Innovation Yin and Yang

There are two key mistakes in the public policy arena that we don’t talk enough about. They are two apparently opposite sides of the same fallacious coin.

Call the first fallacy “innovation blindness.” In this case, policy makers can’t see the way new technologies or ideas might affect, say, the future cost of health care, or the environment. The result is a narrow focus on today’s problems rather than tomorrow’s opportunities. The orientation toward the problem often exacerbates it by closing off innovations that could transcend the issue altogether.

The second fallacy is “innovation assumption.” Here, the mistake is taking innovation for granted. Assume the new technology will come along even if we block experimentation. Assume the entrepreneur will start the new business, build the new facility, launch the new product, or hire new people even if we make it impossibly expensive or risky for her to do so. Assume the other guy’s business is a utility while you are the one innovating, so he should give you his product at cost — or for free — while you need profits to reinvest and grow.

Reversing these two mistakes yields the more fruitful path. We should base policy on the likely scenario of future innovation and growth. But then we have to actually allow and encourage the innovation to occur.

All this sprung to mind as I read Andy Kessler’s article, “Why AT&T Killed Google Voice.” For one thing, Google Voice isn’t dead . . . but let’s start at the beginning.

Kessler is a successful investor, an insightful author, and a witty columnist. I enjoy seeing him each year at the Gilder/Forbes Telecosm Conference, where he delights the crowd with fast-paced, humorous commentaries on finance and technology. Here, however, Kessler falls prey to the innovation assumption fallacy.

Kessler argues that Google Voice, a new unified messaging application that combines all your phone numbers into one and can do conference calls and call transcripts, is going to overturn the entire world of telecom. Then he argues that Apple and AT&T attempted to kill Google Voice by blocking it as an “app” on Apple’s iPhone App Store. Why? Because Google Voice, according to Kessler, can do everything the telecom companies and Apple can do — better, even. These big, slow, old companies felt threatened to their core and are attempting to stifle an innovation that could put them out of business. We need new regulations to level the playing field.

Whoa. Wait a minute.

Google Voice seems like a nice product, but it is largely a call-forwarding system. I’ve already had call forwarding, simultaneous ring, Web-based voice mail, and other unified messaging features for five years. Good stuff. Maybe Google Voice will be the best of its kind.

There are just all sorts of fun and productive things happening all across the space. It was the very AT&T-Apple-iPhone combo that created “visual voice mail,” which allowed you to see and choose individual messages instead of wading through long queues of unwanted recordings.

But let’s move on to think about much larger issues.

Suggesting we can enjoy Google’s software innovations without the network innovations of AT&T, Verizon, and hundreds of service providers and technology suppliers is like saying that once Microsoft came along we no longer needed Intel.

No, Microsoft and Intel built upon each other in a virtuous interplay. Intel’s microprocessor and memory inventions set the stage for software innovation. Bill Gates exploited Intel’s newly abundant transistors by creating radically new software that empowered average businesspeople and consumers to engage with computers. The vast new PC market, in turn, dramatically expanded Intel’s markets and volumes and thus allowed it to invest in new designs and multi-billion dollar chip factories across the globe, driving Moore’s law and with it the digital revolution in all its manifestations.

Software and hardware. Bits and bandwidth. Content and conduit. These things are complementary. And yes, like yin and yang, often in tension and flux, but ultimately interdependent.

The beauty of digital networks is the ability to create micro-custom applications for macro-scale markets. Bits are bits. Anyone can “plug in” to the network. But what if there were no network to plug into?

Kessler assumes the existence of the vast, expensive, powerful networks that Google uses to deliver its search, email, and video applications. How would all our terrific digital content work without the hundreds of billions of dollars worth of new broadband networks that have been deployed over the last several years?

