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Does the mobile industry view “WiFi Disintermediation” as a threat or an opportunity? From the deals being done, I would argue there is more support for “opportunity.” But the word “disintermediation” should be a hint to the contrary. Isn’t it the incumbent that gets disintermediated?

So, Microsoft is offering a free WiFi VoIP client for mobile devices in the mobile version of Microsoft Office Communicator. (Is this the same Microsoft trying to sell their OS to the carriers that they are overtly planning to push out?)

So is Skype.

So will everyone.

And eventually voice calls will be free. And then things will get really interesting, as a new value chain completely disrupts the existing one. Mobile voice calls (and other data, mind you) will soon have a disruptive new path.

This is like digital cameras to Kodak.
Napster to the music industry.
Kryptonite to Superman.

If you read this blog often, you know that I am a proponent of walled gardens because I believe that the infrastructure investment the network operators have made should be protected to the extent possible. Walled gardens also have the benefit of creating an artificial barrier to competition outside of the environment, which benefits carriers, developers and content providers inside the walls.

But with the agreements the owners of the walled gardens are putting in place, it apparently won’t last long.

Critical links on the data communication value chain are shifting to the edge of the network. When I reference the very edge of the network, I literally mean the device in the hand of the consumer. An entire ecosystem can be built at the edge of the network that can completely disrupt the existing network status quo. The cost of deploying this costly new infrastructure can also be pushed to the edge of the network and split into little chunks that individual end consumers will happily bear if they value the total and personal effect of participating in the resultant distribution network. Let me illustrate from business history:

ZapMail
Can you envision the fax as a service? Probably not, but FedEx did when it launched ZapMail in July of 1984. Their ultimate goal was to provide consumers 2-hour delivery of faxed documents electronically via their proprietary network of 50,000 rooftop satellite dishes. Low volume customers would get their faxes delivered from the FedEx service center the same way mail was delivered, and high volume customers would have their own ZapMailer in their mail room. The ZapMailers were intentionally incompatible with existing fax machines entering the commercial market so that FedEx could establish a monopoly through their proprietary system. Problem: At $35 for five pages, businesses decided that the overnight service, at $14, worked just as well and was cheaper. After losing over $300 million they pulled the plug in 1986.

What was happening at the same time FedEx launched ZapMail was a shift from mailroom delivery to desktop delivery of faxes. Almost all the infrastructure was in place to create a global fax network without the need for an intermediary to meter out value incrementally. The last link that had to be added to the value chain was cheap fax machines that simply plugged into existing phone lines. In essence, FedEx’s centralized approach was competing with a decentralized approach. The flaw in their logic was that probably thought there was NO WAY billions of dollars worth of commercial fax machines could possibly be rolled out, so a service business made sense. But that’s exactly what happened. The bulk of the cost of the infrastructure was easily pushed to the edge of the network, to the individual consumer and business owner, because of the clear value proposition to consumers.

Voice calls as a service or free calls forever?
Now ask yourself: Would you rather get a free phone and pay $100/month forever for voice communication or would you prefer to pay $300 for an unsubsidized phone and get free (or near-free) voice communication forever? Consumers like simple math like that. So do I. I’ll take the lower-cost option.

This is why we can count on the enlightened self interest of consumers to build out the infrastructure required to collectively benefit from free voice calls. The opportunity belongs to maybe a Chinese handset maker that cannot get traction with traditional wireless carriers and is dying to get into the market. What if Best Buy or Radio Shack just started selling WiFi/WiMAX/WAN handsets? Or what if they also bundled a WiMAX phone with a WiMAX wireless router? Small businesses can plug the WiMAX router into their existing broadband connection and everyone in the vicinity can access it for free calls. Most people would.

Then a cable company would sue, stating that their EULA doesn’t allow it. Fine. In steps GoogleNet saying they happily allow consumers to use their backbone in this manner and in a few years the consumer collective, with some help from forward-looking entrepreneurs, effectively disintermediates the mobile network operators, many incumbent cable and DSL providers and incumbent handset makers who didn’t participate in the edge-of-network gold rush for fear of losing their current business with the network operators. This is not to mention the cottage industry of companies relying on the closed carrier system to support their businesses, including application developers, content providers and infrastructure providers.

