There's a Good Reason Why Big Public Companies Rarely Lead Innovation

Big public companies are not often noted for their innovativeness. But there's a good reason. The pressure to perform, every quarter, tends to drive out other longer-term activities for which the immediate return is minimal. 

Fon, Deutsche Telekom Do a Deal

Fon, the global Wi-Fi network, is built by consumers who contribute to the network, and is not "carrier owned" or even "carrier class" in the traditional sense.

But that has not stopped Deutsche Telekom from partnering with Fon to build Germany’s largest Wi-Fi network. The "WLAN To Go" network will launch in the summer of 2013, and is inttended to provide greater Wi-Fi offload capabilities for DT and its customers.

The deal illustrates the porosity of "access" methods in a communications environment that increasingly features a mix of "carrier-owned," "carrier grade," "best effort" and "assured quality" networks. 

Given the traditional carrier preference for licensed spectrum rather than unlicensed, and wires rather than wireless for backhaul, the new deal signifies a much more flexible approach to access, overall. 

Samsung Galaxy IV is Coming

In the smart phone race, installed base matters. Coolness matters. Advertising and marketing budgets matter. And Samsung is spending. 

Will Europe Reach U.S. Scale; Will U.S. Data Prices Reach Europe Levels?

In Europe, more than 100 mobile service providers, owned by some 40 companies, serve a population of 505 million. In the United States, four national providers, with market share between 93 percent and 96 percent, serve most of a population of 314 million. 

Regulatory fragmentation, in the form of 27 separate and sovereign regulatory entities is another problem service providers say has to be addressed. Service providers would prefer a single European regulator and consistent policies across EU nations. 

European service providers say their situation is untenable, and are lobbying regulators very hard for permission to rationalize the business by significant merger and acquisition activity. 

In a scale business, those differences probably account for the better financial performance of U.S. mobile service providers.  

For U.S. service providers, there is a different sort of concern, namely a convergence of prices for mobile data services that might potentially entail EU prices rising a bit, and U.S. prices declining more substantially. 

In part, that could come from more severe price competition in the U.S. market, in part from changes in device portability, in part from changes in device subsidy policies and possibly from a shift of end user mobile data demand (offloading to Wi-Fi). 

Potential New Rules, Taxes Illustrate Regulatory Pressures

In most countries, voice communications, Internet communications, broadcast media, cable TV and broadcasting have been governed by distinct sets of regulations. That made more sense in an era when each type of service was provided by a distinct and purpose-built network.

These days, as all media types can be delivered by all or most networks, there will be a bigger discontinuity between the older forms of regulation and the ways services are created and delivered, across networks.

Sweden's new policy of taxing use of PCs and tablets to watch the state-owned TV service, and a German decision on copyright fees, neatly illustrate some of the regulatory challenges that accompany changing communications and entertainment ecosystems.

Traditionally, Swedish households owning televisions have paid a monthly tax of SEK173 ($27) per month to support Sveriges Television, Sveriges Radio and educational broadcasting known as Utbildningsradion.

But Sweden's Radiotjänst collection agency now is collecting the fee even from Internet-connected computers. The logic is that, in some cases, PCs are used as “TV devices.”

German lower house of parliament separately approved a copyright bill that protects Internet search firms from payment of  fees to newspapers and other print publishers when snippets of stories are included in search engine results.

The bill's original draft would have allowed newspapers and other print publishers to stop search companies from showing text snippets, unless they paid licensing fees. The bill still has to win approval in the upper house, which is expected to oppose the current version of the legislation.

The other angle is that the bill does not fully settle the issue of whether search engine applications might have to pay publishers if news aggregators publish bigger amounts of content.

The move by Radiotjänst effectively makes a key form of broadcasting regulation applicable to PCs, notebooks and tablets, in a real sense, even when owners of tablets or PCs  do not watch TV. The tax is applied to a households that own Internet connected PCs, but not TVs, whether or not people in the household actually watch television or not.

Smart phones have been exempted from the law, at least for the moment, on grounds that the primary function of a smart phone is communications, not “watching TV.” Obviously, that distinction will be virtually impossible to maintain over the long term. But there is an existing principle that the “TV tax” applies to a “household,” not devices.

Presumably, that means Swedish households without TVs, but using Internet-connected PCs or tablets, will pay the fee only once, and will not have to pay for smart phone use, in addition to tablet or PC access.

Households that do not own PCs or tablets (possibly only a small fraction of all households), and do use smart phones, might ultimately be forced to pay the fee as well. The point is not whether it is “fair” or “right” for Sweden, the United Kingdom or Denmark to tax owners of TVs.

The point is that rapid changes in user behavior and device capabilities are changing the actual environment within which regulatory policy is conducted. Any nation that has distinct regulatory regimes for broadcasting, communications, Internet and print media will increasingly have to confront the growing contradictions and irrationality of older forms of regulation.

