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September 21, 2009

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A practical question: If open network rules are applied to wireless would this ban AT&T's present practice of not allowing Skype for the iphone to work over the AT&T network? AT&T obviously does this because international Skype calls on the "unlimited" iphone data plan obviously do not give AT&T the revenue they get from a direct call billed through AT&T.

Just wondering.

It may. And I vary between fear and somewhat eager anticipation in my reaction to that.

If you think of the application stack for a phone - starting with raw radio bandwidth and working your way up to voice telephony with voicemail and web browsing - the battle here is over who gets to carve out the biggest chunks of that stack for themselves and how they're going to get paid for doing so. The carriers are the ones who bought the bandwidth at auction and put up the cell towers and laid the fiber optic. Their business to date has been based on controlling the entire voice stack, top to bottom, which lets them meter it and charge quite a lot for voice calls.

Google Voice jumps in and tries to grab a section of that stack away, everything from TCP/IP up. Obviously the phone companies don't like that. But it's not quite as simple as saying that the phone companies are evil. They built the wireless telecom infrastructure out with a certain profit expectation - that they could charge for voice calls, and that data would be a sideline mostly used for web browsing. To date that has been how the wireless business works.

But the combination of the expectation of user-installable apps and internet access blows that away. It's extremely difficult to keep people from making internet telephony apps for your device if you let them use data at all and install apps. Your average web browsing session probably uses more bandwidth than a phone call, and you can hide voice inside encrypted packets and tunnel it through web servers - as far as the carrier is concerned, phone calls can be made indistinguishable from you uploading your latest photos to Flickr.

So this is a really big problem, since the wireless carriers are set up to make money off phone calls and not off data - and since telephony is the most important application for most people AND requires very little bandwidth, it's tough to switch people over to a plan where they're billed for data and still make money.

It's an even bigger problem for the carriers since they've been fantasizing about making money off of mobile video and music and other data-intensive applications. Trouble is, if the user is being billed evenly by the byte, 10,000 minutes of phone calls and one 3 minute MTV video are going to cost about the same.

It's a problem for us rather than just for them for two reasons: one, we all rely on the wireless telephone networks, and keeping all those cell towers working is really expensive; and two, in their death throes the (rather wealthy) phone companies may thrash around and get some laws passed that seriously impede wireless data in this country for quite some time to come.

Just blowing off the carriers entirely isn't going to work, since they're the ones spending the money on cell towers and fiber optic backhaul. There's no cellular infrastructure fairy that will do that for us. But they do probably have to adjust to a new world of living off data revenues, and the rest of us probably have to re-adjust expectations for what we will pay for data.

Give it another 20 years and the idea that there was a "phone company" will seem as ridiculous as the idea of a multinational company based on morse-code telegraphy. But the transition is going to be tricky.

(The wireless companies are evil, mind you, and there is quite obviously an industry-wide price-fixing deal in effect that - were there any justice in this world - ought to send any number of execs to jail for a nice long stretch. The industry-wide jacking of the text message charge will be a textbook example of hidden anti-competitive actions in the future, I think.)

Thanks! Incredible answer. Coming from a much less knowledgeable place than you (I mostly notice the tricks and games the carriers play with pricing) I tend to apply a crude test:

If the telecoms don't like a rule I figure it is probably a good idea.

I know, I know, some rules are just plain bad, but we non-experts have to decide somehow.

So I hope the open networks rules go through and have teeth...

Exceedingly glad to see net neutrality being taken seriously - really hope this is done right and structured in: rules that are easy to change don't work well as rules, and that's too much temptation for the party that never met a rule it was willing to obey....

Jacob -- very very thoughtful response. Now let me tell you why I disagree with all of it. :) (kidding - these are of course legit issues).

First, I think it's a stretch to think that something like Google voice could put, say, Verizon Wireless out of business. But if it does, great. Lots of little carriers would buy up the infrastructure -- which would be better for many reasons.

Second, I don't like the logic of where you're going. Can cable block Hulu? Can Verizon block Vonage? It's a very dangerous game to start deciding what business models deserve to win on the Internet.

In short we can't predict any of that. google was an accident -- as was yahoo, as was email. We have no ability to predict that wireless voice is what needs to remain. And that's what we're doing -- locking in a business model. That's precisely opposite of what makes the Internet great (end-based innovation).

Also, this creates better incentives for construction. AT&T and Vz Wireless know they can't get away with creating excess scarcity. They have to expand capacity, and that leads to all kinds of good effects. And businesses risk things -- that's the idea

But at the broadest level, remember that the wireless carriers aren't bringing us the Internet. They're bringing one tiny piece of it. And even in that, they have enjoyed enormous public subsidies (spectrum giveaways in the 1980s; subsidized special access; etc).

The Internet isn't theirs, it's ours.

Oh, believe me, I am very strongly on the side of net neutrality. And when it comes to wired connections that already operate under de facto net-neutrality there are no problems.

Take what I posted above as an attempt to explain where the wireless carriers are coming from, why they're fighting this so hard on multiple fronts, and what the stakes are for us.

The problem of ensuring construction, maintenance, and updating of infrastructure is a real problem though. Wireless carriers currently spend a lot on that because they have expectations of fat profits in the future from selling voice minutes. They need to figure out a way to make enough money to support the infrastructure in a new world of data applications. Look at Iridium if you want an example of what happens when the technology is there but the business model isn't.

Not sure what you mean about a tiny piece of the Internet. So far as I know, what modern smartphone apps see is a standard, unrestricted TCP/IP network.

Pretty clearly 10-20 years from now we're going to have a wireless data network that doesn't care what applications or protocols are being used, with bandwidth so high that it is "too cheap to meter" for voice calls. If the existing wireless carriers don't do it for fear of killing their golden goose, a new data-only carrier will set up shop. The question is how we get there from here, who owns and operates that network, how far does it extend, and how much do we pay for it.

What the "net neutrality for wireless" rule does is drop a bomb on the current wireless voice business. It might take a little while to go off, but nobody is going to pay 5-10-20c/minute for voice when they can get it for free. As I noted above, since I think they're engaged in price-fixing and other anticompetitive measures, I am not shedding a tear. Quite possibly that bomb is overdue. But we need to think about the aftermath.

And while it's fun to think of Google Voice as the scrappy underdog fighting for the rights of the people, the carriers look at it as a commercial parasite sucking the blood from the entities that spent the money to build the wireless network. In reality neither view is actually true, and both entities are just profit-seeking corporations jockeying for position, which is okay, but we need to look out for our own interests. I mean, remember when Microsoft was the scrappy upstart that was going to save you from IBM? Right.

To speak for Publius, when he says wireless carries a tiny piece of the internet I think he means that internet usage on a phone tends to be limited because the screen size is so small, which makes many uses of the internet difficult. Of course this does not apply if you are using a 3G wireless modem in a laptop, that can really use some bandwidth.

Right now wireless carriers get perhaps $50/month per user on average. If everything is carried on data they can still charge $50/month on average, but users who stick completely to phone usage may end up paying a lot less than they do now.

Realistically cell calls in the US are already unlimited for reasonable monthly charges. People who really use a lot of international long distance (read immigrant communities) use 800 call-around cards they buy in convenience stores, which have rates and quality that compete favorably with Skype. Losing more of the international call market to data plans is not going to dramatically shake up the market. It just makes cheap international calling on a cell easier for occasional users. How many people actually pay the really high carrier rates to make international phone calls? Would these people tolerate the much lower quality you get with VOIP like Skype?

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