A Week in Barcelona

The Mobile World Congress convened in Barcelona, Spain, this week. The agenda-setting event is where wireless network operators, cellphone manufacturers, content providers, advertising gurus, and Internet players gather to assess the nearly $2 trillion wireless industry. Although we like the shiny new devices launched at the event as much as anyone, we’ll focus instead on trends in the business and the changes sought in regulation of the industry.

We noted a bit of defensiveness as event kicked-off. You might find the defensiveness surprising. Here in the US, 88% of US adults are now cell phone owners and a total of 46% of all American adults are smartphone users. But most companies, the Wall Street Journal reported, would be looking to explain in Barcelona one of two things -- "why they haven't done as well as they thought, or what they will be doing differently in order to do better," said Neil Mawston, a telecom analyst at Strategy Analytics. So there was a lot of talk about revenue-building strategies, financial services in a mobile world (see Mobile wallet competition heats up), and how to capture more of the connected consumer's time and money.

And, from the consumer view, increased wireless adoption has led to increased headaches. J.D. Power and Associates’ U.S. Wireless Network Quality Performance Study found that dropped calls, calls not connected, audio issues, failed or late voicemails, text transmission failures, Web and email connection errors and slow downloads have steadily increased since the beginning of 2011. Nearly all of the problems arise from data-related issues, with rates increasing from 16 reported problems per 100 connections in the first half of 2011 to 19 problems per 100 connections in the second half of the year. The increase in problems is attributable to the increase in smartphones, with which users send higher volumes of calls, text messages and e-mails. Wireless customers said they used their phone for Web or e-mail services 20 times within a 48-hour period (translating to an average 300 times a month) in the second half of 2011, up from an average 285 times a month in the first half of the year.

Consumers' increasing love of using services like Facebook and YouTube on their smartphones is leaving many telecoms carriers sidelined while bearing the costs of ever-growing demands on their networks. As users lap up mobile Internet services, the Web giants are strengthening their relationships with consumers, while the telcos are finding their connections with customers reduced to a monthly bill and an occasional handset upgrade. The operators complain that the Web giants are hitching a free ride on the networks in which they are investing billions, while free services like Facebook Messenger are eating into the SMS text revenues on which they have long depended.

London-based research firm Ovum estimates telecommunications companies lost nearly $14 billion last year in text-messaging revenue as consumers migrated to applications allowing them to send messages over cell phone data networks. Ovum said the companies still took in an estimated $153 billion, but that was down 9 percent from a year earlier. Telecom Italia SpA chief executive Franco Bernabe said that free messaging services are undercutting the ability of phone companies to invest in their networks. Paid texting, or SMS, has been a cash cow for phone companies that uses minimal network capacity. The new "players have based their innovation in the mobile domain, without a deep understanding of the complex technical environment of our industry. This is increasingly creating significant problems to the overall service offered to the end user and driving additional investments for mobile operators," Bernabe said.

One way carriers are fighting back is to embed software into new phones that will allow users to do the same sort of Internet-based messaging and voice calls that consumers want without paying separate fees. But cell phones issued by mobile carriers often come loaded with software that many people rarely or never use because they don't like them, so no one knows for sure if consumers will adopt the carriers new Rich Communications Suite (RCS) dubbed “Joyn.” The carriers face an uphill battle denting the popularity of the free messaging services.

Orange and Telefónica have also been looking to innovate in order to improve customer loyalty and value-added services revenues. Mozilla announced that it has partnered with Telefónica to deliver a complete mobile operating system built around standards-based Web technologies. Coupled with a growing array of new APIs, and a user interface dubbed Gaia, the platform can fully control the phone and its features without the complexity of a conventional OS. The platform, geekily dubbed Boot to Gecko, gives users access to the ever-growing array of Web-based applications and services, and gives developers an app model based on Javascript, HTML 5 and associated standards such as CSS3.