Moral Outrage Over "Loosely Coupled Networks" is Misplaced

Lots of start-ups find they actually change revenue models models on the way to building a sustainable business, compared to what they originally were funded to undertake. But there are lots of more-subtle ways businesses wind up providing value in the Internet ecosystem, for end users and other business partners, even when nothing “Internet” is actually directly related to their actual revenue streams.

These days, it is common for Internet service providers, for example, to lament the way value, revenue and equity valuations are created by successful application providers who do not have a formal and direct relationship with access providers.

That leads to ISP efforts to create such business and therefore revenue relationships between some popular application providers. One might say there is almost a sense of moral outrage that in a loosely-coupled ecosystem, companies are able to build big, valuable Internet-based businesses without necessarily having a direct business relationship with any access provider.

One might well argue that a healthy ISP business, broadly defined, is in the consumer interest, the public interest or  the national interest. One might well debate various ways to ensure that this outcome is achieved.

But some of us might argue that the sense of moral outrage is misplaced. One might argue that telecom service providers would not have preferred the loosely-coupled “Internet” as a major communications architecture able to rival their own “closed” and tightly-coupled networks.

One might argue about the degree to which telecom organizations and interests, as opposed to “Internet” organizations and interests, “created” the Internet. But it is hard to argue that telecom interests did not help create the protocols and networks, or that global service providers have not selected Internet Protocol as the foundation of their next generation networks.

That is not to say that all IP networks are “the public Internet,” or that all business models using IP are equivalent. They are not.

But the moral outrage about loosely-coupled networks is more than a bit wrong. Everyone now agrees that this is the way software gets written and that this is the way modern networks operate. The actual ownership of applications and services will vary (some tightly coupled, but most only loosely coupled).

But loose coupling (“over the top” apps) is the way we all have decided modern networks will work. That is not to say, as some once did around the turn of the century, that “bandwidth wants to be free.” That is not to argue the importance of maintaining viable access networks, or the legitimate challenges that have to be faced as massive changes occur in ISP revenue sources.

But the moral outrage really is misplaced. The layered model, by definition, presupposes separation of the application and other layers, including physical and transport layers. It therefore is not surprising at all that new revenue models and business categories now exist, and that such businesses exist without the “permission” of participants working at other layers.

The emergence of loosely coupled networks is profoundly disturbing for legacy access providers, to be sure, even if all service providers now accept such models as the foundation of their own next generation networks.

But any sense of moral outrage or entitlement is wrong and misplaced. Without question, we will need viable and profitable ISPs to support the Internet ecosystem. And video applications do pose issues for ISPs that are very complicated and challenging in a loosely coupled framework.

But that’s the nature of the networks we all have chosen to build and use. In that sense, and without diminishing the legitimate need for strong, financially viable ISP businesses, moral outrage probably is not helpful.

This is the communications world we all have chosen to live in, and some would argue it is a good model. The magnitude of transition issues for access providers should not be underestimated. But in a loosely coupled world, application providers create value, they do not steal it.

Is 3rd Place the Best any Smart Phone Provider Now Can Hope For?

Whether aiming for third place in any competition is a good thing, or a bad thing, depends on perspective. For the acknowledged "best" competitor in any endeavor, third place is a defeat. For an up and coming new competitor that never has won at that level, third is a big win.

In the smart phone business, it appears that "third" place in sales volume or market share is about the best any contestant other than Apple or Samsung now can aspire to. That is not to say that state of affairs is permanent. 

But it might now be fair to say many observers seriously doubt any of the "other" contenders have a realistic shot at anything other than third place. That might not be such a "bad" thing for lots of entrepreneurs, though. 

With a different cost structure, niche markets, specialized products or method of delivery, plus retail price, lots of competitors "too small to matter" can make a living in many businesses. That  has been true in the communications business for a few decades, at least. 

In other words, if you want to be a whale, only a few can succeed. If being something else works, lots of space exists in most communication markets. The scale will be different. So will the gross revenue and profit margin. But those niches always exist.

Specialists serving small business segments, premises-based products such as business phone systems, repair, refurbishing, language populations, migrants, prepaid and other niches provide examples. 

That is not to say the niches are permanently defensible. If the biggest providers decide they need to be in the businesses specialists occupy, and if the "whales" can figure out a way to sell at a profit (one reason whales do not pursue some lines of business or customer segments is that they cannot do so profitably), then other contestants can find themselves squeezed out of the business. 

Each business is different, but the "rule of three" process is likely at work in most parts of the communications business. By that rule of thumb, one should expect to see only three leading contestants in any market. 

Some might also suggest that in most markets, market share is unevenly shared by those three competitors. It would not be unusual to expect the share of the lead contestant to be twice that of the number two provider, and for the share held by the number two provider to be twice that of the number three provider, as a general rule. 

For contestants in the tier one part of the access provider business, and the smart phone business, the rule of three will be an uncomfortable reality for many. but that isn't the game most entities in the communications business are playing, in any case.