Why the Next “Universal Service” has to be Mobile Broadband

The FCC has issued its order regarding the “experimentation” with the evolution of the public network—both from TDM to IP and from wireline to wireless.  The details of the process are no surprise.  The FCC wants to understand how a modernization trend would impact the four “core values” of public safety, universal service, competition, and consumer protection.  I have my own solution.  Forget wireline completely; let natural forces drive the market.  Guarantee universal mobile broadband service instead.

Behind this order isn’t a desire of our public officials to stay up to date with technology trends, but the fact that the regulatory framework that started in the 1930s with the Communications Act and evolved through the Telecom Act of 1996 has essentially set rules that anchored operators in current practices that are increasingly unprofitable.  We now have to decide what we’re going to do about it, and one area of cost-cutting opportunity is to shed the notion that a single model of telephony (or broadband) can cover the country.

The only rational measure of the ability of a geographic area to sustain profitable communications infrastructure is the “demand density”, which is based on the combination of service opportunity per square mile and the cost of carrying infrastructure to those consumers (“pass cost” as it’s called).  By this measure, which I’ve tracked since the ‘90s, the US varies from state to state in terms of telecom opportunity by more than a thousand times.  Other countries like Australia (which I’ll get to in a moment) have similar or even larger variations in demand density, but some (generally Asian countries and much of Europe) have much better density numbers.  When we read that some country is ahead or behind in terms of telecom, we need to consider that question in the light of their natural demand density—it’s easy to set policy on communication when the services are inherently profitable.

Demand density explains a lot in the US market.  Why does Verizon decide to roll out FiOS while AT&T depends on copper-loop U-verse services?  Because Verizon has on the average seven times the demand density of AT&T.  Why do both Verizon and AT&T want to sell off some areas of their territory to independent telcos?  Because their demand density is low.  That’s also why we’re having the current “modernization” debates.  If we want to offer “universal service” to consumers we’ll need to define what services are going to be declared as the targets and what technologies are going to be permitted to meet them.

Public policy here is difficult.  Does everyone have the right to a home phone?  We’ve said “Yes” to that one all along.  Do they have a right to Internet access?  Most say “Yes” to that.  Do they have a right to stream five HD movies at once?  Well…that’s going to be tough because the cost of providing that kind of capability universally will run into the tens of billions of dollars and it’s very unlikely voters would sustain the subsidization needed.

Australia has faced this sort of problem, and they demonstrate in particular the conflict between the notion of universal service and the notion of competition.  Australia has long had a combination of a geography that’s a poster child for radical variations in demand density from place to place, and a regulatory framework that’s been called “radically favoring consumers” over providers.  The most dramatic result was the creation of NBN, the national broadband infrastructure that was to take over providing services to everyone and would, by cross-subsidizing the sour areas from the sweet ones, provide at least a decent national service level.  The problem is that in the better areas there’s pressure to allow competitors to enter the market to improve consumer services there, but these competitors would essentially be cherry-picking by selecting only high-demand-density zones and setting prices that would not provide the cross-subsidy.  So what our friends in Oz are saying is “Does everyone have the right to the same thing?”  If we make the argument they do, in communications, then does that mean that roads and public services and perhaps even cars and housing quality are also “leveled?”  Obviously that’s a major public policy decision, one that neither I nor any other single individual has the right to make in a democracy.

So what is this FCC experiment going to prove?  The answer is that it will prove that we can’t go on the way we are.  There will be a low threshold set for “broadband” service that would come under universal service.  There will be a gradual elimination of wireline services where higher-margin services can’t be profitably delivered there.  There will be an end to the “black phone” or “plain old telephone service” (POTS)—because to demand that these services continue is to demand that we subsidize nostalgia instead of subsidizing broadband effectively.  Every dollar the FCC demands operators spend at an inferior rate of return will lower the standards of broadband overall, because you can’t force public companies to invest at a loss.  What the experiment is about is proving what everyone inside the process already knows (though often won’t admit).  We will have to pick our battles here carefully, recognizing that whether we try to level the playing field on communications services through universal service funds or through a national broadband network that cross-subsidizes among subscribers, we’re not ever going to make everyone the same.  Wireline services can’t be made equal across all customers, or even “acceptable” across all customers, at costs voters will pay.

Habit changes might, though.  We are seeing a shift toward mobile broadband as people become wedded to mobile devices.  At some point, it might be that all the average consumer cares about is their smartphone, and that’s something we could make universal.  It’s this point I think the FCC should focus on.  Forget wireline; we will never get fiber to every home, or even a third of them.  Focus on universal wireless instead, because that we could do and that’s something that might eventually get public policy and public habits into sync.

How Close to “Her” Can Machine Intelligence Get?

