Friday, August 27, 2010

VoIP-Smartphone Revolution Is Coming

For all the talk of dramatic change in the smartphone landscape over the last two or three years, they pale in comparison to the impact of what's next: The shift from circuit-switched voice to VoIP, or Voice over Internet Protocol. This has been talked about for 10 years, but the stars are finally aligning to hit with full force right now. Here is why:

The average U.S. smartphone monthly bill is approximately $100, plus tax. Of this $100, approximately 2/3 goes to an unlimited voice plan, and the other third to a broadband data fee for service ranging from 2 gig to unlimited.

Think about this for a moment. All the excitement of new and old apps alike, ranging from email to simple Web browsing to Facebook, Netflix, Dropbox, Twitter and numerous games -- is covered by one third of what you pay every month. In the other corner, the 100+ old app of simple phone calls eats 2/3 of your bill.

This may have been justified until recently, but Skype is now available on the iPod Touch, iPhone, iPad and other platforms. Other VoIP apps are, too, including Vonage, Fring, Truphone, 8x8 and others. Most recently, Google announced on August 25 that all calls to U.S. numbers will be free -- at least until the end of this year.

Do you now see what is so wrong with this picture? Once you bother using any of these apps -- Skype, Google Voice, Vonage, Fring, Truphone, 8x8 or any of surely many others already (or soon be) available or soon -- you are paying 2/3 of your monthly smartphone bill for nothing. Pure waste.

Did you wake up yet? I have just pointed out that a multi-trillion dollar industry may stand to lose 2/3 of its revenue once people invest in a smartphone and click to install one or several of these VoIP apps.

Of course, as with almost all changes in technology, this will not flow through the system as soon as a solution is available. It will take years to play out. But once there's a crack in the Hoover Dam ... and you can't plug it ... do you really want to invest against this trend?

Who will be the winners and losers in the market, as a result of the imminent VoIP smartphone revolution? The answer is divided into two parts: Smartphone makers and network service providers.

First, smartphone makers. There are only two devices in the market today with the ability to take advantage of the VoIP smartphone revolution, not forcing you to also pay for a traditional circuit-switched voice plan. The most interesting example is the Apple iPad. It is to my knowledge the only GSM-ecosystem device in the market with significant smartphone capability, that you can buy with a data plan only, and not have to pay for any circuit-switched voice.

All you pay is $25 per month for 2 gigs worth of data, and then you use Skype. This makes the iPad the cheapest smartphone in the market today, in terms of the monthly service fee. Yes, really. Compared to the iPhone, it saves you $70 per month, or $1,680 over two years. You hadn't thought of this, had you?

Of course, the iPad is a huge device and most people aren't going to use it "as a phone" because it doesn't fit in most pockets. But Apple has "a device for that" -- the iPod Touch. The current iPod Touch, of course, runs Skype, and you can use it with a separate data modem such as the Novatel MiFi (available from Verizon Wireless, Sprint and Virgin Mobile) or the Sierra Wireless Overdrive (available from Sprint and its partners). These types of plans start at $25 per month, mimicking AT&T's iPad data plan.

We all know Apple will be announcing a new iPod Touch on September 1. Today, the iPod Touch is the only device in its class, feeling just like a smartphone, but lacking the cellular modems of every other smartphone in the market. Apple could simply mimic the iPad and equip the next-gen iPod Touch with the same kind of embedded HSPA (or EVDO or WiMax or LTE) data modem as it has already done with the iPad. If so, it would be a pure VoIP machine, in the right size for a traditional smartphone.

If Apple were to unveil such an improved iPod Touch device, it would be the only company offering a smartphone with a monthly bill two-third lower than every other smartphone on the market. If Apple were the only company doing this, it would punctuate the sales of every other handheld communications device in the market. At that point, Apple could sell well over 100 million of these units per quarter, on a global basis. Indeed, this is at the core of my bull case for Apple stock.

That said, why would Apple be the only company offering such a device?

Of course it wouldn't. Every other smartphone maker can easily jump into this game. Every one. Skype and Google Voice, among others, could run on every OS, every device. Nokia, SonyEricsson, HTC, Motorola, RIM, Samsung, LG -- one wonders what excuse any of these companies has for not already having launched such a product.

Indeed, I will go so far as to say that the failure to launch this product represents nothing short of gigantic malpractice by all of these managements. The first company bothering with this would catapult its market share like nothing we have seen in the smartphone world to date, including the iPhone and Android.

