A Kick to the Head

I’ve written before about “cage match competition” in the broadband space – “space” seems like a better word than “industry” – in which the companies that deliver some part of the integrated broadband experience compete with each other like wrestlers in a cage match, forming and reforming alliances and engaging in head-to-head confrontations on the fly.

Well, this week, the fans who paid to see the match got their money’s worth, when Google, which seemed to be busy locking up Facebook looking for a surprise take-down in a clash over the fuzzy boundary between social media and search, suddenly disengaged and delivered a roundhouse kick to Apple’s head in devices by spending $12.5 billion – in cash, thanks – to acquire Motorola’s handset company.  It’s a classic example of life in the broadband cage.

And from this swift and sudden change in tactics, I take away three points.

The first is that the “cage match” model of competition is real, and that policy makers and industry analysts need to get with the program when thinking about the broadband space.  This isn’t some treadmill sprint between Hydrox and Oreo or Coke and Pepsi or boxers and briefs – it’s something far more complex and, despite its stylistic differences, something that delivers all the benefits of “classic” Coke-Pepsi competition and more.  Much more, if you look at the margins on soft drinks.

The second point is that wireless is the future.  Again, nothing new here, but when Google’s CEO, Eric Schmidt, tells you that Google is a “mobile first” company, or when Larry Page, Google’s Romulus, says on the front page of the New York Times that “even if I have a computer next to me, I’ll still be on my mobile device,” it’s time to stop thinking about whether wireless competes with wireline, and start thinking about what the future of wireline is going to be in the face of burgeoning innovation in wireless.

And the third point I take away is that, as Jolson used to say, “you ain’t seen nothin’ yet.”  (Although Jolson said in blackface, which gives you pause about what he was about to show you.)    Specifically, Apple has plenty of money – more than our country, as it turns out –   and plenty of opportunities to respond to Google.  In fact, let me telegraph my punch – if AT&T doesn’t get T-Mobile, Apple could.  And if T-Mobile isn’t available, Apple may well look to Sprint or another wireless infrastructure provider and create a true “walled garden” global wireless system that levers Apples amazing iDevices, and that would lay the idea that competitive” must mean “open” in its grave.

(I have a fourth point, too.  It’s that when a presidential candidate calls monetary policy “treasonous,” and discusses how the Fed chairman would be dealt with “pretty ugly” down in a state where only recently a man was dragged three miles off the back of a truck to his death in a hate crime, there’s something very, very wrong, and it’s not monetary policy.)

Let’s start with the news.  In 2007, Google set forth upon this planet Android, its operating system for mobile phones, and made it “open,” meaning any manufacturer could use it to support their handset or device.  To date, 39 manufacturers (per Google) have done so, among them companies such as Samsung, HTC, and other manufacturers, who have climbed aboard Android and survived the Apple flood.  But Google’s announcement turns his dynamic by ninety degrees – rather than encouraging these Android-enables anufacturers, Google’s new step-child, Motorola, will now compete with them.   Larry Page’s press release (which ominously welcomes “Motorolans” to the family of “Googlers” – who’s writing this stuff, Gene Roddenberry?)  says that Android will remain “open,” meaning that HTC, LG, and the other 36 manufacturers who are not Motorola can continue to use Android and will be treated fairly, which sounds the right thing to say, but which still is like saying that you’ll get a fair shot at Little League playing time, even if you’re at the same position as the coach’s kid.    Like most successful alien invasions, Google’s incursion into devices may seem harmless at first for the indigenous population, but that’s rarely how the movie ends.

Here, again, I drink from the bittersweet wine of age and experience.  Back at Unisys twenty years ago, we pushed UNIX as the “open” alternative to IBM and Microsoft operating systems, but everyone knew that UNIX was owned by AT&T, and they laughed us off the field.  Android, like UNIX, is open and proprietary, and the contradictions again may come home to roost.

Time out – there’s also this: there are also patents in the mix.  Motorola has 17,000 patents, although given the mess we confront in patent policy – what with “strategic” and “defensive” patenting contorting the system  – 17,000 patents begs inquiry as much as does 73 home runs.  But having these patents strengthens Android’s position against challenge, and that’s got some old-fashioned value to it.