Inviting the Greeks to Troy
But here is the funniest thing about the future of wireless communications: However plausible you think my idea of edge-of-network voice disintermediation is, such a distributed competitive disruptive effort may not even be required. The winners in the communication future are currently being ushered in with complicity by the very incumbents who stand to lose the most.

at&t is inviting Yahoo inside.

Vodafone is having Google over.

T-Mobile started the trend.

Say you are Yahoo and you want to convert some of Cingular’s proprietarily protected customers to your own communications suite so they can pay you. How do you get at them? Do you launch an off-deck marketing strategy complete with television ads and short codes? Build a Yahoo device and spend millions on channel marketing to try to get some share at retailers? Start your own MVNO? Integrate mobile services on your website, do a blast email to everyone and hope for conversion of Yahoo Go? (Which the Register doesn’t seem to like, but I think it’s useful. More on that later.) You need to be clever, find a back door right?

No. None of that is necessary. You just walk right in the front door and do a deal with them to distribute your suite of communication services that integrates itself tightly with the device and then slowly but surely disintermediate them. Is it valuable to a carrier to act as a messaging intermediary? You bet. Give it to Yahoo. How about picture messaging? Does it create a switching cost for your subscribers to host their photos on the carrier’s server? Sure it does. Give it to Yahoo. How about the PIM? Is it valuable to have subscribers’ contacts linked to the device that only works on your network so it is harder to simply switch over to another network? Logic would dictate yes. Give it to Yahoo. How about ringtones, games and wallpaper? Carriers make a good few bucks on those, right? Yes, but fuck it. Hand it all over to Yahoo.

Why?

Why would at&t do such a deal if the threat of losing subscribers to Yahoo existed at all? Could it be that at&t thinks they just did a content deal that will bring them more subscribers from Yahoo? In the short term, that may be true. Similarly, Vodafone doing a deal with Google to provide search may bring increased value to their users in the short term and so maybe they won’t churn out as quickly. Plausible. And when T-Mobile did the deal with Google, it probably lowered their costs of running a data enterprise in the short term. All good things – in the short term. But winning is about the long term. Fear and greed drive the market, and when things change in the future, it is going to be really bad for someone and really good for someone else. Who looks greedy to you? Who looks afraid? Who would you bet on? The worst possible historical footnote will be if the incumbent network operators are actually PAYING these websites to eventually take their customers away.

Why would Skype and Google invest in FON?

Why is Yahoo paying so much attention to WiFi?

Why are Google and Earthlink partnering to wire San Francisco with WiFi?

Troy is gone. It is called Hisarlik now, and that’s not even in Greece…
The primary value driver to the wireless subscriber today is the network that enables voice and data communication. But there is a point in the future when enough “Wireless subscribers” will also be “Yahoo subscribers” and the network access mechanism will be the least differentiable value driver, particularly if it is generally free and available everywhere. Is it at all plausible that Google and Yahoo have a plan for what happens five years from now and not just next quarter?

If you were a Trojan defending your city against a siege, would you ask the Greeks to build you a gigantic wooden horse to show their goodwill?

So back to Microsoft and their mobile WiFi VoIP client. Remember that VoIP is data. So why stop at voice? Just like the Skype client is also an IM interface, the cornerstone of Phone Call 2.0 is a multi-modal communication tool that is essentially your presence, outbound blogging infopad, personalized information center, social networking tool, calendar and messaging center all rolled into one. Thank you, God, (and the IETF MMUSIC and SIP working groups) for your glorious and enduring gift of SIP.

I have used Yahoo Go and I can say that it is not quite right out of the box for the mass market, but nothing ever is. But it is very useful to people who actually want deep Yahoo integration on their handsets because they have built their personal productivity around Yahoo products, and by the time version 3.11 rolls out it will be awesome. (3.11 was the first truly useful version of Windows. I am sure Microsoft is glad they didn’t stop at 2.0 after very little adoption. The market is there. Build it and they will come.)

I will also bet dollars to donuts that Yahoo fully understands the future value of SIP, and a future version of Yahoo Go will include a VoIP client tied to Messenger.

Better hurry though, because Sony Ericsson and Google just announced an upcoming device that tightly integrates with Blogger. Can you envision a blogging-centric device and service acting as the centralized hub of your personal communications? I can.

