Tuesday, March 30, 2010

iPhone on Verizon? Time for Some Logic

With the latest in a long line of Verizon iPhone rumors recently circulated by The Wall Street Journal, it's worth commenting on the engineering logic and how it relates to a timeline for such a potential event.

First of all, I have absolutely no insight into the Apple and Verizon negotiations or plans to the extent they even exist. Second, I don't know what Apple's contractual obligations are with AT&T, including when, if ever, AT&T's exclusivity ends. But there are at least three reasons there wouldn't be an Apple-Verizon deal of any kind in 2010 or even 2011.

1. AT&T has an exclusive until time X in the future (2012, whenever).

2. AT&T simply agrees to pay Apple more than Verizon would pay Apple in order to ensure continued exclusivity. Using round numbers, AT&T currently pays Apple $600 per iPhone and sells it for $200, eating the $400 difference upfront, taking the consumer credit/fraud risk. Verizon simply may not be willing to pay as much, or AT&T may be willing to increase its subsidy in order to extend its exclusivity.

3. Verizon may just not like Apple's terms on any one or several levels, such as those relating to the AppStore, iTunes, branding, service pricing, whatever. Verizon may be of the opinion that the iPhone would clog its networks and would require some form of variable pricing for bandwidth consumed, just like we all pay for electricity, fuel for our cars and food. Basically, if you consume more, you pay more.

But let's say that none of those three points apply. Let's say that Verizon and Apple are both free to cut a deal, and that they want to do so. What are the semiconductor requirements in order to produce this Verizon iPhone device? There are two scenarios here.

Scenario No. 1: Let's say that Apple and Verizon intend to ship the Verizon iPhone before the middle of 2011. This would mean that the device could utilize the same baseband ("radio") chip currently powering the Blackberry 9550/Storm and 9630/Tour. This is a Qualcomm chip, as Qualcomm has a de facto monopoly in the market today on chips that include the requisite CDMA/EVDO/GSM/HSPA standards for worldwide coverage. This is a product that is technically possible to ship today.

Scenario No. 2: Let's say that Apple and Verizon intend to ship the Verizon iPhone no earlier than the middle of 2011. This would mean that the device could utilize the next-generation LTE-inclusive baseband chip from Qualcomm, which was introduced at the Mobile World Congress trade show in Barcelona in February 2009. Qualcomm stated at the time that it intended to sample this chip around the middle of 2010, which normally means that it could be on store shelves one year thereafter, around the middle of 2011.

Here is a central question to what must surely be part of Apple's negotiations with AT&T and Verizon alike: Will a Verizon iPhone have the exact same hardware as the AT&T iPhone when AT&T's new iPhone version appears presumably sometime this summer? Why even ask the question?

In an ideal world for Apple, it would prefer to make only one kind of hardware, common for both AT&T and Verizon. It would mean that there would be at least a technical path to users switching between networks. It would also open up a theoretical additional path for Apple to sell a device directly to the consumer, without a service contract, just like Google does with its Android Nexus One. For consumers wanting to pay $600 or more for this flexibility, this would be a great thing.

Apple has no problem making such a universal iPhone, either under scenario No. 1 (non-LTE), or under scenario No. 2 (LTE-inclusive), or both. Same thing for Qualcomm. And yet, there are two reasons it would still be unlikely for such a common device to appear in the next couple of years.

Reason No. 1: Cost. This isn't an issue for Verizon because its device must include GSM/HSPA no matter what in order to ensure international roaming. And at that point, the cost differential between a two-band GSM/HSPA chip and a four-band GSM/HSPA chip is essentially zero. However, it's a big issue for AT&T. Why? Because AT&T doesn't want to pay the "Qualcomm Tax" resulting from Qualcomm's de facto monopoly on CDMA/EVDO. AT&T has no reason to include CDMA/EVDO in any device, iPhone or otherwise. So unless Qualcomm is willing to give away this capability for free -- which is possible, but unprecedented -- this probably wouldn't happen.

Reason No. 2: Carrier rivalry. But bluntly, it may just be the case that AT&T and Verizon both want to ensure that their iPhones each are unique to each other, even if Qualcomm was to take the chip cost off the table for AT&T. Perhaps they are both afraid of Apple's power if the same device could be used on other carriers, despite the contractual two-year subsidy lockdown.

