Mobile operators will lose voice services to mobile platforms

Broken Mobile

Imagine buying your SIM-free mobile phone from a local electronics store and logging into your Google or Apple account as soon as you turn the phone on for the first time. Then imagine having the phone ready to use for voice calls with a phone number provided to you by Google Talk or Skype, and ready to access email, YouTube or Facebook.

That same phone automatically hooks to your home Wi-Fi or any of the available 3G, WiMax or LTE networks without you even knowing (or caring) which specific network its running on at the moment. No longer do you have to belong to a specific carrier — your phone automatically picks the strongest and cheapest network option at any given time. Your network access, along with voice, app/in-app purchases and everything else are provided to you by the mobile platform provider. The carriers are only there to run network infrastructure and sell bandwidth to two to three mobile platform providers.

Let’s face it, the only two things that still connect carriers to consumers are the voice number and billing for the network access. SIM card technology is rudimentary — you can easily conduct user authentication using a simple login, just like Apple does on iPods when you want to buy apps or songs from the iTunes store.

Looking into the future, even the phone number itself will disappear. Why bother with all these numbers when you can just place a call directly to anybody’s Facebook profile?

This future is inevitable, and the changes are coming very soon. With mobile platform providers running the show today, carriers simply have no way of stopping the process. Not having any control over the platform vendors — for instance, via a consortium that would centrally license Android or other mobile platforms to equalize the balance of power between the platform provider and the carriers/OEMs — they will eventually give up on their ambitions to control the user. Just read the Google/Motorola/Skyhook story to see how it happens.

It only takes one carrier to crack and start selling bandwidth to Google, Microsoft or Apple; all other carriers will simply have no choice but to follow. It’s like the prisoners’ dilemma from economic textbooks: If both prisoners don’t talk, both win. But if separated and one is promised a way out (or an easier sentence) and he talks first, then game theory suggests the winning strategy for each prisoner is to talk. In other words, one of them will crack. They are nowhere close to being united enough to stand together, even in the short to mid-term. Look how effortlessly Apple, then everyone else, took over their app distribution businesses — something that only five years ago would have been totally unthinkable.

Most likely, these first-to-crack carriers will be tier-two low-cost carriers outside the U.S., possibly acquired by, but likely just partnering with, the big platform players. Those carriers will have a high incentive to enter such partnerships, as their networks are already optimized for low costs (lean, efficient cost structure without heavy marketing, support, premium services overheads, better network logistics, etc.). Short to mid-term, the strategy will be against tier-one carriers, who have a high marketing/operations cost burden. The UK actually looks like a very logical place to start, especially when some UK carriers have already been experimenting with Skype phones, which were successful to the degree that price-sensitive younger audiences actually started to carry Skype phones as their second device.

It will probably be a while before most users fully switch to non-carrier-provided voice/network services — maybe five to seven years — but it’s only a matter of time, as the new model is so much more compelling to the consumer. Signing up for multiple phone numbers as easily as opening email accounts, getting the best and the cheapest network at any given time in any spot (finally, no more service drops!), free and unlimited voice/video on WiFi networks, cheap roaming even when overseas on a local service, and so many more benefits are poised to take off.

Once this happens, carriers fall into a very undesirable position. Network access becomes an absolute commodity, much more so than in the case of landline ISPs. The latter at least have relatively high switching costs, while a mobile phone is already connected to every network available in its physical location. This means carriers compete head to head over who sells the cheapest bandwidth to Google, Apple or Microsoft, and only those most economically fit with the strongest network logistics survive in the game. This time, the brand, handset subsidies or any other marketing tricks are of no help — it’s all about economics.

What’s really interesting is what could happen with next-generation networks. As carriers see their margins disappear almost entirely and the profits shift to mobile platforms, operators won’t accumulate enough profits to be able to invest in next-generation networks. Nor does the marginalized economics of the network business promise them high ROI. Mobile platforms do the opposite: By that time, they’ll have accumulated profits for all the value-added services, so they’ll have both the money to invest and the strong economic incentive to do so. This will also be very lucrative to mobile platforms politically, as owning services end to end, from cloud to network to devices, enables a whole new level of control and market power.

Ilja Laurs is CEO at GetJar, the world’s biggest free app store.

Image courtesy of Flickr user Arthaey.

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