The silver lining
The FedEx ZapMail example is a clear case of wholesale edge-of-network disintermediation, but it wasn’t the same for Kodak when digital cameras came out, nor has P2P completely killed the music industry.

We will still need the WAN because we will still need to make calls in our cars. There will be lobbying and resultant regulatory issues using safety as their backbone – someone will draft a bill stating that every “carrier” (which will be redefined to include skype and other companies like it) must provide “essential services” like e911 access, and that access must be provided with a certain QOS to ensure connectivity, and since VoIP is a best-effort call completion mechanism, it does not qualify, and so every device must have at a minimum a WAN radio in it, blah blah, etc. etc.

But the threat to the wireless incumbents isn’t that ALL voice traffic goes away anyway, it’s that all the calls that I make from home or the office or a stationary location within reach of a hotspot (like at a hotel or a convention) go away. Simply put, voice ARPU will fall and the entire industry will adjust itself to a new, lower, level of voice revenue. This is evident, let’s not bother trying to develop a defensive position. But now would be a good time to develop an offensive strategy to evolve the business overall. (And “TV on your mobile phone” isn’t it.)

Maybe the future is meant to be different from today. Maybe the incumbents shouldn’t defend their positions because there is more value to be unlocked through mergers and consolidation. Maybe Google will buy T-Mobile USA and the result will be a better value proposition for consumers. That wouldn’t be bad at all.

This is clear: The sands are shifting, and it is creating a new category of company called the LMNO as I predicted a year ago. When mobile data traffic travels on a new value chain, there will be many ways to win, and there are many different scenarios I can envision. I wonder if one scenario will be that the incumbent network operators win. It is, after all, theirs to lose. This is a trend worth watching closely.

My opinion on 3GSM is that it has jumped the shark: It is too big, too far to go and too much to spend to not get enough done, and 600 euros for an exhibits pass is ridiculous.

I did, however, learn 3 things at 3GSM in Barcelona this year:
1) How not to interface with members of the opposite sex in Spain
2) Openness is coming sooner than I expected
3) Flash kicks much ass and is the future of device UI

1) Everyone smokes, not everyone dances. There are at least 3 people I know for whom the following phrase is meaningful:

“Fumo. Bailamos.”

As a pick-up line, it does not work in nightclubs in Palma de Mallorca, where this lesson was learned. (As luck would have it, the Intercasting Corp annual offsite strategy meeting was in Palma right before 3GSM.) No further details are available.

2) Openness cometh. (Sooneth.) More European carriers than I would have expected were very happy to discuss their “fuck it, maybe we are just bitpipes” data strategy. Following T-Mobile’s move last year to hand the keys over to Google as their default home page, several other carriers we met with mentioned openly that this was their plan, as well.

So let’s say this is the trend. What does it mean? As two of the largest properties on the internet, this spells opportunity for Google and Yahoo, as carriers want to hand the keys to someone that will bring them users. Look for similar deal announcements throughout this year, at least in Europe. It probably bodes ill for every other search engine, portal or directory. In my opinion, this is like Xerox PARC doing all the hard work developing a windows-based UI and then giving it away to Apple and M$: You spend billions of dollars building a closed network that gives you exclusive access to an incredibly valuable subscriber base and just when your opportunity to monetize that base is about to explode, you hand it over to a website.

So on one hand this is bad: It is bad for the cottage industry of companies that rely on a closed network to artificially support their businesses which are based on pushing discreet chunks of content to consumers. If you sell ringtones, non-networked games, wallpapers or anything else that is a piece of content that can be attached to an email and sent somewhere, you are facing the twilight of your existence. God help you if you came late to the party and just hired your “entertainment guy” who is going to “do deals with Hollywood” for you to energize your business. If you rely on licensing, it’s over for you: When a business that relies on a closed distribution system (like the music industry) collides with an open distribution system (like the original Napster) that business faces an uphill struggle as the mob of consumers finds a way to route around the closed system to get what they want. See my post about Surviving Openness to learn what kinds of applications you should be focusing on now for the future.

On the other hand, this is very good: Consumers win because they can get whatever they want rather than having to settle for whatever exists in the walled garden. Carriers win because their favorite data business model is “I don’t lift a finger, and I make a lot of money” and essentially outsourcing their data strategy to someone else amounts to basically charging a gigantic slotting fee, or better yet, charging an access fee for data like an ISP. In addition, they will be able to focus on their primary business in the future, which is trying not to lose users to free and semi-free WiFi-based networks. I know I will pay for QOS. Openness will also fuel off-deck marketing as companies vie for mobile eyeballs.