One final point is that regardless of what AT&T or Verizon do with the iPhone for the next 12 to 15 months, Sprint, through its 57%-owned Clearwire, has a one-year time-to-market advantage with its WiMax technology. Any iPhone from AT&T or Verizon operating before the middle of 2011 simply cannot compete with the superior performance afforded by the 120 MHz worth of spectrum Clearwire has at its disposal.

The first WiMax phone for the United States is the HTC EVO 4G, introduced a week ago and available this summer. It can simply do things -- such as multiple channels of HDTV -- which no iPhone can do until the arrival of LTE in a handset as early as the middle of 2011.

And even then, keep in mind that the amount of spectrum available to both AT&T and Verizon (some 20 MHz each) pales in comparison to Clearwire's 120 MHz.

If Sprint and Clearwire can bring attractive devices to market to capitalize on this gigantic advantage, all other wireless broadband operators should be very worried. This Clearwire/Sprint WiMax network is up and running in 28 markets today (covering more than 30 million people) and will be covering at least 120 million people by the end of this year. So far, only Google and HTC (in combination) have announced that they are taking advantage of this significant time-to-market advantage afforded by Sprint/Clearwire.

Will Research In Motion's BlackBerry be the next to make the move with Sprint's WiMax advantage?

Tuesday, March 23, 2010

Blackberry Faces Challenges

Firms in the enterprise market can be divided into two kinds -- very large enterprises with particular compliance requirements and smaller enterprises in which internal policing is lax.

Research In Motion's BlackBerry dominates the compliance-sensitive, large-enterprise market with essentially 100% market share. The reason for this is relatively simple: BlackBerry has a consistent record of catering to the needs of these companies. What are those needs? They all revolve around security and manageability, but most specifically they revolve around the compliance department and legal exposure.

A large compliance-sensitive enterprise that needs to protect itself against lawsuits needs to police its employees hard. It needs to ensure that the smartphone isn't used for trivial matters such as social networking, entertainment and games, just to mention some red flags. Basically, if you can't do it on your work PC while in the office, you shouldn't be able to do it on your enterprise-provided smartphone.

While it may take some time for the other platforms to match BlackBerry in the policy-enforcement, security and manageability aspects of enterprise needs, BlackBerry faces other threats along the way. Skyrocketing unemployment is one obvious problem. Old BlackBerry devices get recycled in the enterprise, and the employee joining the unemployment ranks often gets an iPhone from Apple, Google's Android or sometimes even a Palm.

Perhaps the greatest threat to BlackBerry is that its enterprise users often are stuck with two-year-old devices that are outdated in their capabilities. They don't have the new 360x480 screen resolution or 256 megabytes of memory, and therefore they can't hold or run many interesting apps. Comparing a two-year-old BlackBerry with a brand new iPhone or Android device isn't a fair comparison, but that's the comparison that people often make.

Technically, BlackBerry's newest devices, such as the 9700 Bold, are very competitive in most areas, but people are frustrated with their experiences with their old BlackBerry in the enterprise environment, causing them to "lash out" in favor of iPhone and Android. This is a calamity RIM must fight with facts and education, not with a completely useless "Love what you do" advertising campaign that was so generic that it could have applied to almost any kind of item in life.

Thankfully, RIM is getting closer to plugging some of its technological challenges. The new WebKit browser should be available as early as the June calendar quarter, although the timing could slip by a few months. The device memory will be bumped shortly from 256MB to 512MB, although frankly, a much bigger boost is needed.

New touch-screens will become available some time before the end of 2010. Two-way cameras enabling videoconferencing will likely hit the BlackBerry within the year. One could only hope for MiFi-type functionality and a WiMax version for Sprint and Clearwire before December.

So what's the competition like? Apple has made strong headway with the iPhone, plugging some security holes last June with the encrypted 3GS. Some enterprises are starting to allow it, although far from a majority just yet. Still, as of right now, Apple is the most credible threat to RIM in the enterprise, as unlikely as that would have seemed even a year ago.

Google is basically nowhere with Android in the enterprise, but this won't remain forever. Expect a traditional BlackBerry form factor, where there is a keyboard but it's not a slider keyboard, to become available in the next few short months from companies such as Taiwan's HTC, in particular. That said, Google's less-than-stellar reputation in the privacy department (Buzz comes to mind) will make the enterprise market a tough sell.

