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Tag: walled garden

Net Neutrality 2.0

If there is one consensus in the very polarized technology world, it is that more and more people and more and more devices will be connecting to the internet. Consequently, the amount of internet traffic that will be delivered over these networks will explode – estimates by Cisco suggest that total internet traffic will grow on average 41% every year resulting in an almost inconceivable 327 exabytes per year in 2012. To put that into context, that’s the equivalent of ~84 billion DVDs!

The growing size and importance of the internet has pushed regulators and activists to advocate for new rules and regulations to preserve the internet’s independence and neutrality from political and corporate interests. This movement has been called “Net Neutrality” and seeks to make it impossible for network owners to gain too much power over the content and information that a consumer can access.

Now, I am a firm believer in the aspirations of net neutrality – I am no fan of “walled gardens” and am even less a fan of Comcast/Verizon/AT&T throttling access to content they don’t approve. I am also well aware that major network owners, at least those in the US, are granted public licenses by the FCC to operate, and thus have a moral and legal obligation to provide a public and valuable service. But, aspirations and obligations without a realistic assessment of technological and economic realities are meaningless, and I suspect, based on many of the arguments I’ve heard on the internet, that many net neutrality proponents don’t have a good grasp of why their Eden-esque visions of net neutrality may be missing some of the bigger picture needed to make sure their implementation is more effective than naive.

The fundamental reality around the economics of network construction is, in short, that it is expensive as hell. There are enormous upfront costs that need to be recouped, and there are plenty of maintenance costs and challenges. This has two direct consequences:

  • Network providers tend to be large
  • The cost of an incremental byte of data transmitted is marginal (because the equipment is already there), but the cost of incremental capacity is extremely high (because the provider has to buy new equipment, contract new construction/digging, bring it online, etc.)

What does this mean for net neutrality? The cynical view would be that the network providers are primarily interested in minimizing new capacity investments/maintenance costs and in finding ways to “jack up” prices on data transferred, for example by only allowing content and devices where the content providers/device manufacturers pay the network owner a handsome reward. There is no doubt that network carriers can be guilty of this mindset, but the carrier’s current reaction to the smartphone revolution by opening up their formerly “closed gardens” and the failure of walled gardens like AOL to dominate the internet service provider space suggests that something else is at play. In my mind, what will dominate the business priorities of the network providers as time goes on is one question: how will network carriers profitably provide access for the exabytes of content that will be traveling through their networks?

The best example of what may come is in the mobile phone space where AT&T has been caught off guard with the enormous network demands from Apple’s iPhone. It seems the general consensus is that AT&T has been behind on its network infrastructure investments, but the fact of the matter is it will be increasingly difficult for network providers to keep pace with the investments in capacity necessary to maintain service quality for its users. This is especially complicated in the mobile phone space because of three things:

    1. the amount of wireless spectrum available for use is being consumed faster than it is being made available (although this could be alleviated by new regulatory policies)
    2. the quality of network service is dependent on more than just the wireless spectrum, but also an extremely expensive-to-upgrade, rapidly saturating “backhaul” network
    3. the spectral efficiency (how much data you can cram down a particular wireless pipe) is reaching the theoretical limit defined by Shannon’s Law (chart below)

I’ll admit I haven’t fully crunched the numbers (its been my experience that its pretty difficult for a casual observer to find good data on the costs of upgrading network capacity or on the ability of femtocells/network topology changes to help carriers cope with new data demands), but I suspect that network carriers will soon hit a real wall in terms of their ability to profitably expand their networks to meet new demands. If this is true, then there really are only four options open in the long run for profit-seeking network carriers:

  1. Dramatically increase cost of network service – Ending “unlimited access” plans and increasing the average monthly service costs and cost per byte transmitted could alleviate the profitability constraint in the short-run; but, depending on the economics involved, if the network service reached a high enough price, new users would be deterred from using the service, resulting in user attrition for the service provider and the loss of a potentially valuable network access for society
  2. Introduce tiered traffic and practice heavy network management – Allowing the carrier to preference certain traffic (e.g., to users/businesses or content providers/application developers who have paid more, or to preference emergency/government network traffic, etc.) and practice heavier handed network management could alleviate the network traffic constraint without dramatically changing the cost of network access
  3. Some combination of (1) and (2)
  4. Government bailout