The winners in the open future are companies that provide services that are either inherently mobile relevant or still valuable in an open environment. The example I like to use is Match.com. As a dating site, there is no “content” of any value other than that created by the participants in the community, and the only reason they create it is to participate in the community. On the most open of networks, the internet, they still make hundreds of millions of dollars in revenue.

I think openness will be net positive for the mobile space because it will actually force the space to evolve. When it gets more difficult to compete, better solutions come to market, which benefits everyone. I don’t just mean content providers and developers, either. The whole value chain will have to evolve.

3) Flash is revolutionary. I sold my entire position in OPWV today (at a 20% profit) based on my belief that we are about to see the beginning of the shift from browser-based data services to active and compelling UI. I just don’t see how Openwave will be able to stave off the competition when you hold a WAP browser next to an active UI like Flash.

Did you go see Adobe at the show? They were impossible to find at 3GSM, but I am glad I did. Flash Lite and FlashCast are very cool. They have huge penetration in Japan, and it would be hard to imagine that the carriers in Europe and the U.S. wouldn’t want to revamp their data offerings to include an easier way to sell data to probably the most consumer segment, which is those people who have never bought data because it is simply too hard to do and totally uncompelling when they finally figure out how to do it. An active home state baked into the native UI that can quickly take you to push data services (think PointCast on your phone, not that that was successful, but as an alternative to WAP, it’s pretty cool) will be compelling to the newbie data buyer just looking for essential services like weather and sports scores. Energize a developer community (everyone already knows Flash) to build compelling applications that actually port across hadsets without the tremendous headache of BREW or J2ME, and you’ve got an absolute category killer. I am adding a position in ADBE to the Portfolimno based on what looks like a bright future for Flash as an enabler of LMNO applications. (And every other kind of application, too.)

Did you get the email from Jeff at Fierce Wireless on Friday announcing that they are starting a new sub-newsletter called FierceMoCo?

Is it just me or is this a little confusing? There are two newsletters that everyone in our industry subscribes to: FierceWireless and MoCoNews. I love them both and read them faithfully. FierceWireless is an efficiently summarized and extremely useful must-read on general industry trends and news. MocoNews is Rafat Ali’s blog-style mobile content news with commentary that provides more depth than any other source plus a good measure of opinion which has been proven overtime to be trustworthy. Between these two newsletters, the industry is pretty much covered and there is nothing else that I am required to read in order to keep my finger on the general pulse of the mobile space. I suppose the owners of these newsletters are competing for readership and advertising dollars, but I see them as complementary. I refer to them as “Fierce” and “MoCo” and whenever someone asks me to which newsletters they should subscribe I always say both are required reading.

Except now I may have to recommend another, with a name dubiously similar to one of the others. The question is whether the confusion was even necessary.

The real issue here is whether we need to segment the mobile industry so deeply at this point. It looks like the volume of activity is rising, so why not give readers a way to pick and choose which segments they want? If this is the trend, I shall soon expect to see the following:

- FierceMoMuNews, focused exclusively on Mobile Music trends
- MoCoMoTVNews, all about mobile TV
- FierceCoLiNews, focused on the voodoo of content licensing deals
- MoCoLoCoNews, Not about Location Content as you might expect, rather a treatment of the crazy shit going on in the Latin American mobile content market

(I would subscribe to all of these, btw.)

I am starting a newsletter focused on Mobile Social Software Location-Based Content and am calling it FierceMoSoSoLoBaCoNews.

(.net. Can you believe the .com was taken?)

We will publish every time something really big happens in the MoSoSoLoBaCo space. The great thing about Mobile Social Software Location-Based Content is that with FierceMoSoSoLoBaCoNews I can corner the market for readership because it is so new now but is going to be so huge. I will be THE source for news on the MoSoSoLoBaCo space. By this time next year, I expect my advertising revenue to reach well into the tens or even twenties.

You can subscribe by sending an email to FierceMoSoSoLoBaCoNews@intercastingcorp.com with the word “Subscribe” in the subject.