Interestingly and paradoxically, while Apple is the only company having offered devices able to take advantage of this trend thus far -- iPod Touch and iPad -- it may be the only company restricted from launching the killer product I described above (iPod Touch with data-only modem). Why? Because its agreement with AT&T may prevent it from creating a product that so closely competes with -- and whose sales would completely punctuate -- the iPhone.

That said, if the well-publicized rumors of AT&T's deal with Apple ending by January 2011 are true, this restriction will soon be history anyway.

Conclusion on the smartphone side: Anyone stepping up to the plate and bothering to make this VoIP-only machine will be a winner -- if they do it in time. Anyone who doesn't, or takes too much time figuring this out, will go the way of the horse-and-buggy and mainframe. While Apple has the early lead here, this lead could be vaporized in a nano-second by Google and its partners -- or by anyone else.

What about the service providers? The lion's share of revenue and profit from the traditional cellular service providers comes from circuit-switched voice. With this business collapsing into the corner of Skype, Google Voice and others, it would appear to present an impossible equation for these companies. Yes, data revenue will continue to grow like a weed, but that may not be enough to replace the profits from the legacy voice business. In this light, I don't see any reason to be long any of those companies -- AT&T, Verizon, Deutsche Telekom and others.

Only one company stands out as a zero-loser in this new VoIP telecom world: Clearwire. It's the only pure 4G play, with not a penny of circuit-switched voice revenue to lose. Its network has the lowest latency -- critical for VoIP to work well -- and offers the most capacity for VoIP. As all other cellular network providers see their revenue fall by two-third over time, Clearwire's revenue should mushroom dramatically.

Perhaps Clearwire will fail anyway -- the perils of being heavily leveraged -- but if that doesn't happen, it may be the only wireless company left standing with revenue growth. Either way, it makes it a most attractive acquisition target.

So there you have it, folks: The mobile VoIP revolution is up for grabs for any smartphone maker willing to cater to this market, and Apple has the fragile early lead with the iPod Touch and the iPad. On the service provider side, this will be a blood-bath for all of them except the VoIP-only network play: Clearwire.

Tuesday, August 24, 2010

"Net Neutrality' Is Akin to Socialism

Someone has to say it. The debate surrounding so-called net neutrality proposed policies reminds me of a heavily Marxist-influenced student protest from 1968. It's all about keeping private property in name only, while regulating the product so that it can only be provided in a way defined by the government. In other words, it's a regulated utility which may just as well not be a private enterprise at all.

The "debate" regarding net neutrality is in fact no debate at all, reading 99% of the commentary on the matter. It's equivalent to the debate surrounding "rent control" in many cities, say 50 years ago. Just prohibit private property owners to run their businesses the way they want, and the consumer will benefit unequivocally and proportionately the argument goes. The government bureaucrat proposing to rob Peter and give the monies to Paul can always count on the support from Paul.

We all know what a brilliant idea rent control was. Indeed, applying the net neutrality principle to all of society, as it was ostensibly done in the Soviet Union, really catapulted the standard of living forward to new consumer friendly heights -- not.

So what is net neutrality? It's the idea that it will be illegal for anyone to purchase preferred access on broadband networks -- wired as well as wireless. All bits must be treated equally. No special privileges for anyone. A fine principle, taken straight out of Cambodia's "Killing Fields" and of every other socialist utopia attempted over the last 100 years or so.

Indeed, why limit the net neutrality legislation to broadband networks? Shouldn't all products and services in society benefit from the egalitarian principle of nobody being able to purchase a preferred service or product? Take an airline, for example. Let's establish an air neutral policy of prohibiting business class and the practice of charging people based on supply and demand for seats. Each airline seat will have a fixed price and there will be no multiple classes of service. Air neutrality will prevail in the same nirvana as on the net utopia envisioned by the Federal Communications Commission.

What are the most important products in society? Food, shelter and clothing. Without them, we would die relatively soon. We can manage without broadband, air travel, and even health care in many cases over an entire lifetime. Let's apply the net neutrality principle to food. Nobody should be able to buy "preferred" food of higher quality and better taste than anyone else. This dictates a government bureaucracy dispensing identical rations to all citizens. Think Mao's Chinese cultural revolution and great leap, and 50 million dead.

The net neutrality principle applied to shelter? Equal apartments to all. Nobody should be able to pay for a better house than anyone else. That is, except for the political elite. Did you ever pay a visit to a Moscow suburb in the 1980s?

How about the net neutrality principle applied to clothes? Nobody should be able to pay up for something differentiated or better. Government must ensure neutrality in clothing, with everyone in adult school uniforms. Think North Korea or China in the 1950s, again. I can't wait!

