice-only folk will end up paying less, because the money will come from the higher bandwidth products that people come up with. Just as with electricity or shipping/mail, it makes little sense to offer unlimited service for a fixed fee. That will lead to overconsumption and hard limits (like Comcast shutting off consumers who use a lot of bandwidth). I'd rather have people pay for bandwidth, so that we choose what to use and not worry about being shut off. Does FedEx stop shipping your packages if you ship lots of them? No! They treat you even nicer! In a world where people pay per byte, the ISPs will want customers who use a lot. This is the “fat head” of data transmission. Other devices can use very little, without making it too expensive. I'm not going to buy a cell phone plan at $20/month for my thermometer or microwave. If I only paid by the byte, it'd be incredibly cheap to transmit the time and temperature once in a while, and those devices will become feasible. This is the “long tail” of data transmission.

I also wanted to mention that when people talk about “3G” they are thinking about the higher bitrate. But it also provides always-on service that can be used simultaneously with voice. I suspect (just as with broadband) that always-on is what will change society more than higher bandwidth. Phone companies thought videophones (high bandwidth, not always on) would be the big thing, but it turned out SMS text messaging (low bandwidth, always on) was what was really took off. Twitter and IM are going to be used more than Second Life or World of Warcraft. Flash games in your web browser are being played more than Playstation 3 games.

I think it's reasonable for electric companies to initially offer only a small set of products, like lighting. It's the low hanging fruit. And it lets them build out their system and make sure everything works. Once the infrastructure is there, it makes sense to open it up. I think the same is true for the cell networks. It makes sense to start with something more limited, so you can work out all the details and build the infrastructure. Once it's established, it's time to open it up to even more products, so that you can make even more money. I'm happy to see Verizon's announcement (I haven't seen details yet). I hope they've thought about the history of electric companies, and are thinking about a world in which every device uses the network, and cell phones are just one of many.

Labels: future