None of these options (especially #4) are especially attractive, but it is important for regulators and activists to keep these potential futures in mind when considering their proposals. I fear that the strict form of net neutrality espoused by many would drive carriers to adopt course #1: something which could cut short the full potential of the internet to only wealthy individuals and businesses. This blogger’s humble opinion is that the best outcome would be to use regulation to pursue a variant of #2 for the following reasons:

  • AOL 2 is unlikely to happen: To believe that network carriers absent strongly worded neutrality regulations will rapidly clamp down on access is to believe that the failure of AOL’s walled garden and Verizon allowing Skype and Android on its network are flukes. The value from the openness of the “full Internet” is not trivial and no longer something that major network providers can ignore. And, based on Verizon’s recent promotion of the Droid by harping on problems with the closedness of Apple’s iPhone App Store, is something carriers have learned to use for their own purposes.
  • Regulations can be implemented just around content neutrality: Of all the concerns that I have about network neutrality, the one that matters the most to me is equivalent treatment of content. After all, the internet in the US would suffer a great deal if every ISP/carrier only provided content sanctioned by just a single political party. The remainder of the provisions (universal device access, universal platform access, ability of third party networks to piggyback off of the main network) are much less important, especially if content neutrality is mandated, and implementation of them may even weaken the ability of the industry to create high-quality integrated/tailored products (e.g., requiring AT&T to allow the iPhone to access Verizon’s network as well would have significantly delayed the iPhone’s release and probably would have worsened its battery-life and introduced additional problems). Furthermore, the cost of implementing content neutrality is likely minimal, whereas the cost of requiring networks to support every possible platform/device/third-party are likely to be significantly more prohibitive.
  • Enabled tiering/network management allows network providers to manage networks for higher quality experience: Strict network neutrality could limit the ability of network providers to manage the traffic on their networks, especially in times of peak demand, likely reducing quality of service for all parties. It also limits the ability of network providers to prioritize traffic that should be prioritized (e.g., emergency/government communications, traffic which businesses have network providers manage for them, or even packets related to keeping tabs on the network service quality or devices on the network) and potentially do basic things like block spam/DDoS attacks or manage the quality of internet experience by traffic type (the demands for web page viewing are very different from the demands of internet video and internet telephony).

I won’t claim to be the policy expert that knows what the right solution or sets of costs and tradeoffs are, but hopefully this gives a sense of some of the nuances behind the network neutrality debate.

(Image credit) (Chart credit – Qualcomm whitepaper)

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Why smartphones are a big deal (Part 2)

[This is a continuation of my post on Why Smartphones are a Big Deal (Part 1)]

Last time, I laid out four reasons why smartphones are a lot more than just phones for rich snobs:

  1. It’s the software, stupid
  2. Look ma, no <insert other device here>
  3. Putting the carriers in their place
  4. Contextuality

My last post focused on #1 and #2, mainly that (#1) software opens up a whole new world of money and possibility for smartphones that “regular” phones can’t replicate and (#2) that the combination of smartphones being able to do the things that many other devices can and phones being something that you carry around with you all day spells bad news for GPS makers, MP3 player companies, digital camera companies, and a lot of other device categories.

This time, I’ll focus on #3 and #4.

III. Putting the carriers in their place

Throughout most of the history of the phone industry, the carriers were the dominant power. Sure, enormous phone companies like Nokia, Samsung, and Motorola had some clout, but at the end of the day, especially in the US, everybody felt the crushing influence of the major wireless carriers.

In the US, the carriers regulated access to phones with subsidies. They controlled which functions were allowed. They controlled how many texts and phone calls you were able to make. When they did let you access the internet, they exerted strong influence on which websites you had access to and which ringtones/wallpapers/music you could download. In short, they managed the business to minimize costs and risks, and they did it because their government-granted monopolies (over the right to use wireless spectrum) and already-built networks made it impossible  for a new guy to enter the market.

imageBut this sorry state of affairs has already started to change with the advent of the smartphone. RIM’s Blackberry had started to affect the balance of power, but Apple’s iPhone really shook things up – precisely because users started demanding more than just a wireless service plan – they wanted a particular operating system with a particular internet experience and a particular set of applications – and, oh, it’s on AT&T? That’s not important, tell me more about the Apple part of it!

