The Cage Match
I keep wanting to write about the merger of AT&T and T-Mobile, I really do – not because it’s so important, but because it’s really so unimportant. Sure, there are a few critics who think that T-Mobile’s disappearance will make a significant difference in a market from which competition has already made them (T-Mobile, but also the critics, I guess) irrelevant. But every time I get it together to draft something, something more interesting happens.
Back on March 24, I was about to hold forth on the merger when something far more important indetermining the future of communications happened – the release of the iPad 2. But as I planned to update and post the T&T-Mobile piece this week, time and tide decided to stop waiting for me and an even more important event overwhelmed me once again – the acquisition of Skype by Microsoft. Because long after T-Mobile’s cellular network is gone and forgotten, the Microsoft/Skype combination will influence what happens in broadband.
Why is Microsoft willing to pay so much — $8.5 billion — for Skype, a product that’s yet to turn a profit? For a start, because it fits in so many places. Mcrosoft has a very nice teleconferencing product, but a growing number of businesses are using Skype for teleconferencing, and it’s better to compete against yourself than let others compete against you and win. Integrating Skype into Office and Outlook not only meets this objective, but keeps Office and Outlook alive in a world in which you can get Open Office or other substitutes or the price of asking, and in which the “cloud” will soon bring you computing on demand, which could make products such as Office expensive and pointless.
Skype would also fit in with Microsoft’s Xbox game products, which have never seen and don’t intend to soon, but I know that talking to someone while you’re blowing their avatar’s head off has to be more fun than simply blowing their avatar’s head off without the trash talk. $8.5 billion dollars so some pimply kid can say “Gotcha, Dude!” Heaven help us all.
Then there’s the mobile market. The dramatic improvement in the major wireless networks means that mbile phones can increasingly handle Chester Gould’s pioneering vision of two-way, real-time video calls. And despite its advantages of money, name brand, money, money, engineering talent, and money, Microsoft continues to be a second-tier player in the mobile market. The Wall Street Journal says today that Google’s Android operating system has 35 percent of the U.S. market, with Blackberry at 27 percent and Apple, at just over a quarter. Microsoft is at 7.5 percent and dropping. Small wonder that Microsoft has recently thrown its lot in with Finnish handset manufacturer Nokia, which once dominated the device market, back when devices were simpler. To me, it’s a great match – Microsoft has some good ideas about what handheld devices could do, but it can’t make the product cheaply or attractively enough to crack the market, while Nokia can make things just fine, but needs a better operating system to teach its old dogs new tricks. And if you throw Skype into this mix, then Microsoft suddenly looks like a threat in the mobile market, instead of a something between a sad commentary and a joke.
Then there are the other markets to which Skype bridges. Skype is a video service – it just happens that the videos it sends are pictures of people talking to you. Netflix is a video service – it just happens that the videos it sends to your devices – -the same devices as pick up Skype – don’t talk back when you talk to them. Skype is a social network – it just happens that instead of poking people or posting stuff on their pages that will embarrass you even more than that tattoo for the rest of your life, it calls them. Facebook is a social network, too – Skype could do whatever Facebook does if they wanted to write the code, but its strategy is to focus on one part of your relationship with your ‘friends,” contacts,” or whatever you want to call other people – talking to them. Facebook could have bought Skype just as easily and built it into its pages. Ebay’s a social network, too – heck, to their credit, they realized they were in the same people-to-people business as Skype back in 2005, when they bought Skype for $2.6 billion. (And then sold it a few years later, leaving behind only fond memories and a $1.4 billion accounting charge – unlike love, accounting means you have to say you’re sorry.)
Is a pattern starting to emerge? First, Microsoft wants Skype because of its wireline business – making its Office, Outlook, and other old school computing products more attractive. Then it wants to enhance its presence in the mobile market and revive its operating system in wireless. Then it wants to prepare to do battle with the social networks and peer-to-peer applications. Then it wants to be able to move videos and other content across a range of platforms and devices. Then it wants to enhance its gaming. What does it all add up to?
It’s all the same market! Do you get it yet? Back to ATT/T-Mobile – you’ve got some people out there wringing their hands over whether the ghost of T-Mobile makes a difference in the mobile market when, in fact, the market for wireless signal is just one facet of a meta-competition among wireline providers (telco, cable), wireless providers (whether it’s cellular or WiMax or satellite), device producers (from the iPhone to the Xoom to the Kindle to the Xbox), applications producers (like Skype), content producers (be they Facebook or Ebay or Google or Warner Brothers or NBC). They’re all in the same business and they’re all competing against each other! Because they’re all trying to be the same thing – the “systems integrator” for the consumer.
We used to think of the mobile signal providers – the Verizons and AT&Ts and Sprints and perhaps the Clearwire and some others – as Christmas trees on which the ornaments of a handset and maybe some primitive service – GPS or some such – were hung. But now, the consumer doesn’t pick the tree and then go get the tinsel. The iPhone changed that – suddenly, the consumer picked a device and then went and got the signal that best fit it.
When I was an executive at Unisys, we had a similar moment. It was when we realized that our relationship to our customers – and it was a business client base, no one ever brought a Unisys home to run Visicalc or play Pong — was being intermediated by the Arthur Andersens and the other technology consultants who were doing the systems integration, matching the gear and the operating systems and the software and the surrounding environment. Our customers were suddenly telling us, “Call my agent,” which is one thing you never want to hear.
Customers are telling everyone in what the FCC calls the broadband “eco-system” to call their agent, but their agent is themselves. They’ll decide which signal, which devices, which applications, and which content they’ll bring together. And, as a result, each of these segments is linked in a meta-competition for the consumer’s allegiance. Sometimes they respond by offering the customer something new, or something their competitors do – Apple Face Time the latter, Amazon Kindle the former– and sometimes they fail – Google Wave, even Microsoft Bing, when you come down to it. Sometimes they try to get it through acquisition – Comcast and NBC (and therefore Hulu), Google and YouTube, now perhaps Microsoft and Skype. Hell, Google’s just announced that they’re going to build and market their own laptops. Huh? Why are they bothering? To be the point of entry into the digital, broadband world.
This is the real competition that drives the broadband space. Better devices force better signals and allow better applications; better signals permit better devices, applications, and content; better applications and content lead consumers to demand better signal and devices. And they all compete with each other to be the point of entry into this amazing “eco-system” of connectivity, devices, applications, and content. We used to think of competition as being like a sprint – Coke and Pepsi, Oreo and Hydrox racing to a finish line. But Microsoft, Google, Apple, Comcast, Motorola, Facebook, Amazon, Clearwire, Verizon and the like (but, unfortunately, not T-Mobile) are not on a track – they’re in a cage match, in which alliances and partnerships continually form and reform with the goal of being the last contestant standing – the entity that “brings the entire broadband experience together” for the consumer.
You’d think an economist would have figured this out. Some have, others are still trying to figure out what to wear to T-Mobile’s funeral. The best single statement of this new kind of competition is a great paper by Jonathan Sallet, who knows his economics from what his economist friends told him over cocktails, but has been around technology long enough to write this piece, a great place to start.
One of these days, I’m going to write about AT&T and T-Mobile. It’ll be on a slow week. But can you blame me? After all, why go to a poorly-attended funeral when you watch an exciting cage match?
[Cross-posted from Ev Ehrlich’s Everyday Economics.]