BLOG

“Guelaguetza” is an ancient custom among the Zapotecs of what is now the state of Oaxaca in Mexico. It is a sort of formalized exchange or barter among individuals or communities of “gifts” of work, animals, materials or food. When a giver is later in need, recipients return “gifts” equal in estimated value to those originally given. It is a way of using the community as a sort of bank, accumulating and transacting “social capital.” It essentially makes the community itself a gigantic stored value account. Individuals, of course, do this in every part of the world, but the added level of organization and formality provides a stronger glue to hold the community together.

There is a big Guelaguetza festival in Oaxaca in July. I am going to try to go this year.

There is also a restaurant in Los Angeles called Guelaguetza (at Sepulveda and Palms) that is walking distance from the JAMDAT offices. I was there last week for dinner talking to some smart people about the future of mobile communication applications, and I found a certain irony about the discussion given our venue. More on that later in this post.

(NB: Unless you are very hungry, do not get the “Molcajete Oaxaqueño.” It is essentially a gigantic bowl of various meats, very hot peppers and cactus. The cactus, with its aloe-like properties, is apparently included to act as a sort of soothing salve when your mouth is en fuego from the very hot peppers. This place is insanely good. Try the mole negro tamales.)

Here are three observations from that discussion:

1) Network operators run the risk of helping to disintermediate themselves. Not because they are stupid, but because they are smart.
There are several “VoIP Over Wireless Networks” (VOIPOWN?) companies springing up lately. Generally speaking, from a technical standpoint this is exceedingly easy to do. All you have to do is build a client (in J2ME, for instance) that talks to your infrastructure the same way a client on a PC does. Then you have to get it to the handset, which is, of course, easy to do, as long as the handset can accept an application in that manner.

You will see most of these companies stating that they only work on T-Mobile, Cingular and Nextel in North America because they can email a J2ME app as an attachment on these networks. The other requirement will be that the user have a data plan. Every data plan offered in North America is a flat-rate, all-you-can-eat deal that gets you unlimited browsing and bytes/airtime when using data applications. So technically, if the VOIPOWN company can offer calls at, say, $.02 per minute, the scales start tipping in favor of consumers.

For instance, the T-Mobile rate plan featured on their site is “700 shared Nationwide WHENEVER Minutes” for $59.99 per month. Plus, you get two lines - that’s a pretty good deal. My T-Mobile Sidekick data-only plan costs me $29.99 per month, and I get unlimited data. So say I put a VOIPOWN client on my Sidekick and make 700 minutes worth of calls at $.02 per minute. That’s an additional $14 on top of my $29.99, so at $44, that’s a bit of a discount to me over the $59.99, so I might do it if I had the same QOS, etc. I would definitely do it if I was faced with the alternative of roaming internationally and paying $2.50 per minute.

So here’s the problem: T-Mobile isn’t offering a VOIP client on the sidekick, which means they aren’t getting $.02 per call. If some other company distributed such a product and I put it on my Sidekick, such an application would definitely cost T-Mobile not only the direct cost they would incur for carrying the data over their network, but also the opportunity cost on lost voice revenue. Where does T-Mobile’s cost intersect margin on flat-fee data services? I would guess that at somewhere around 120mb/month they start losing money - maybe less.

The companies that are offering such applications are not apparently doing so with the blessing of, and commercial agreements with, the network operators. Beware if your business plan includes “going around” the carriers: At every carrier, there is a person who gets a regular report of the top 100 freeloaders costing them the most money. The network operators can, will and do deny access to companies that offer services over their networks that fall outside of the carrier’s terms of service agreement. Those terms of service exist to provide the consumer a fair price for access to media over their network while providing sufficient margin for the network operator to be a going concern. Remember Conahan’s Third Law of Mobile Media Distribution: The Network gets paid. This is smart of them. They are in the best position to continue to charge people for valuable services.

But with low barriers to entry, carriers are going to be playing a lot of whack-a-mole.

In opposition to the Third Law is a consumer mindset about data consumption that has been cultivated for years by the media and data services companies. That mindset is “flat fee, all-you-can-eat.” Remember that the early business model of the ISPs was metered access, and today the only business model that a consumer will adopt is unlimited access for a flat fee.

But that puts us on a slippery slope in the mobile data space where spectrum is a scarce resource. The reality is that the voice service that gets broadly adopted by consumers won’t be the “very inexpensive” one, it will be the “free” one. At the very least, if a VOIPOWN company went to the network operators and gave them a reasonable cut, there might be a way to bring such services to the market. But the whole reason VOIP is so valuable on the web is that it bypasses the telephone company and therefore lowers costs. The only calls I get from Europe anymore are Skype calls.