What’s more, the iPhone’s commercial success accelerated the change in consumer appetites. Smartphone users were now picking a wireless service provider not because of coverage or the cost of service or the special carrier-branded applications  – that was all now secondary to the availability of the phone they wanted and what sort of applications and internet experience they could get over that phone. And much to the carriers’ dismay, the wireless carrier was becoming less like the gatekeeper who got to charge crazy prices because he/she controlled the keys to the walled garden and more like the dumb pipe that people connected to the web on their iPhone with.

Now, it would be an exaggeration to say that the carriers will necessarily turn into the “dumb pipes” that today’s internet service providers are (remember when everyone in the US used AOL?) as these large carriers are still largely immune to competitors. But, there are signs that the carriers are adapting to their new role. The once ultra-closed Verizon now allows Palm WebOS and Google Android devices to roam free on its network as a consequence of AT&T and T-Mobile offering devices from Apple and Google’s partners, respectively, and has even agreed to allow VOIP applications like Skype access to its network, something which jeopardizes their former core voice revenue stream.

As for the carriers, as they begin to see their influence slip over basic phone experience considerations, they will likely shift their focus to finding ways to better monetize all the traffic that is pouring through their networks. Whether this means finding a way to get a cut of the ad/virtual good/eCommerce revenue that’s flowing through or shifting how they charge for network access away from unlimited/“all you can eat” plans is unclear, but it will be interesting to see how this ecosystem evolves.

IV. Contextuality

There is no better price than the amazingly low price of free. And, in my humble opinion, it is that amazingly low price of free which has enabled web services to have such a high rate of adoption. Ask yourself, would services like Facebook and Google have grown nearly as fast without being free to use?

How does one provide compelling value to users for free? Before the age of the internet, the answer to that age-old question was simple: you either got a nice government subsidy, or you just didn’t. Thankfully, the advent of the internet allowed for an entirely new business model: providing services for free and still making a decent profit by using ads. While over-hyping of this business model led to the dot com crash in 2001 as countless websites found it pretty difficult to monetize their sites purely with ads, services like Google survived because they found that they could actually increase the value of the advertising on their pages not only because they had a ton of traffic, but because they could use the content on the page to find ads which visitors had a significantly higher probability of caring about.

imageThe idea that context could be used to increase ad conversion rates (the percent of people who see an ad and actually end up buying) has spawned a whole new world of web startups and technologies which aim to find new ways to mine context to provide better ad targeting. Facebook is one such example of the use of social context (who your friends are, what your interests are, what your friends’ interests are) to serve more targeted ads.

So, where do smartphones fit in? There are two ways in which smartphones completely change the context-to-advertising dynamic:

  • Location-based services: Your phone is a device which not only has a processor which can run software, but is also likely to have GPS built-in, and is something which you carry on your person at all hours of the day. What this means is that the phone not only know what apps/websites you’re using, it also knows where you are and if you’re on a vehicle (based on how fast you are moving) when you’re using them. If that doesn’t let a merchant figure out a way to send you a very relevant ad, I don’t know what will. The Yowza iPhone application is an example of how this might shape out in the future, where you can search for mobile coupons for local stores all on your phone.
  • image Augmented reality: In the same way that the GPS lets mobile applications do location-based services, the camera, compass, and GPS in a mobile phone lets mobile applications do something called augmented reality. The concept behind augmented reality (AR) is that, in the real world, you and I are only limited by what our five senses can perceive. If I see an ad for a book, I can only perceive what is on the advertisement. I don’t necessarily know much about how much it costs on Amazon.com or what my friends on Facebook have said about it. Of course, with a mobile phone, I could look up those things on the internet, but AR takes this a step further. Instead of merely looking something up on the internet, AR will actually overlay content and information on top of what you are seeing on your phone screen. One example of this is the ShopSavvy application for Android which allows you to scan product barcodes to find product review information and even information on pricing from online and other local stores! Google has taken this a step further with Google Goggles which can recognize pictures of landmarks, books, and even bottles of wine! For an advertiser or a store, the ability to embed additional content through AR technology is the ultimate in providing context but only to those people who want it. Forget finding the right balance between putting too much or too little information on an ad, use AR so that only the people who are interested will get the extra information.

The result of all four of these factors? If you assume that a phone is only a calling device, you’re flat out wrong. And if you think a phone is just another device for accessing the internet and playing goofy little games, you’re also wrong. The smartphone will, in this blogger’s humble opinion, dramatically change the technology landscape, and the smart money is on the companies and startups and venture capitalists who recognize that and act on it.

(Image credit) (Image credit) (Image credit)

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