I could go on and on showing how the net neutrality principle is simply a warmed-over Marxist wet dream. The sad part here is that these madnesses of Marxism sometimes make it into policy, such as the innocent-sounding "rent control" which managed to destroy the living conditions in many U.S. cities for decades until they were phased out, allowing for entrepreneurial freedom and individuality.

Owners of broadband networks need to have the freedom to provide access to their properties on whichever terms they see fit, just like owners of hotels and airlines. If the consumers demand and are willing to pay for usage looking like net neutrality, chances are those service providers will find it in their best interest to supply services in that fashion. You can always get together with like-minded investors and build your own net neutral network if you think the incumbents aren't doing what they should.

We just can't have a situation -- at least not in a free non-North Korea-style society -- in which government bureaucrats dictate the manner in which private companies provide services. If this happens, we must ask ourselves why the government doesn't just expropriate Comcast, AT&T, Verizon, Time Warner Cable and others. If a private company isn't allowed to design and price its product in any manner its shareholders see fit, we simply aren't a free country anymore.

Back in 1944, Friedrich Von Hayek, who later came to receive the Nobel Prize in economics in 1974, published his most-read book -- "The Road To Serfdom" -- in which he explained that government control over the private means of production must spiral into a lack of political freedom. If people don't have control of their private property, they cannot fund political pluralism.

Hayek's book became a favorite behind the Iron Curtain, passing hands in brown envelopes because its possession could yield a labor camp sentence or worse. In the current net neutrality debate, we should heed Hayek's warning and praise the right of owners of property to be free from socialism enacted through the back door. If you like government-mandated products and services -- from food to clothing, shelter and transport -- you will love net neutrality. Those of us who value the freedoms afforded to us through our exercise of private property rights will fight net neutrality just like Ronald Reagan fought the Evil Empire.

Advocates of net neutrality tend to be the same people who complain that there hasn't been enough broadband capacity built. If broadband networks are to remain privately owned, net neutrality legislation will only serve to disincentivize investment. If the government told you how you had to use your house, offer services in your hotel, or whatever, how much would you invest in such a building? Probably next to nothing. You surely wouldn't expand. This is basic incentive theory, folks. If the government will punish you for making an investment, you're not going to do it. Enacting net neutrality legislation is simply one big discouragement of investment.

Tuesday, August 17, 2010

Superior Protection for Your iPhone 4

So you've paid $299 plus tax, perhaps bought a MobileMe membership, a car charger, an international travel charger and a superb Motorola S305 stereo Bluetooth headset, for the market's finest handheld computer design -- Apple's iPhone 4, 32-gig version. All in, you're out more than $500 plus over $100 (inclusive of tax) per month for a two-year contract. The iPhone 4 is an engineering piece of wonder all right, the new decade's equivalent of the finest Leica camera design.

The problem is now twofold: (1) You have this thing -- the iPhone 4 -- on you all the time, doing everything imaginable from text and visual communications, to reading books, listening to podcasts and engaging in business productivity; and (2) because you depend on it for almost everything, you're toast if it's destroyed.

What's the most likely reason your iPhone will suffer a hardware failure? Dropping it onto a hard surface, such as a marble floor or a sidewalk.

So what should a responsible iPhone 4 owner do to protect the two-year investment? If you're serious, may I suggest the Otterbox Defender case. It is the Mercedes 600 of iPhone 4 cases, and the price is $50 plus tax. Bottom line -- it's extremely well worth it!

There really isn't an easy way to describe the physics of the Otterbox Defender multi-layer case, except to say that it naturally adds some bulk to the very thin and narrow iPhone 4, while giving it more protection than any other case I've seen. Much of the exterior is covered in a rubber that's neither too slippery, nor too rubbery. Oh, OK, some people may have wanted it more rubbery for better grip, but that would have caused complaints among those who want to get it in and out of a pocket with ease.

Once you've spent about a minute getting the Otterbox Defender case onto your precious iPhone 4, you feel extremely secure that nothing will hurt your investment short of dropping it in the ocean or having it run over by a John Deere tractor. You would have no problem dropping it from eight feet onto a marble floor, or a regular sidewalk. Mission accomplished.

The only remaining question is whether you need all of this extreme protection. I vote in favor, but Otterbox also sells two cases of lesser protection for $35 and $20. I am not going to argue with anyone choosing either of those two because they will also provide protection superior to most other cases.

All responsible iPhone 4 owners should have a case that provides protection at least almost as good as as the Otterbox Defender. If you can't find it in the Apple store or from AT&T, you can always go to the source and order it from