I know I’ve said it before, but it is worth saying again: Consumers will happily pay for an unsubsidized device if they can get free and near-free calling for life. If Skype made a branded device that was a free in-network calling device that only worked on WiFi networks, they would fly off the shelf. But in the meantime, if I can just get a Skype client on my handset, that will do for now because it is so much more cost-effective.

If backed against a wall on this issue, the network operators have a couple choices:

1) Have a really restrictive EULA. You simply state that users cannot do certain things (like use VOIP or stream video) with their very expensive 3G phones and their flat-rate high-speed “unlimited data” plan. This can only create bad press as you start shutting down some of your best customers because they are in fact your worst customers, in that they are actually taxing your resources. As a consumer, I have always been very suspicious of the “gym membership” business model: “We want more people to sign up and pay us every month, but we don’t want them to actually come to the gym and utilize our infrastructure.” If you use the word “unlimited” you better be prepared to accept some criticism when it is not descriptive of your service.

2) Have a very restricted user experience. Helio is a good example of this. Derrick The Early Adopter was all excited to sign up on their first day because we had met with the Helio guys and really liked their vision, their approach, the devices, the UI – I mean everything about this company was speaking directly to Derrick as a technomedia geek. But the deck is locked down, as in “cannot get an opera mini browser on my phone” locked down. So let me get this straight, my “unlimited data” plan applies to the shitty WAP browser only? That’s not “data” the way most consumers think of data. Plus, it is an insult to the beautiful Helio devices and slick UI to culminate the experience with boring WAP pages.

So while the carriers are very smartly focusing on monetizing their very valuable networks within the constraining realities of spectrum scarcity, someone (everyone) else is building a separate distributed network of WiFi and WiMAX hotspots and someone (everyone) else is building the mobile devices that access the same voice and data applications consumers have today over those networks. In the meantime, voice calls are going to free. (The latest evidence of this trend is the spate of hotels now offering unlimited free long-distance calling from guestroom telephones, long known to be the one device you should NEVER touch to make a call unless you wanted to add a hundred dollars to your expense report.)

Essentially, the network operators, by adhering to their current business model, could actually help create the impetus to build their greatest threat: If there is great enough demand for mobile VOIP, capital will pour into the opportunity to service that demand. As an example of the belief in the future value of fixed wireless alternatives, Clearwire just filed for their $400mm IPO.

So what to do? Carriers certainly shouldn’t give their shit away, and they are, after all, the gatekeepers of massively valuable infrastructure that all exists for one purpose, which is communication, which is ironically their present opportunity and their future threat.

This leads me to my second thought:
2) Communication-centric applications are the logical extension of the network operators’ core offering. The core offering is undeniably voice, but there isn’t a wireless carrier left that hasn’t had the strategic epiphany that they are in the business of providing communication, not just voice communication. I don’t think any consumer thinks of their voice call as an “application” but that is essentially what it is. My mobile device enables a great many different applications that all use a combination of the network and the device itself.

The device used to be “dumb” in that it wasn’t really expected to do anything but complete a voice call, and the processing power inside of it was basically there to power the radio and accomplish call completion. Today, we carry around what are essentially small wireless computers, the processing power of which rival the desktop computers of around 1997.

Now, as someone who achieved some success in the mobile space by slinging ringtones, it is difficult for me to say that “mobile entertainment” is not a big opportunity in general. It is. But it pales in comparison to the opportunity called “communication.” When we started Intercasting Corp, it was because our vision was about an evolution of communication. The very concept of “intercasting” is to understand where media and communication intersect. The way to exploit that opportunity is to build the applications at that intersection that provide the most value for consumers.

But what does that mean, practically? Well, if I were the owner of valuable communication infrastructure, I would be thinking about what consumers want. If communication in general is a commodity, then I would be thinking about how to add value to that commodity. The network operators have been exceptionally good at doing this, by the way. Voicemail, 3-way calling, call waiting and putting a PIM on the phone were all great ways to enhance voice communication. SMS, MMS, IM and putting a camera on the phone were all great ways to enhance non-voice communication. But all of these innovations have viewed communication principally as something that happens between two people.

We are evolving our communication habits, and point-to-point communication is becoming less relevant in a world where every teenager has a personal space somewhere on the internet that stores their pictures, personal details and collection of friends while at the same time acting as their time-shifting communication hub, often aggregating email, IM, message board, calendar and now voice calling. The cellular telecommunications industry is competing with hundreds of other communication options, ranging from picture sharing to instant messenging, and the “consumer attention account” (and wallet) is only so big. As more communication options are presented to consumers, the network operators face increased competition for relevance in a world where most modes of communication are priced well below the cost for a cellular voice call or SMS.

