The reality is that nobody stays in business selling something for less than it costs -- despite the self-indulgent fantasies of dot-com startups. And in the brave new always-connected world, devices (other than Apple products) to connect may be dirt cheap, but the infrastructure that makes it all work is anything but. AT&T isn't the first carrier to observe that more is less when it comes to iPhone profits. As smartphone subscribers eat up rich media and interactive content, operational costs grow faster than ARPU.
Selling the iPhone hurt Southeast Asian carrier SingTel's operating margin by about 4%, the company told Reuters a year ago. Scandinavian carrier TeliaSonera reported a 20% decline in Danish ARPU (average revenue per user) in the two years since introducing the iPhone -- from US$38.35 to US$30.39 - according to the same report.
AT&T's move points to the future. Once upon a time, minutes were a relevant measure of telecommunications infrastructure cost. When minutes became irrelevant, that didn't mean that the infrastructure was free. Today bandwidth is the meaningful measure of infrastructure cost and average profitability per user (APPU) is more important than ARPU. The pricing model will change simply because businesses that can't sell their services at a profit won't be in business to offer high quality all-you-eat data plans.
And that will have another impact. When network operators' returns match investment, the infrastructure business - the pipe - is going to be a lot more attractive. Which, no doubt, is part of the reasoning behind Google's 1-Gbps FTTH network "experiment" that the Internet giant announced last February. Certainly, Google stands to benefit from increased use of its Web-based applications, ad revenue from the new network, and control of the underlying delivery infrastructure.
But the bottom line is that Google sees a business opportunity in becoming a traditional telecommunications company. And why not? One of the greatest beneficiaries of VoIP disruption of voice communications business was Comcast Cable - now the 3rd largest US telephone company.
For more analysis of AT&T's new pricing, read media sociologist Shelly Palmer's June 6 post, Understanding AT&T's New Limited Data Plan.
In the last two years, Google has made several forays in the voice market. After buying VoIP startup GrandCentral in 2008, Google went on to buy the peer-to-peer softphone Gizmo5. Google did nothing with these investments; suspending new customer signups for both services at the end of 2009, with the explanation that Google was conducting extended beta tests before "re-launching" the services.
Google has undoubtedly studied the history of Internet companies in VoIP; and AOL's, eBay's, and Yahoo's VoIP missteps paint an uninspiring picture, as Tom Keating noted last year.
There's a fundamental lesson: operating a telephone company has a very different imperative than operating an Internet company: subscribers have to get a dial tone when they pick up the phone - 100% of the time.
Meeting that imperative is what legacy telephone carriers are good at: performing a well-understood and clearly defined operation in real-time, with near-absolute reliability. How hard it is to achieve these goals simultaneously can be measured by how little Internet software pioneers Yahoo, AOL and eBay advanced the VoIP technology that they purchased.
Google certainly has the financial resources for building infrastructure and operations with "five nines" reliability. And Google has one advantage over legacy telecoms. It can start on Day One with the best technology - Google doesn't have to figure out how to upgrade millions of miles of copper wire.
It will be interesting to watch. Any bets? ]]>In the last two years, Google has made several forays in the voice market. After buying VoIP startup GrandCentral in 2008, Google went on to buy the peer-to-peer softphone Gizmo5. Google did nothing with these investments; suspending new customer signups for both services at the end of 2009, with the explanation that Google was conducting extended beta tests before "re-launching" the services.
Google has undoubtedly studied the history of Internet companies in VoIP; and AOL's, eBay's, and Yahoo's VoIP missteps paint an uninspiring picture, as Tom Keating noted last year.
There's a fundamental lesson: operating a telephone company has a very different imperative than operating an Internet company: subscribers have to get a dial tone when they pick up the phone - 100% of the time.
Meeting that imperative is what legacy telephone carriers are good at: performing a well-understood and clearly defined operation in real-time, with near-absolute reliability. How hard it is to achieve these goals simultaneously can be measured by how little Internet software pioneers Yahoo, AOL and eBay advanced the VoIP technology that they purchased.
Google certainly has the financial resources for building infrastructure and operations with "five nines" reliability. And Google has one advantage over legacy telecoms. It can start on Day One with the best technology - Google doesn't have to figure out how to upgrade millions of miles of copper wire.
It will be interesting to watch. Any bets? ]]>