Microsoft(MSFT) has been the most credible competition to BlackBerry on pure technical merits, with great Exchange/Outlook integration. The problem has been in the ease-of-use department, and with crummy hardware. Interestingly, just when Microsoft was ready to close those gaps with BlackBerry, it launched the Series 7 Phone, which is 100% focused on the consumer, and not at all on the enterprise. As it stands, no enterprise would consider a Microsoft Series 7 Phone, which is set to become available by the fourth quarter.

This shift in focus also meant that Microsoft committed suicide in the smartphone enterprise market, because nobody believes that Microsoft will focus on its current 6.5 platform anymore.

As for Palm and Nokia with its Symbian, those competitors are essentially non-factors in the U.S. enterprise market.

The bottom line is that BlackBerry continues to reign supreme in many of the enterprise segments, but the clock is ticking. It needs to quickly adopt the best technological capabilities of the other platforms, such as iPhone, Android and Palm, before market share-losses become material. This race against the clock will play itself out, at least in terms of the critical mind share, in 2010, not in 2011.

Monday, March 15, 2010

iPad Has User Log-In Flaw

Amazingly, nobody has yet pointed out a severe usage limitation on Apple's iPad that surely will cause grief with the very first reviewers. I'll get right to the bottom line: Just like the iPod Touch, the iPhone and most or even all other smartphones, the iPad lacks multiple user profile logins, including any "Guest" login.

Think of the iPad as one big iPod Touch or iPhone. Once you've entered the password, you're in. And I mean in! You have complete access to all emails, instant messages, the address book and calendar. Contrast this with a laptop: On a PC, you may have, say, four different user logins (father, mother, son and daughter) and one generic "Guest" login. This means you can't see others' emails, instant messages, address books, calendars and any other documents created. Privacy is protected.

So why is the lack of multiple user login or a guest account such a critical flaw on the iPad, when the world of smartphones doesn't seem to have crumbled in the wake of a similar deficiency? The answer should be obvious, but I will spell it out anyway: Unlike an in-pocket smartphone, the iPad is almost naturally a somewhat communal device.

Where will you find the iPad most times? On the table, not in the pocket. What is its main purpose? To surf the Web, among many other things, of course. There is almost an expectation that anyone should be able to pick it up and use it. Just imagine the regular family of four: Residing on the dining table, kitchen counter or coffee table, the kids in the family will be jumping for the iPad at every moment. Will you tell them, "No?" Can you imagine their loud screams?

For the iPad to have meaningful utility to a productive adult, it needs to be synchronized with your personalized data using iTunes and Apple's MobileMe. But wait. By containing all this personalized data, including your emails, address book and instant messages, just for starters, the kids will be only seconds away from destroying your most valuable information -- often work-related -- on the iPad. You can see the headlines right now: "Kid Gets Password to iPad ...." Fill in the humiliating blank.

The fact of the matter is that the iPad is a lot more like a laptop than a smartphone in terms of how you need to protect your information. You wouldn't let your kids use your laptop under your personal login, with access to your emails, address book, documents, and instant messages. This will force parents and others to not sync their personal information -- through iTunes and MobileMe -- with the iPad, at which point the iPad has immediately lost a material portion of its intended utility.

It should be very easy for Apple to fix this critical flaw. In fact, Apple needs to do the same for the iPhone and the iPod Touch as well. You want to be able to lend your iPhone and iPod Touch to someone -- no matter how temporarily -- knowing that all this person can do is to surf the Web, depending on how limited you have set the permissions. The same goes for all the other smartphone systems - Blackberry from Research in Motion, Google's Android, Palm, Nokia and so forth.

Until such time that Apple fixes this critical flaw, however, this gives rise to what I predict will be the biggest complaint about the device, with the possible exception of the much-feared lack of ubiquitous multitasking. As it stands, no user in his or her right mind will dare to synch the iPad with iTunes and MobileMe. And there goes much of the utility of the device. And for those who dare, they have just signed their own personal information death warrant courtesy of their kids.

Someone told me that the solution will be for that family of four to simply buy four iPads. That may even be Apple's secret plan to beat all of its revenue estimates! Please. If there was a more obvious way to upset your new iPad owners, I can't think of one. You have just spent $500 to $830 on a device that's fundamentally less capable than a $300 laptop and immediately you're told that you need to buy four of them in order to protect your personal information. Please!

In the movie "Armageddon", one astronomer declares "We have 18 days!" until an asteroid hits Earth. Indeed, Apple, you have a April 3 deadline to fix this. You can do it. I hope. Or else the reviews won't read so well.

