This week saw yet another rumor that Apple was working on some sort of mobile virtual network operator (MVNO), though it was eventually shot down by Apple itself. We’ve also recently seen the launch of Google Fi, Google’s own MVNO, and both Google and Facebook are moving forward with efforts to provide wireless connectivity in emerging markets using balloons and drones respectively. One of the questions I’m asked most frequently about all this is how disruptive will it be to the traditional wireless carriers? The reality is the wireless industry is unusually immune to disruption from outside forces and that none of the companies that are presently creating new models to tackle the wireless services market are likely to have nearly as much impact as the companies already in the market in shaping its short-to=medium term future.
A highly capital intensive industry
The most important thing to know about the wireless industry is it’s enormously capital intensive. The four major US wireless carriers will spend over $30 billion this year on capital expenditure with the vast majority of it going to maintain their existing networks while improving coverage and increasing capacity. These four carriers already have networks in place – they’re far from starting from scratch – but, even in this mature market, they’re spending an amount equivalent to almost half Google’s annual revenues or twice Facebook’s capital expenditures. Building a new network, even in a single country, is so enormously expensive hardly anyone has tried now for years in most major markets. LightSquared came close to trying in the US a couple of years ago but its plan ultimately unraveled before it even got going. Acquiring spectrum to deliver services is another huge hurdle – even the companies already in the market are struggling to get enough to support their growth. And the US government is working furiously to free up more to auction off for billions of additional dollars.
MVNOs can never be truly disruptive
For all these reasons, the MVNO model often looks attractive on paper: you let other companies spend all that money on capital expenditures while piggybacking off their network and paying only for the bandwidth and airtime you use – what’s not to like? But the problem with all MVNOs is they run into two fundamental rules:
- Rule 1: MVNOs can never be truly disruptive to the network operators in the market, because they rely on those very operators for connectivity and are ultimately at the mercy of those operators, who always have the power to shut them down
- Rule 2: The only MVNOs network operators are typically willing to support tend to serve a niche or a portion of the market the operators themselves can’t or don’t want to serve cost-effectively
The reality is, especially in the US, only one MVNO has ever been truly successful over the long term — TracFone, owned by Mexico’s America Movil and providing services under a variety of brands including TracFone itself as well as Straight Talk and Net10. The only reason TracFone is so successful is it goes after the very lowest end of the US wireless market, a segment extremely difficult to serve profitably if you’re subject to traditional carrier economics, and which the major carriers would rather leave to third parties than attempt to target themselves. Every other MVNO launched in the US market has either failed or succeeded by targeting a very small and focused market the carriers can’t justify going after directly. An Apple MVNO clearly wouldn’t fly in the US given these two rules – Apple would take away the most attractive customers the operators have and would do so at a substantial scale. Why would the major operators ever support this? Google Fi is relatively unthreatening because it’s currently tied to a single device with limited appeal, heavily bounded by the closed beta, and limited by Google’s inability to effectively support a large scale end user service which requires heavy customer support. I believe Sprint and T-Mobile have supported it precisely because they don’t feel it’s a threat and because they both need to increase their overall scale to compete with AT&T and Verizon.
Google and Facebook’s efforts won’t affect the US
The other idea that’s always appealing to would-be disruptors is going back to the drawing board and inventing some new way to provide wireless service. In that category, we currently have Google and Facebook’s efforts to provide wireless connectivity using airborne technologies. Google’s Loon effort uses balloons and finally has its first commercial deployment lined up in Sri Lanka, while Facebook has recently revealed the name and some details around its wireless drone project. However, both of these projects are targeted at areas where there isn’t much traditional wireless connectivity for two very good reasons: first, that’s where these companies have an incentive to grow coverage because they thereby create new potential customers in the absence of meaningful competition; and second, their technology only works in very sparsely-populated areas where single airborne vehicles can provide coverage to vast swathes of land. The efforts may be admirable (though ultimately driven by the profit motive), but they can never have a meaningful impact in a country like the US, with vast existing wireless infrastructure, huge mobile populations, and many densely populated areas. As attractive as the idea of completely new infrastructure always is to both startups and consumers, the reality is there are very good reasons why we’ve settled on the technologies we have today.
Disruption comes from within, and over the top
The only real disruption in the wireless market tends to come from two places: from within the ranks of existing providers and from those whose business models make use of rather than seek to disrupt those existing networks. Disruption from within comes in a variety of forms. T-Mobile’s moves over the last several years are a great example of this. Though a lot of what it has announced is, in reality, price discounting dressed up in disruptive language, T-Mobile has undeniably had an impact with its various Un-Carrier moves: shifting the market away from device subsidies and towards installment plans, introducing free international roaming, allowing more frequent device upgrades, and so on. Some of these have been embraced by the rest of the industry and others remain more or less exclusive to T-Mobile. But T-Mobile has done all this, not with some entirely new business model, but on the basis of betting the resulting growth will eventually offset the thinner margins it will see in the short term. It’s still using traditional wireless network technologies and is spending heavily to bring its network coverage up to par with its biggest competitors.
The other source of true disruption comes from those who target not infrastructure but the services that run over it. Over the past few years, we’ve seen first the international calling market decimated by VoIP, then carrier SMS revenues hollowed out by messaging apps, and many potential new sources of revenue for carriers scooped up by device and operating system vendors like Apple, Samsung, and Google. Whereas it’s enormously difficult to disrupt carriers on infrastructure, because new entrants are subject to at least the same constraints as the incumbents, where carriers have been far more vulnerable is on services, where their timelines have historically been years long and startups can create competing services in days or weeks. When competing services are backed by major companies like Apple or Google, those services take off rapidly and can quickly dwarf and squash carriers’ equivalents. Verizon is getting ready to launch a mobile-first video service, but I don’t know of anyone outside of Verizon who believes it’s going to be successful in the face of so many competing offerings from far nimbler players.
Commoditization and the dumb pipe
As a result of all this, carriers are faced with two of their most feared outcomes: commoditization of their core value proposition of connectivity and relegation to the role of dumb pipes, with all the differentiation and the associated profits being captured by other players. This isn’t a new threat – wired carriers have been worrying about it since the early 2000s and wireless carriers have been fighting it for the last several years, too. But it may finally be time for these carriers to start to work out how they can compete effectively in a world where essentially all the innovation in content services and communication is happening at layers of the market they don’t participate in and where they’re going to be slowly pushed back into the connectivity box.