Anyone But Google

imagesCarriers are understandably unhappy with today’s mobile platform duopoly. Apple and Google generate demand for data services, and carriers can’t live without them (as T-Mobile USA admitted about Apple late last year). However, Apple extracts enormous subsidies, mandates high minimum orders, has complete control over the customer experience, and maintains its own direct billing relationship with the subscriber. In some ways, Google is worse, as it competes directly with carriers. Google bids on spectrum, owns fiber in the U.S., runs a broadband network (currently limited to a single U.S. city), and has this annoying habit of offering services for free that carriers like to charge for. Carriers have long been searching for alternative operating systems that give them more control over the user experience. MeeGo, Maemo, and LiMo have all been promoted by various carriers in the past, and the latest carrier OS hopes center around Tizen, Mozilla’s Firefox, Jolla’s Sailfish, and Canonical’s Ubuntu.
Mozilla and the Tizen Association recently held press conferences that included realistic commitments from hardware vendors and carriers – 17 carriers backing Firefox, if I read the press release correctly. It certainly looks like Tizen and Firefox phones will actually reach the market, but once they do, why will consumers buy them?

“Open” Is Not a Reason a Consumer Buys Anything

None of these devices are all that innovative, none have apps or service ecosystems that are remotely competitive with Apple or Google today, and the vendors kept talking about how “open” they are as if that’s a feature that matters to anyone. Openness does resonate with carriers looking for alternatives to Google and Apple, and I understand why OEMs are building these phones – because carriers say that they’ll sell them. However, the opportunity costs for doing, say, Firefox, instead of trying to deliver a better Android product, are extremely high. And I have yet to see a compelling reason why consumers will give up the Android or iOS ecosystems and buy one of these phones.

Tizen and Jolla basically ignore the question – their presentations have focused on carriers and distributors. Canonical’s execs told me that consumers and enterprises want a system that can span phones to desktops. Do they? And even if they do, since when has Ubuntu been successful on the desktop? Mozilla came closest to describing an actual consumer value proposition, claiming that Firefox smartphones will offer a better user experience than the lowest priced Android 2.3 phones. I’m skeptical. The Firefox mobile user interface is certainly simple enough, resembling a first generation iPhone with a single centered home button and a grid of icons for apps. However, even if consumers prefer a UI without home pages and widgets, Android still has a richer selection of localized apps than Firefox. Google’s services are also a draw, although those are often omitted on low cost Chinese phones. Of course, the whole question of how well Firefox compares to a $100 Android phone in China may be moot: many of the operators signed on to sell Firefox phones are targeting prepaid markets in Europe, where the entry point is slightly higher.

Where Do Google, Microsoft, BlackBerry, and Samsung Fit In?

Google’s launch of the Chromebook Pixel proves that there’s a big faction at the company that views web standards, not native apps, as the future of computing. If Mozilla does have success with Firefox, I would expect to see a ChromeOS phone. Actually, I expect to see a ChromeOS phone regardless.

The focus on Firefox and Tizen seems to indicate that carriers have given up somewhat on Microsoft. Windows Phone has not been terribly successful so far, and Microsoft does not offer operators full control over the services that are eroding their margins. Still, in terms of leverage against Google and Apple, Microsoft is certainly a better bet than any of the alternatives. Microsoft has a real OS in the market today and hardware from Nokia, HTC, ZTE, and Samsung at multiple price points. Microsoft also has the resources and the strategic imperative to keep pouring money into Windows phones and tablets no matter how well (or poorly) they do. Microsoft is a computing software company. Computing is going mobile. Microsoft needs to become a mobile computing company.

Carriers are supporting BlackBerry, at least for now, by helping the company launch the Z10 in over 100 markets. However, few expect it to grow into a real counterweight to Google or Apple, and if the Z10 does not perform well after its initial launch, carrier support will disappear entirely.

Samsung is the largest and most profitable Android vendor, and yet it is also one of the biggest backers of Tizen. Clearly this means [insert hysterical argument here]. The truth is simple: Samsung has always hedged its OS bets. Samsung’s smartphone strategy has always been to bet on every horse (e.g., Symbian, Palm, LiMo, and Windows Phone), and enter its own horse in the race as well (Bada and now TouchWiz). However, when it saw success with Android, it doubled down in that area. For most of Samsung’s competitors, investing in alternate OSs comes with high opportunity costs – allocating time, talent, and management attention to an unproven OS means falling farther behind Samsung in Android. Samsung can afford to follow blind OS alleys just to see if they lead anywhere.