But innovation was not the only or even the main solution offered by carriers. Vodafone CEO Vittorio Colao’s message: ″We really need to stop this regulatory autopilot mentality,″ describing the regulatory regime in Europe as ″a legacy of the past.″ He urged regulators to stop imposing stringent controls on pricing, roaming, mobile termination rates and so on, and instead ″let the industry re-invest the money.″ Ralph de la Vega, president and CEO of AT&T Mobility, also took up the theme of de-regulation, although his key message centered on the need for more spectrum to be made available to drive innovation and growth within the industry. ″No innovation is possible without investment... [and] we need regulations that are supportive,″ he said. ″Spectrum has to be made available,″ he explained, in order for companies to invest in advanced networks – creating jobs – and in turn to drive the development of new devices, applications and content, and ultimately consumption. ″You need more spectrum to keep the cycle going,″ he said.

As we reported last week, there are now plan in the US to free up spectrum currently used by television broadcasters and auction it off to wireless carriers. Federal Communications Commission Chairman Julius Genachowski was in Spain. He blamed the lack of spectrum on inefficiency and went on to say that he expected the FCC's just-approved authority to hold incentive auctions to pay broadcasters for giving up spectrum to become a worldwide tool. Fellow FCC Commissioner Robert McDowell was also on hand to say those auctions will offer “opportunities for small, medium and large companies to bid for and secure licenses."

Carriers also sought network-sharing deals to divvy up the costs of high- speed systems for bandwidth-hogging video and gaming services. France Telecom SA, Vodafone Group Plc and Deutsche Telekom AG are among operators pushing agreements in markets hurt by the European debt crisis -- and increasingly in emerging economies -- to cut costs by sharing parts of their networks. The move is also one way to stem falling revenue and meet state-imposed coverage requirements. The unraveling of takeovers and mergers in the past two months, including a sale of T-Mobile USA and a combination of Vodafone’s Greek assets with a rival, highlight the need for European carriers to find ways to boost profitability as regulators from Washington to Brussels balk at consolidation.

Several wireless carriers around the world experimenting with slicing up the Web into limited offerings and exclusive deals they hope will bring marketing advantages or higher profits. The tests show that the "open Web" ideal that has long governed Internet use is starting to break down as more and more surfing takes place on mobile devices. Telecom executives, tired of being the "dumb pipes" through which valuable Internet traffic flows, say they need to cut such deals to make investing in expensive mobile-data networks worthwhile. But entrepreneurs seeking to devise new mobile offerings worry the shifting rules of the game will favor well-heeled companies that can afford carriers' new terms. The moves by carriers to allow special access to some websites have also drawn criticism from "network neutrality" advocates, who say the entire Web should be equally accessible to users. In the U.S., the Federal Communications Commission has adopted network neutrality rules that are stricter for landline networks than mobile ones.

AT&T network and technology head John Donovan said this week that the carrier is preparing a service that would let content providers and developers of mobile applications pay the wireless carrier for the mobile data its customers use. He likened the service to toll-free calling for the mobile-broadband world. Public Knowledge was quick to point out that the “new plan is unfortunate because it shows how fraudulent the AT&T data cap is, and calls into question the whole rationale of the data caps. Apparently it has nothing to do with network management. It's a tool to get more revenue from developers and customers.” PK’s Harold Feld said, “The plan creates two new groups of customers and app developers -- those who pay AT&T extra for the privilege of being exempt from the cap and those who don't. The recent Validas study has already shown that data caps on unlimited users are essentially worthless, yet AT&T keeps imposing them and lowering them down to 2 GB.” Calling for FCC oversight, Feld said, “What AT&T proposes is a radical change in pricing for a critical piece of our information infrastructure on which our economy increasingly depends. But we understand virtually nothing of how these prices and policies are set. The FCC has tremendous authority to investigate what is going on, whatever ultimate authority it may have to regulate in this area.”