Tuesday, March 2, 2010

Abolish The FCC

Once upon a time, when I was a student of economics and foreign policy, we had to learn about government five-year plans to accomplish this or that. "The central government is marshaling the productive forces to build X, Y or Z for the people" and so forth. Fill in the blanks depending on the day or year. In those days, the subject geography was the Soviet Union.

Fast forward a few decades, and we now have adopted the government five-year planning syndrome right here at home in the United States. From the auto industry to the banking industry, student loans, energy policy -- you name it. The Federal Communications Commission is on the case with broadband.

So what is the pretext for this new Soviet-style FCC plan to do something with broadband? The argument goes that broadband is too slow, and that too few people have access to it. Let's first state where we are today. In terms of wired broadband, approximately 95% of U.S. households have access to cable modem, DSL or fiber optics. The 5% that don't basically live in very rural areas where the investment required to pull wires aren't paid for by users.

In terms of Internet speeds, when cable modems and DSL were first launched on a broad scale in the second half of the 1990s, speeds started at little over 1 MB/s. For natural reasons such as distance attenuation with DSL, as well as the obvious fact that investment isn't uniform, speeds have come to vary widely. Some remain stuck around 1 MB/s, whereas others get around 100 MB/s. Most people with a cable modem (priced at around $40/month) get more than 10 MB/s.

Basically, in less than 15 years, speeds have gone up by approximately 10 times on average, while prices have remained the same on a non-inflation-adjusted basis.

On the wireless side, things are more complicated. Ninety-five percent or so of Americans have access to four wireless networks: AT&T, Verizon, Sprint and T-Mobile. Other networks cover significantly fewer cities, but some of them are game-changing. In particular, Clearwire now covers 27 cities (over 30 million people) and will be at 120 million people by year-end. The primary reason wireless Internet speeds remain low today, and are typically capped at 5 GB/month, is the limited amount of spectrum used.

Really the only good thing I am hearing out of the FCC these days is the desire to privatize more spectrum. The FCC is talking about 500 MHz over 10 years. This is excellent, and indeed it should do even more. If you know why Clearwire is the only wireless operator not capping its users at 5 GB/month, it's because the company has an average of 120 MHz spectrum depth per market, which is dramatically much more than its competitors. Privatizing more spectrum is the key to better wireless.

Beyond privatizing spectrum, there is no intelligent role for the FCC.
If we want more broadband investment, the building of broadband needs to be deregulated and taxed less. Investors in broadband are now scared stiff as a result of various threats of "Net Neutrality" legislation or regulation. "Net Neutrality" is akin to rent control for apartment buildings.

As an investor, you want your company to be free to offer any service at any price and in any manner the owners so choose. Any encroachment upon this basic constitutional private property right will discourage investment in broadband.

The FCC's view of broadband appears to be: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it. We are now in the last phase, the subsidization phase. Under the guise of "universal coverage" and "stimulus," we are now going to use taxpayer money to build stuff that the market doesn't want to invest in otherwise, in part because of the threat of "Net Neutrality" regulation. It's the simultaneous stick-and-carrot from the FCC.

Whip the industry with "Net Neutrality," but hand it billions of taxpayer funds if the companies jump through certain hoops such as pull cables in very rural areas where the number of Internet users is very small. Think "The Bridge to Nowhere."

How should we encourage a sound broadband industry? I have a simple five-step plan:

1. Remove the treat of "Net Neutrality" and all similar regulations.

2. Abolish the FCC and replace it with a Spectrum Privatization Board, whose sole purpose will be to do what its title says: Sell government property to the highest bidders.

3. Declare that all telecom and technology will be 100% unregulated by the federal government.

4. Abolish all taxes on telecom and technology. The basic telecom tax was instituted in 1898 (yes, 112 years ago) in order to pay for the Spanish-American War. I believe that war ended already, and in fact Cuba has changed regimes a few times since. So we can safely remove this telecom tax now.

5. Repeat the equivalent of 1-4 above on the state and local levels.

Just look at your iPhone bill and you will see how much this nonsense adds to the cost.

The bureaucrats won't like my five-step plan above because it means that 99% of bureaucrats involved in taxing and regulating broadband would have to find real jobs, where they don't parasite upon real people who do real work. However, this five-step plan will encourage massive new investment in broadband, now that this industry would no longer be penalized. Broadband providers would be able to focus on expanding services, instead of worrying about government punishment.