I know I am not telling you anything you don’t know. Every carrier business development team recognizes this simple fact about communication applications, and written on all of their white boards are names like MySpace, Facebook, Intercasting - Rabble, Air G - chat, etc. (I actually saw that exact list written on a carrier bus dev guy’s white board this week.)

But as true as this may be, there is one major competitive difference between the wireless network operators and every other form of communication: The mobile phone is a stored value account. If you look a few steps ahead, past whatever deals you think make sense in the communication application category, you can see a future where carriers can themselves reinvent their core offering to bring an even more robust experience to subscribers.

This brings me to my next observation…

3) Network operators have an opportunity to create a guelaguetza.
In some ways, this would be a radically new concept for network operators, but in other ways it would be only a small evolutionary step. I have already talked about how the carriers face potential erosion of their positions because of their business models – namely, that they are geared toward the consumer, assuming a wall-garden approach to the communication features made available to them. But networks are increasingly open, and the biggest threat to the carriers comes in the form of small software companies distributing their very valuable communication applications to consumers without vetting them through the carrier’s business development process. That’s a problem that will hopefully be solved by economic interests over time.

I say hopefully because there are many users who would like to access their:
- blog
- social networking site
- email
- photo gallery
- music collection
- VOIP provider
- etc.
…from their personal mobile communication device.

And at the moment, that personal mobile communication device is useless without the mobile communication provider that powers it. Which means the network operators are in a position to leverage the access that they provide, and the communities that they enable. Yes, a network operator’s subscriber base is a community.

ALLTEL’s Circle offering is the best example I have seen of a carrier fully understanding the value of personal community. In your Circle, you can define 10 people on any network to whom you can make unlimited calls. (For select plans.)

(Technically speaking, metroPCS and Cricket trump this offering by giving their subscribers unlimited calling to anyone for a flat fee, but ALLTEL is actually defining the experience in the context of a personal community.)

Now let’s take this concept and mash it up with Cingular’s Rollover minutes. Cingular’s marketing is brilliant, too, because it communicates to subscribers that their rate plan is in fact a stored value account. “Didn’t use all your minutes this month? No problem, they are in your account so you can use them next month.” It creates the impression that minutes are a derivative form of currency in the same way that frequent flier miles are a form of currency.

What would the result be of merging Cingular’s stored value account with ALLTEL’s Circles? A Guelaguetza. Subscribers who didn’t use all of their minutes one month could give them to someone in their circle. One of your friends who wanted to place an expensive long distance call could benefit from the contributions of several other friends, all pitching in to put enough value in your friend’s account to enable the call. Add the right kind of infrastructure, and a carrier could easily create a marketplace for minutes, making it easy for people to find each other based on need. Envision a Craig’s List portal where NON-SUBSCRIBERS can post needy messages: “Hey buddy, can you spare 5 minutes?” The result would be an innovative viral marketing success story if executed properly. Given the influence of peers on purchase decisions, if paired with a marketplace in which friends are enabled to “host” their friends on their network, this would be a near-zero-cost customer acquisition strategy. (For an industry that pays $400 per subscriber.) Think of the impact particularly on the youth segment, where teens scrounging money to top up their prepaid account resemble crack addicts looking for a fix. “Hey man, can you spare 10 minutes so I can call my girlfriend? I’ll get it back to you when I get my allowance on Friday.”

This would also be a strategic competitive block against the various communication providers all trying to disintermediate the network operators. Companies like Yahoo want desperately to be the hub of personal communication, but the one thing they can never claim is to administer their users’ stored value accounts. In fact, the network operators are in a great position to cut deals with 3rd parties based on their stored value. Want to try Yahoo’s map application or whatever on your phone? Don’t pay actual money, trade in some minutes and the first month is free. Yahoo would happily pay the cash value to the carrier to have access to a near-frictionless billing mechanism like that. Then multiply that concept many times over, for all forms of mobile data, across millions of overlapping personal networks.

I use the term “Guelaguetza” because it is descriptive of the massive marketing power and valuable relationships the carriers have with their subscriber bases – it just hasn’t been unlocked in that way yet. I guess it all comes down to who is willing to do the work to make it happen, but this would be easier than it even sounds. The big pieces are all in place already. All that is required is the glue to tie users together - the marketplace, the relationship management, etc. This could be easily outsourced. Pretty exciting stuff. Too bad I don’t run a carrier.