Still, most of Samsung’s device profits come from Android, and Google’s native apps and services add tremendous value to Samsung’s hardware. It would be foolish for Samsung to make any big changes in strategy unless Google forces its hand. Samsung is not foolish. Then again, Google is not entirely predictable – with Motorola, the Nexus program, and the Play Store, Google competes directly with its licensees and carrier partners. Hence the need for Samsung to have a Plan B. Samsung certainly could move away from Android, or create its own Android flavor (the approach taken by Amazon, Barnes & Noble, and many Chinese vendors). However, Samsung mostly wants to use the threat of alternatives to negotiate better mobile ad revenue share with Google, and to keep Google’s Motorola division in check.

AT&T Without T-Mobile: Whither Wireless?

We now know what the U.S. wireless landscape will not look like in a couple of years. The filing of U.S. v. AT&T effectively ends AT&T’s dream, tacitly shared by Verizon Wireless, of a wireless duopoly with a troubled Sprint maybe hanging on.

Title page of US v. AT&TOf course, AT&T made the obligatory noises about fighting on to win approval of its acquisition of T-Mobile USA, but this deal is as good as dead. It is possible for an acquisition to go through over government objections–Oracle-PeopleSoft is an example, but it is very rare. The deal has to be kept on ice for months or years while the legal battles are fought out. The Justice Dept. complaint makes it clear that it would be very difficult to modify the deal in a way that made it acceptable to the government. And even if it were to prevail over the Justice Dept., AT&T would still have to win approval, on the basis of different laws and criteria, from a very skeptical Federal Communications Commission.

That leaves us with the status quo: Two national mega-carriers in Verizon and AT&T, two much smaller national carriers in T-Mobile and Sprint, and an assortment of much, much smaller regional wireless companies.

T-Mobile and Sprint, however, have exactly the same problems that threatened their viability before the AT&T deal was announced. T-Mobile has been a feisty competitor, a fact that helped persuade Justice to move to block the merger. But T-Mo’s coverage is spotty in many parts of the country, it’s 3G service is incompatible with anyone else’s (that why an unlocked iPhone can only get EDGE service on the T-Mo network), and it lacks any clear path to 4G.

Sprint has big problems of its own. After six years, it still hasn’t fully digested the purchase of Nextel and faces challenges in migrating the remaining Nextel iDEN customers to CDMA/EV-DO technology. Sprint’s 4G strategy is also murky. It owns a majority interest in Clearwire, which owns a big swath of national 4G spectrum, but which made a bad technology bet on WiMax. Sprint currently provides 4G service over the Clearwire network and is expected announce its strategy at an event in early October. The government move against AT&T probably makes it more likely that Sprint will buy the rest of Clearwire and accelerate its migration of 4G technology from WiMax to the LTE standard used by Verizon and AT&T (and most other carriers in the industrialized world.)

Would a combination of Sprint and T-Mobile be better equipped to challenge Verizon and AT&T than two relatively weak competitors? Superficially, this makes sense, but there are tremendous difficulties in the way of such a deal happening, or succeeding if it were to happen. Sprint has relatively little cash, a lot of debt, and is deeply entangled in Clearwire.

Sprint would probably have to raise the financing to buy T-Mobile outright. Because it is a subsidiary of Deutsche Telekom, there is no possibility of a merger of equals. In theory, a merged company could be operated as a partnership between Sprint Nextel and DT (as Verizon Wireless is a partnership between Verizon Communications and Vodafone) but T-Mo’s German parent has shown no interest in doubling down in the U.S. market.

A T-mo-Sprint combination would also be a technological nightmare. Sprint operates a CDMA network with EV-DO 3G data, all at 1900 MHz and Clearwire 4G at 2500 MHz. T-Mo provides GSM and EDGE service at 1900 Mhz and 3G UMTS at 1700 and 2100 MHz. There’s no compatibility anywhere and no existing devices that will run properly on both networks. Given its painful technology integration experience with Nextel, Sprint may be particularly reluctant to wade into another swamp.

So it looks like the status quo will be with us for a while. Let’s hope that the Justice Dept.’s belief that this competitive landscape will be better for consumers than a T-Mobile-AT&T merger turns out to be correct.