Back to the point.  In fact, there were three points, and the first was the cage match.  We used to think of competition as being like a sprint – Oreo and Hydrox, Pepsi and Coke, that sort of thing – fast, straight-forward, and one-dimensional.  But the broadband space – or eco-system, or sector — I’m not what term is both “technically” accurate in the province of economic argot and still conveys the dimensionality of the thing – isn’t about that.  It’s a space in which a consumer integrates signal, services, devices, content, and applications, and no one makes the whole slate.  So the providers of all of these “pieces” of the broadband experience have to compete to be the “platform” on which the others rest.

The best way to understand this is to go back to when it wasn’t the case.  Earlier in the Internet’s development, the signal provider held sway.  Handheld devices were pretty standard, and the signal provider subsidized them to attract users to their networks.  Applications for the device were few and rare.  The device was an ornament on the carrier tree.

What changed?  What changed was that signal providers innovated like crazy, making signal better and more reliable and cutting its effective price rapidly – charging you hamburger prices for filet mignon.  They raced into fiber and new cable technologies and through 3G into 4Gin wireless, all the time adding signal strength and reliability, and facilitating a dramatic expansion in the capabilities of the devices.  Once the iPhone arrived, devices turned the model on its head – where devices were once an attachment to the network, the network increasingly became the stage on which the device did spectacular things.  And as devices grew in power and sophistication, an entire new industry in applications emerged, competing with the devices that spawned them much as the devices competed with the service providers that allowed the device guys to exist in the first place.

So now, rather than an edifice built on the signal of Internet providers, the broadband experience is arranged, as a pivotal paper by my friend Jonathan Sallet has it, as a “value circle” in which, signal, devices, content, and applications all compete to be the organizing framework for the consumer’s experience.  While each of these were once “layers” built on the platform of the network, now each is a platform in its own right – each competes to be the part of the experience to which the consumer bears allegiance, whether it’s “Verizon has the best signal,” or “the iPhone is better than all the others,” or “Google organizes the Web for me,” or “I’m on the Internet so I can use Facebook” (or the aptly named Twitter).  Each is competing for a larger slice of the “pie” of value the consumer assigns to the integrated broadband experience.  In fact, a few months ago I posted a note on Eric Schmidt’s  comment that there were really four companies that were exploiting this “platform strategy” very well – Google, Apple, Facebook, and Amazon.   Leave the nuances to the side for a moment — what’s conspicuous about his comment is that the signal providers who were once the gateway to Webworld  don’t even appear on the list.  Ten years ago, there was much wringing of hands about the “cable-telco” duopoly.  Now, the CEO of perhaps the most important platform that rests on the broadband Internet – Google – doesn’t regard them as worth a mention when he sizes up the future of broadband competition.

But this “platform” competition is working the way competition should, and then some.  Innovation in signal leads to better devices, which leads to more applications, which leads to better devices to deliver the applications, which leads to better signal to attract the users of devices.   It’s happening right in front of you.  Google is a ‘search company,” right?  Lives off advertising that accompanies searches, right?  The algorithm is the “Coca Cola secret formula of the new millennium.

Well, no.  Google has now made clear, even if Android itself didn’t, or its dalliance with spectrum auctions didn’t, or its cutting-edge high speed networks in isolated places didn’t, that it is much more.  It wants to be the entity that organizes your total broadband experience, both wired and wireless, to be the “platform” on which you put your network, your devices, your  applications, your content, and everything else.  It competes with Facebook, with Apple, with AT&T, with Amazon – with every other platform seeking the same objective.  Which is the point of this latest move in the cage match.

So that’s the first point – the nature of competition in the broadband space has changed.   And the second point is more of the same – it’s time to recognize that not only do wireless and wireline compete, but that wireless may have the upper hand in that competition.

