Monday, June 18, 2012

More competition and smartphone subsidies are needed, not less.

Yesterday I read this great comparison between the UK and US smartphone markets in The Guardian. I think it fairly well outlines how far the US wireless market has to go to become competitive and reach wider smartphone adoption.

While the US smartphone market has revolutionized both the US as well as the world since the first iPhone and Android devices were launched, on the carrier side of the equation less progress has been made.

The US consumer, while having access to top of the line devices, is still limited to rather expensive devices and incredibly expensive service which at the end of the day is of less than stellar quality compared to other markets.

The US networks have improved when it comes to capacity and data speeds but mainly from a very poor starting position and what is called 4G here (even the LTE kind) delivers what would be called fairly average to rather good 3G speeds elsewhere. The LTE networks that have been launched (not that many) in Europe and elsewhere often deliver speeds in the 40-80Mbps range to customers.

Without becoming too negative, one can come to the conclusion that there is great room for improvement in the US market, especially on the carrier side. And to be fair to the US carriers, they started out in a pretty poor spot compared to the rest of the world and went through a perfect storm of technology revolution, legacy networks and ending up paying the price for less than stellar frequency allocation and planning by the FCC.

When the first iPhone came out in 2007 the US carrier networks were about five years behind their European cousins when it came to network build-out, especially of 3G technologies like WCDMA. To make things worse, not much, and definitely not internationally coordinated, new spectrum had been awarded for the carriers to deploy 3G networks. Instead they had to refarm whatever spectrum they were already using for 2G/2.5G services.

That meant that the US carriers went from being five years behind on the network side as well as handset side (remember, people were still using clamshell phones in the US instead of proto-smartphones commonly used elsewhere) to suddenly being five years behind on the network side but five years ahead of the rest of the world on the handset technology side. Disaster ensued. Clogged networks, poor user experience and backlash.

Today, the US carriers are mostly able to deliver what they should have delivered five years ago but still at incredibly high prices which have maintained their margins at stratospheric levels throughout what should have been a real test.

If you take a look at the comparison in The Guardian, you note that you can get the iPhone, with contract for less than half of the total cost as compared to the US, most likely this also include better quality service as well as significantly more data and minutes than in the US.

The US market is ripe for more intense competition but has been hampered by some events that have created a perfect storm of poor service delivery at high prices to US consumers.

1. Less than efficient spectrum allocation by the FCC. No focus on competition, all focus on auction revenue is a recipe for disaster.

2. Inability by the FCC to secure internationally coordinated spectrum bands for the US operators. This leads to more expensive devices, networks and smaller ecosystems.

3. Allowing AT&T and Verizon to create a defacto duopoly in the US carrier market.

4. Longstanding internal problems at Sprint that has hampered execution of anything resembling a successful strategy. Great assets in Clearwire and NexTel has languished for years of indecision and no willingness to invest in a future for the company. Still the current strategy is centered around a "make do with what you have" execution in an industry that is exposed to incredible change.

5. Little focus on the US market by parent company Deutche Telekom and few bold moves by Tmobile to become relevant in the US market.

If the US market is going to fulfill its promise of delivering great service at reasonable prices, look mainly for changes at the FCC, Sprint and Tmobile. AT&T and Verizon has little incentive to change.

I would not be too surprised to see some interesting offerings from Tmobile this fall offering the iPhone at very competitive prices to target the large market of non-smartphone customers and maybe some of the existing owners as well. 

If you run Tmobile or Sprint and want to change the market, you need to invest to compete. Either in your network or your offerings, preferably both. You can not be expected to have the same margins as AT&T and Verizon during your investment/competition phase based on where you start out from.

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