Emerging monopolies

There was an article in yesterday's USA Today about the cellphone companies and their race to push advanced wireless services. They have to do this because basic cellphone service is not very profitable, and they also know that VoIP, enabled by WiFi and other open standard wireless systems, will inevitably eat away at cellphone use.

Sprint/Nextel, the recently merged cellphone companies, are trying to leverage 2.5 gigahertz licensed spectrum that the company owns. They bought it years ago when no one thought it was worth anything, but today, the firm thinks they have a competitor to WiMax. Sprint/Nextel owns the licenses for the spectrum in 80% of the major U.S. markets, which sounds uncomfortably like a monopoly.

But the whole next generation wireless device situation is very complex, and as we know from past experience, the best technologies don't always win the race (e.g. Betamax vs. VHS). While WiMax is probably going to be a better, open standard platform, if Sprint can offer compelling devices that offer useful services--in licensed spectrum, rather than unlicensed spectrum--Sprint could end up choking off WiMax deployment.

I'm not at all confident that the cellphone companies have much of a future. Their marketing focus has been largely dumb, with an emphasis on entertainment and novelty services like ringtones. Ringtones have been very profitable, but I don't think building your business on the interests of extremely fickle and easily bored teenagers is a good long term strategy.

The other challenge the cellphone companies face is the de facto monopoly they have on the phones themselves. By not allowing an open marketplace for phones, and instead tying phones to the company selling the service, consumers can't just go out and buy the phone they want. This also strikes me as a bad long term strategy, as it will tend, over time, to drive people to technologies and systems that offer more choice. An example of that is the Web server market, in which open source Linux has steadily eroded Microsoft's early near monopoly.

Wireless is a mess, and is likely to stay that way for some time. WiMax may bring a shakeout, but it will be two years before we see how that is going. The first WiMax is just coming out this fall, right after billions have been spent on WiFi. Not everyone is going to rush out and buy WiMax when their current WiFi systems are working just fine.

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