Take away the long-haul fiber-optic networks that connect American cities and the globe. Take away new last-mile fiber-optic, DSL, and digital cable networks to homes and businesses. Take away fast 3G wireless, 240,000 cell phone sites – and hundreds of thousands of Wi-Fi nodes. (Kessler says Wi-Fi can replace mobile networks, which is very unlikely. But regardless, who does he think operates most of the public Wi-Fi hot-spots?) Take away Apple’s iPhone, which uses Google as its chief built-in search engine.

Take away the network, and how useful are Silicon Valley’s awesome Web-based applications? You might as well travel back to 1983, when you were loading five-inch floppy disks onto your Commodore 64.

Kessler says the telecom business is dying. (“For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%.”) But the service providers are also charging too much and making too much money. (“Margins in AT&T’s Wireless segment are an embarrassingly high 25%.”) Which one is it?

Mobile phone subscribers in the U.S. use more minutes and pay lower prices than in any other OECD nation. The average price per minute in the U.S. is just 6 cents versus an international average of 16 cents. U.S. subscribers thus consume more than four times the wireless minutes (815 minutes per month) of their international counterparts (185). In the past dozen years, U.S. mobile phone voice prices have fallen by more than 87%.

It’s obvious for all to see: as old products like copper-based residential voice quickly erode, new markets like mobile data and fiber-optic video are ascendant. Are communications companies forbidden from adapting — and innovating — in this highly dynamic and unpredictable market? Can they not replace failing low- or negative margin products with successful high-margin products? Google has mastered a variant of this strategy: it subsidizes all its free products like Gmail and Voice with its super-high-margin search-and-advertising business. Good for them. Good for us.

Kessler wants to get rid of spectrum ownership, which has been a chief driver of massive investment in wireless networks. He says the  approximately $70 billion in spectrum auction payments from the big mobile carriers “all gets passed along to you and me in the form of higher fees and friendly oligopolies that don’t much compete on price.” But prices are low, falling fast, and show no signs of deterring our intense mobile phone culture. Just look around. It’s true that new technologies like smart antennas, software radios, and frequency sharing could yield a new model of spectrum management in the future. But we’re not there yet.

In place of mobile phones, Kessler writes that “Google Voice is the new competition.” But Google Voice doesn’t compete with service providers along most market axes. It’s a useful app that emulates a sliver of their product set while relying on their infrastructure.

Suggesting innovation is being stifled, Kessler asks, “How many productive apps beyond Google Voice are waiting in the wings?” Who knows all the great stuff in the pipeline? But in just 13 months, the Apple App Store has delivered an astounding 100,000 new applications. Before the iPhone, hardly any mobile apps existed. Phones were phones. Now they are true mobile computers. Zero to a hundred thousand apps in a year. With tens of new smartphone designs from a couple dozen handset makers all leapfrogging each other. Doesn’t sound remotely like a stagnant sector to me.

Oddly, Kessler wants to ban the practice that launched Apple into the mobile phone and App Store markets just two short years ago. He wants to prohibit exclusive handset deals like the AT&T-Apple iPhone or the Sprint-Palm Pre. So in the name of some abstract notion of openness, he would block the type of actual innovation represented by the iPhone phenomenon that has transformed not just the mobile phone world – but perhaps the entire computing and Internet landscape – more than any other.

Kessler’s last point is to “encourage faster and faster data connections to homes and phones.” Hear, hear! He says network speeds should roughly double each year, yielding residential broadband of 100 megabits per second by 2017. Wonderful. But does Andy think that prohibiting network providers from making any money will encourage this goal? This is a grand case of assuming magical innovation without supporting actual innovation.

It’s like insisting Google absolutely must find a way to read my mind by 2015 but capping its advertising rates such that it can’t invest in the research that would make such an amazing thing possible.

Silicon Valley innovation in digital applications is not dependent on the death of Internet service providers. Quite the opposite.

The health of the two are intimately intertwined. Innovation in the network spurs innovation in digital apps, and vice versa. Innovation yin and yang.

— Bret Swanson


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