Wireless data caps and throttling were a big part of the story this week. American Public Media’s Marketplace reported that mobile intelligence company Validas recently looked into what kind of speeds people are getting on wireless plans, specifically customers who use a lot of data. “So we took a look at the data usage of those top 5 percent for both tiered and unlimited plans on Verizon and AT&T,” says Dylan Breslin-Barnhart of Validas, “and interestingly what we found is for, especially for Verizon it was most remarkable that, ultimately, it doesn't matter if you're on tiered or unlimited, if you're in the top 5 percent bracket, you're using about the same amount of data.” But your experiences could be pretty different. Validas found that customers on the unlimited plans were getting throttled, their data was moving slower than customers using the same amount of data on tiered plans. The tiered customers were enjoying a streaming episode of "Mad Men," everything’s great. The unlimited customers were getting buffering messages, hiccups, delays, they had no idea what Don Draper was up to. Why are the wireless carriers doing such a thing? “The argument that they're making is that the people on unlimited plans are data hogs,” says Mike Masnick, editor of Techdirt, “and are using way too much data and are causing congestion for everyone else.” But why is the network slow for some customers and not others? Masnick thinks the networks don’t want customers on unlimited plans at lower rates, they want everyone to be tiered. “Well, it appears that they have plenty of bandwidth,” he says, “and what they're really trying to do is push you into paying more money for the same thing.”

So customers that have signed up for “unlimited” wireless data plans are finding out that, sometimes, all-you-can-eat does not mean all you can eat. Smartphone users who try to get the most out of their devices are learning exactly what that means, even while paying for plans that promise unlimited consumption. The nation’s largest wireless phone companies are getting around those plans by slowing down a smartphone’s Internet transfer speeds for heavy users. The practice serves as a backdoor limit of data by making some downloads impossible. The wireless companies say they are trying to find a fair way to manage the swelling demand for mobile data, but consumers are feeling cheated and suspect some carriers are trying to lure them into higher-cost data plans. Parul Desai, policy counsel for telecommunications at Consumers Union, an advocacy group, said carriers had not shown evidence for how and when their networks needed to be throttled. “Is this an issue of where you’re trying to squeeze consumers into limited data plans?” she said. “Are you just trying to move people over to higher-priced plans?”

Mark Sullivan at PCWorld looked at just what happens when a consumers’ service is throttled – and it ain’t pretty. “It’s like taking a Ferrari into a dealer, and you get it back, and it only goes 45 miles per hour, and you say, ‘What the heck, dude?’ ” said Matt Spaccarelli, who recently found his phone slowed. “And they say, ‘You’re going 100 miles per hour, and it’s too dangerous for you, but if you pay us more, we’ll let you go fast again.’ ”

What’s more, wireline Internet providers seem to be on the same path as wireless. So, if you get Internet access from Comcast or one of several other large broadband providers, you might not want to get hooked on Netflix's offerings. If you watch too much via Comcast broadband -- or do anything else online that involves moving more than 250 gigabytes of data per month -- you're at risk of an ugly surprise. Violate that cap, and Comcast can suspend your broadband service for a year. According to Telogical Systems, five of the nation's seven largest broadband providers now impose monthly data caps. Four of them -- Comcast, CenturyLink, Charter Communications, and Cox -- say they will suspend customers who violate the caps. The fifth, AT&T, charges $10 for each extra 50 gigabytes.

Comcast's Charlie Douglas says the company has set "a reasonable, transparent, and fair threshold" for a network on which customers share bandwidth. "We feel that that is an extraordinarily large amount of data. That limit is there to make sure we provide a great online experience for every single paying customer." Some fear an ulterior motive: They want to steer customers away from services such as Netflix that pose a competitive threat to their core pay-television businesses, and tilt the playing field for future data-heavy services to their own advantage. (For more see Why Comcast Will Crush Netflix)

We’ll continue to keep an eye on wireless and wireline, capping and throttling – and we’ll see you in the Headlines.