I want to pose a question, as a prelude to looking at Amazon’s and Google’s quarters.  The question is “Is the kind of intelligence portrayed in the movie ‘Her’ possible?”  The reason for the question is that it’s clear that the notion of almost-human machine intelligence in the movie captured a lot of imaginations.  It’s also clear that deep inside the plot line there are real technical paths to explore, real opportunities to address.  For two companies whose future may depend on seizing the future, the question of “Her” feasibility is an important one.

Experts on the subject of machine intelligence, including one of Siri’s creators, are quick to point out that this movie pushes the boundaries significantly beyond the state of the art.  I agree, but I think that misses the point.  Can we make a machine so human it can provoke an emotion like love?  Probably not, but we almost certainly can make one mimic human behavior quite effectively in a controlled context.  To be sure, there are probably people who’d like to have a machine-intelligence friend/lover but most of us are just looking for machine-intelligence to be “intelligent”.

This is where Amazon and Apple and Google come in.  Leaving aside those who want machine relationships and not intelligent answers, mobile broadband sets contextual boundaries on what people would look for from machine intelligence.  I think I mentioned that the number one contextual question from a mobile user is “What’s that?” (closely followed by “Where am I?”)  The combination of location, the specific visual focus, and the social context of a question considerably narrows the field of what’s expected, which makes it far easier to generate a machine response.  You can imagine the rules associated with carrying on a conversation in abstract, then imagine the rules that are associated with someone walking down a street.  In the latter context, the most likely conversations would be related to location/surroundings, so you could quickly tune voice recognition to preference this sort of inquiry.  And if you could do this, you could create contextual mobile broadband services that people would buy.

According to Juniper Research, mobile users will spend $75 billion on apps by 2017.  To put this into perspective, that’s more than the global telecom industry is expected to spend on IT in that same year (Ovum).  How much money might be earned by supporting users in contextual services?  I think, a lot, which is significant when you consider this in light of the recent numbers from Amazon and Google.

In Amazon’s case, you have a good story that wasn’t good enough; profits and revenues beat but not by as much as the Street had hoped for.  What was most interesting about Amazon’s story in our view was that the cloud (AWS) didn’t really figure much into Street commentary.  Why that’s notable is that if you pull out the notion of the cloud, then Amazon is nothing but a low-price online retailer and it’s really hard IMHO to justify the heady share price.  I don’t think Amazon would be pushing the cloud if it didn’t think it had to, and yet the Street is focusing on its old-line retail business.

Amazon is in fact the largest and (currently) the most innovative player in the cloud space, but it’s just hitting growth targets and not blowing them away, despite the fact that it’s doing a lot in a technical sense to make its cloud better.  The expanded model of platform services in the cloud is something Amazon has down perfectly, and exploits nicely with its Kindle.  But Amazon needs to be a mass-market cloud player just like it needs to be a mass-market retailer, perhaps even more so.  That means going beyond simply supporting Kindle to supporting the contextual service model that “Her” suggests is possible.

Some will say this argues for Amazon getting into the phone business, which many believe they will at some point.  Actually fielding a smartphone and becoming an MVNO might in fact work for Amazon.  The problem is that an Amazon phone might also be a major diversion at a time when Amazon doesn’t need one.  The thing Amazon needs is a set of apps that can exploit AWS to mobile broadband users wanting contextual services.  It doesn’t have to be linked to an Amazon phone; the profits would be better as a standalone and it would likely provoke a less dramatic competitive response.

Google has, perhaps, an even greater motivation.  Google’s in-line results would very possibly have led their shares downward had it not been for the story that Google was looking to shed its Motorola handset business, whose margins and potential for growth the Street never liked.  Google is now clearly counterpunching with Facebook in its positioning of mobile, and that is where I think they’re making a mistake.

At a high level, the Google decision (if proved) to shed mobile handsets is an indication that it’s not going to make mobile/Android directly profitable.  Google is also admitting, with its new assertion that media is media and mobile is just one place to get it, that it’s not going to be able to lead in mobile advertising.  Thus, they want to play down the value of the whole category.  The problem is that, as I’ve been saying, online advertising is largely a zero-sum game and if Google takes a decisive step away from being a “mobile player” and asserts “mobile advertising” is just another face of the ad coin, it’s positioning away from some piece—perhaps the largest piece—of that zero-sum pie.  That makes it a less-than-zero-sum for Google.

There is no player in the market who should have a better handle on contextual services than Google (except perhaps Apple, who appears equally clueless).  They have all the pieces, including mapping, search, social networking chat and voice calling—there are few elements missing from that picture of context, except perhaps for the will to drive it forward.  Given how the movie resonates with people for what networked intelligence and context could combine to do, maybe Google (or Amazon, or Apple) will finally get it.  We can’t get to “Her” but we might get closer than anyone thinks.