Just as Verizon begins throttling the access of its heaviest mobile data users ahead of the iPhone launch, a new study predicts that smartphones could drive networks into the red in just three years, unless they innovate.
A PDF file has appeared on Verizon's website explaining its plans to curb the mobile data consumption of its heaviest users: Verizon says it "strives to provide customers the best experience when using our network, a shared resource among tens of millions of customers. To help achieve this, if you use an extraordinary amount of data and fall within the top 5% of Verizon Wireless data users we may reduce your data throughput speeds periodically for the remainder of your then current and immediately following billing cycle to ensure high quality network performance for other users at locations and times of peak demand."
The message is stark: If you're one of the one in 20 Verizon mobile data users who use your smartphone or tablet a lot, you'll find your download (and presumably upload) speed throttled occasionally for the whole month that you fall within the selection bracket. And for the next month too, probably as a deterrent. Effectively, Verizon is kneecapping its few power users to meet the data needs of the average and low-consumption users, who far outnumber them. The network is scared it'll struggle to meet the data throughput demands when millions of new subscribers join its network, waving their new iPhones proudly—exactly the problem that beset AT&T, Apple's previous exclusive partner in the U.S.
But are such tactics enough to keep networks viable as more and more users flock to smartphones? Tellabs, a medium-sized mobile phone infrastructure provider, has just published a study that suggests the answer is no. The thrust of the piece is that the rising cost of providing mobile data to an ever-hungrier public, combined with falling per-unit revenues as customers expect more data for less cash, creates a diminishing returns situation. Inside three years, it's possible that to meet the market demands, many cell phone operators could see their data business falling into the red, with costs exceeding returns from subscribers. This is assuming smartphone growth proceeds the same way it has been, and that network's business models continue as they have been.
One trick for network survival may be to innovate, but faster than they have been doing, to keep pace with the hottest trends in smartphone manufacturing.
The ravenous way people use the iPhone for mobile data was so unexpected it caught the cell networks napping. Apple spent billions developing and testing its device, and knew that it could shatter the existing smartphone paradigm, where data use was rare thanks to expense and low-value experiences.
AT&T spent close to a billion dollars on R&D in 2010 (up 18.5% on 2009) in a desperate rush to catch up with the explosion of mobile data use—and we can imagine some of this was directed at infrastructure refinements to boost the experience of millions of iPhone users, and some to ensure its upcoming 4G service is future-proof. It's trying really hard to innovate, to keep up with the innovations among its smartphone manufacturer partners. Samsung, meanwhile, spent around $3 billion on R&D in 2010, although not all of it on the smartphone market.
The industry leader in R&D spending is Nokia which, new data shows, spent $3.9 billion in 2010 alone—almost three times the average spend of its peers, including Apple. And yet, Nokia seems to be losing the smartphone war.
Samsung and Apple have spent their R&D money wisely, using it to innovate (in Samsung's case to embrace Google's Android OS and release very viable competitors to the iPhone and iPad), while Nokia's spend has gone astray, leaving it stuck with old-fashioned thinking and a sinking role in the smartphone market—even while it still sells millions of phones. Spending a lot of money on R&D isn't the total cure—you have to innovate to remain competitive.
Tellabs' data, and the expected explosion in iPhones, Android phones and 3G-connected tablet PCs that's coming this year, suggest that AT&T and its peers are going to need to spend a lot more, spend it smartly, and do so fast.
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