This isn’t news to people thinking through how they want to manage their broadband connection, trying to figure out the  difference between their iPad and their laptop and their desktop.  It’s not news to the growing number of people who have “cut the cord” and use only mobile telephony.  But it is news to the Federal Communications Commission, which is still trying to figure out if wireline and wireless compete for voice.  Yes, voice.  A year ago, in a case involving Qwest, the FCC confessed that:

The increasing percentage of residential customers that rely solely on mobile wireless voice service suggests that an increasing percentage of voice customers view wireless and wireline services as close substitutes, increasing the likelihood that wireless service may materially constrain the price of residential wireline voice service.

And remember, this is for phone calls, not for data-based services.  But in no less than the next sentence, the FCC continues, “the record here does not enable us to make such a finding…

But everywhere else, the finding is being demonstrated in real terms, real time.  My favorite indicator, sports websites, confirms this – mlb.com recently reported that over half its hits last month came from mobile, and landline, users.       A recent Nielsen study shows that 74 percent of smart phone users, and 78 percent of tablet users, watch video apps at home, even if they’re next to their TV.    To some, that seems like playing with a flight simulator in a cockpit, or a great birthday card my wife got for a friend that had a picture of an old lady sitting in a rocking chair holding two Wii controllers in front of her with the caption “Wii Knitting.”

Your mobile phone doesn’t deliver as good a signal as your landline, but you use it anyway when both are in reach.  Your mobile data device will do the same.  I could play Scrabble with you at my desk station any time I wanted to, but I’ll pay for the privilege if I can hold a device in my lap.  Google owns a big piece of desktop space, but its plans are for mobile, because mobile is the future.  I’m not sure how wired and wireless divide the future, but before I ask the question “Does wireless compete with landline?,” I’d ask “what are the landline uses that wireless can’t replace?”

And the third point is that the cage match continues, and the most amazing moves, holds, and throws await us.  Back to Apple, which has a Treasury with more in it than the GDP of Chile or the Phillipines.  They have gone from a device and application – the iPod and iTunes — to devices that extend themselves beyond the individual application, like the iPhone and iPad.  They made AT&T their cost-sharing partner in their effort to launch and teach consumers about the device, but are now so important in the device world that Google is prepared to spend $12 billion to buy the ability to do what others are willing to do already – that is, make really cool Android phones.

Google’s response to Apple was to be “open,” but as the Motorola purchase implies, “open” isn’t working.  People like “open” – it sounds so, well…open – but they don’t necessarily buy it at the store.  Apple is winning by being “closed” – by being the shepherd and steward of everything that comes within its orbit.

So it would be logical for Apple to buy T-Mobile, or Sprint, or perhaps Clearwire, or perhaps the seeds (or is it remnants, or
shards) of hedge fund manager Phil Falcone’s planned network, and turn it into a network dedicated to Apple devices.  Oh, I suppose you could run your Blackberry on it, just as you can run your Windows on your iMac, but why bother?   It’s Wii Knitting.

A network engineered to Apple’s device specifications and tailored to run its apps – your iPhone and iPad and all the content and applications and services that follow them on iNet!  The heck with open – it makes a great slogan, but customers don’t want it so much as they want a quality experience.  In fact, the only reason why we have “open” is because customers demand it – that’s why the Internet is “open” but you don’t get E.D.-fixing, Nigerian lost money partner nonsense on your cell phone.  Moreover, a “closed” Apple network would put more competitive pressure on other carriers – both landline and wireless – as any new, “open” network would.  “Open” doesn’t mean competitive.  Making customers happy means competitive, and an “iNet” – forgive me, company that already has that name —   could make many customers very happy.

Will it happen?  Maybe not.  Could it happen?  No question.  And do the circumstances exist that would allow it to be considered?  Yes, because in the broadband cage match, Apple already competes with network infrastructure providers, device manufacturers, application developers, and content providers, just as Google does.  Google’s Motorola buy ups the ante, putting new life into Eric Schmidt’s vision of “platform” companies that with each other across alleged boundaries in the broadband space.  As the FCC  dithers over what “competition” is and “neutrality” critics bemoan the absence of competition in broadband, competition is happening all around them.

[Ed. note: Cross-posted from Ev Ehrlich’s Everyday Economics blog.]