I see three parallel developments that I predict will kill the phone companies as we know them. Unfortunately, this is not a minute too late.
When I was in the Netherlands this week, a major source of irritation was Vodafone NL, who charged me by the megabyte (!!) of 3G internet traffic. To quote Christian Engström, Member of European Parliament: Megabytes? I didn’t know they still made those. 80M cost €20. That is an exorbitant price: 25 cents per meg.
It is not an exorbitant price because it’s the market price, but because it isn’t the market price. The production cost of transferring one gigabyte over a 3G network is approximately one euro. Or was, a year ago; there is no reason to believe prices have risen like oil.
So why use Vodafone, if I’m so angry with them? Why not use my ordinary provider? Because they (3, as in the provider “3″) charge me three euros per megabyte. That’s a 300,000 per cent profit margin. That pricing has absolutely nothing to do with market prices.
It’s more than an annoyance. I’ve spent a large part of my life explaining to people why the free market works, and here’s a smoking gun it doesn’t. This is not an annoyance, it’s a personal insult.
It’s the same thing with Skype being blocked in some mobile networks — the vertical bundling means the operators can prevent a functioning market.
For the same reason, governments have been absolutely insane giving telcos subsidies to roll out broadband. Telcos will never roll out broadband to a level where it threatens their existing business; this is holding back society’s technology levels because politicians are trusting vested interests with being in charge of disruptive technology. Why would you do that?
I see three parallel developments that will kill the telcos for good:
The first development is the shift to mobile handsets. Landlines are disappearing for good. The businesses and offices that are in need of landlines don’t really need landlines as such; they need lots of phone numbers to a fixed location, which doesn’t mean physical bundles of cables. Asterisk boxen and similar solutions is one common way of dealing with it. There are others. In short, businesses get their series of POTS phone numbers through their ordinary internet connection.
This first development kills the primary investment of the telcos: all the copper in the ground, which is being replaced by fiber not necessarily owned by them.
The second development is the political pressure to make internet connectivity a basic urban utility, like streetlighting. I predict the arrival of the first municipal wireless networks within five years, given the current pressure, intended to cover urbanized areas of cities and be loginless. Now, in the US, this can be seen as “competing with commercial actors” and may have a political snag or two. In Europe, though, it would be seen as upgrading the city in the public interest, a situation where businesses will be told to move or be steamrolled over.
This second development makes the copper in the ground twice useless, since it can’t be monetized for stupid ADSL, either. Real fiber to households will still have a market: you can’t compete a shared wireless connection with a fixed gigabit connection. But ADSL? Pffft.
(UPDATE: Apparently, I’m a bit behind — I missed that New Orleans did this five years ago. I don’t know how it has fared. But I still predict more will follow.)
The third development is the handsets’ increasing ability to place voice calls directly over the internet, bypassing the telco network altogether. We’ve seen this development with Skype, Viber and Redphone for mobile handsets, and there are many different actors coming in this field. These phones are all capable of using wireless networks rather than telco 3G connectivity, and usually prefer to. If this development continues, and there is no reason it shouldn’t, it means that at some point in the semi-near future, Android and other smartphones will come in versions without SIM cards altogether, only relying on wi-fi for connectivity.
This means that nobody will use the voice services of the telcos anymore, or at least, nowhere near in the volumes needed to sustain the behemoths.
The combination of these three developments mean that in the quite near future, people will still have mobile phones, but will make voice calls directly over the net using municipal wireless networks at any time they are within city limits. The telcos and telco standards will not be involved.
So won’t this scenario have drawbacks? Of course it will. The telco’s cellphone coverage outside urban areas would be left uncovered. But I’m sure somebody will think of a way to solve that in the coming years.
As a side effect, this scenario means all this “lawful interception” that is currently plaguing residents in the Arab world will be a thing of the past. Telcos and telco standards bodies have been bending over backwards to make sure their own customers can be betrayed. This is an attitude unheard of in Internet culture: defenders of citizens and privacy will defend those values no matter who the intruder is. So what does this mean given these developments? You can’t intercept a decentralized network with end-to-end encryption. That means that hardened criminals can’t be wiretapped, but neither can anyone else. I see that as a fundamentally good development.