Smart Phone Skeptic

America’s National Broadband plan seems predicated on the idea that smartphones can serve poor people. The cellcos are telling Wall Street’s financial analysts and the policy makers in Washington that there are more cell phone-based internet connections in the world than fixed wireless or wireline connections. But skeptics are starting to show that those cellphones may be underused, overpriced, and come with caps. Meanwhile, cellcos’ core businesses are threatened. Prices will rise and service caps will fall. Washington — and policymakers around the world — should allocate more resources and spectrum to services that deliver true internet, not the restricted walled garden of the cellcos.

This debate was central to the fascinating discussion at the State of Telecom event at Columbia’s Instititue of Tele-Information, held in mid-October. I attended the afternoon sessions.

Wall Street’s vision

Simon Flannery, managing director at Morgan Stanley, described the challenges that are eroding the margins of the cellcos. Of course, the top two cellcos are doing better than the rest. Flannery said that margins at Verizon at about 45 percent, while margins at Sprint are about 16 percent. Apps that are eroding core revenues include free text messaging and free calling.

Meanwhile, cellcos are selling advanced services that require more bandwidth. “Backhauling fiber to towers requires a massive build,” said Flannery. “Smaller carriers lack the cash flow to reinvest, and there is no financing for newtworks that are without returns.”

The market is trending towards a duopoly.

Craig Moffett, senior analyst at Bernstein Research, said that the services that people pay for are the easiest to provide: internet access, phone calls, and so on. “People are less willing to pay for information and entertainment, which are services that cost more to provide.”

Voice may require 9.6 Kbps and people will pay $50 per month for it. People will only pay about $30 per month more for the next generation services that multiply data usage by 10 or 100 times. “The sale price per bit is falling faster than the cost per bit.”

At the bottom end of the market, Moffett said, there is the “poverty problem” where households whose net income is negative after paying for food, clothing, and shelter account for perhaps 40 percent of all homes. “Retailers can depend on the upper two quintiles, but telcos have to sell to the full 100 percent of the population,” Moffett claimed.

The consumer advocate concurs

Mark Cooper of the Consumer Federation claimed that he disagreed with everyone on all sides of this debate. He said that in some poor countries, there are 75 cell phones per 100 people. “People who have no electric power at home may have cell phones.”

If a cellco is just adding voice customers, it’s easy to grow. “It is easy to add subscribers but it is expensive to add capacity. Users, uses, and usage all add costs to wireless mobile networks.”

He agreed with the Wall Street analysts that the marginal sale price of bandwidth drops rapidly.

He added, however, that unlicensed wireless spectrum is the great success story of the past two decades. Even AT&T is now selling Wi-Fi. “Unlicensed has no champion in the scrum for spectrum.” Cooper said that at most 10 percent to 20 percent of spectrum should be sold to the cellco monopolies, so that the Washington can avoid the next monopoly and the next “100 year mistake.”

The Economist Magazine has the data

In an article entitled The Limits of Frugality, The Economist magazine warns that those rural cellphone users who have no electricity in their homes will soon be paying higher prices. “Sunil Mittal, the boss of Bharti Airtel, the mobile-phone operator … said the extra cost of servicing rural customers, and their low usage levels, had made things unprofitable. Prices are now expected to go up across the industry, after two decades of decline. India’s low-cost telecoms revolution has, it seems, reached its limit.”

Buildouts will now focus on the urban rich. “Today perhaps 17 percent of India’s population has half of its spending power, according to the Asian Development Bank …. One proxy for the difference in profitability between the urban rich and the rural poor is the price paid for mobile-telecoms spectrum. In the 2010 auctions for 3G telecoms licences, operators bid ten times more for a slice of the airwaves in affluent Delhi, with 18m people, than in east Uttar Pradesh, with 120m people.”

Washington, D.C.’s policymakers should expect fixed wireless and wireline internet to connect the rural poor at an affordable price. The true price of cellular broadband is going up fast, worldwide, and like all price rises, it will harm the poorest the most.

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