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Permanet, Nearlynet, and Wireless Data First published March 28, 2003 on the “Networks, Economics, and Culture” mailing list. Subscribe to the mailing list.

“The future always comes too fast and in the wrong order.” — Alvin Toffler

For most of the past year, on many US airlines, those phones inserted into the middle seat have borne a label reading “Service Disconnected.” Those labels tell a simple story — people don’t like to make $40 phone calls. They tell a more complicated one as well, about the economics of connectivity and about two competing visions for access to our various networks. One of these visions is the one everyone wants — ubiquitous and convenient — and the other vision is the one we get — spotty and cobbled together.

Call the first network “perma-net,” a world where connectivity is like air, where anyone can send or receive data anytime anywhere. Call the second network “nearly-net”, an archipelago of connectivity in an ocean of disconnection. Everyone wants permanet — the providers want to provide it, the customers want to use it, and every few years, someone announces that they are going to build some version of it. The lesson of in-flight phones is that nearlynet is better aligned with the technological, economic, and social forces that help networks actually get built. The most illustrative failure of permanet is the airphone. The most spectacular was Iridium. The most expensive will be 3G.

“I’m (Not) Calling From 35,000 Feet”

The airphone business model was obvious — the business traveler needs to stay in contact with the home office, with the next meeting, with the potential customer. When 5 hours of the day disappears on a flight, value is lost, and business customers, the airlines reasoned, would pay a premium to recapture that value.

The airlines knew, of course, that the required investment would make in-flight calls expensive at first, but they had two forces on their side. The first was a captive audience — when a plane was in the air, they had a monopoly on communication with the outside world. The second was that, as use increased, they would pay off the initial investment, and could start lowering the cost of making a call, further increasing use.

What they hadn’t factored in was the zone of connectivity between the runway and the gate, where potential airphone users were physically captive, but where their cell phones still worked. The time spent between the gate and the runway can account for a fifth of even long domestic flights, and since that is when flight delays tend to appear, it is a disproportionately valuable time in which to make calls.

This was their first miscalculation. The other was that they didn’t know that competitive pressures in the cell phone market would drive the price of cellular service down so fast that the airphone would become more expensive, in relative terms, after it launched.

The negative feedback loop created by this pair of miscalculations marginalized the airphone business. Since price displaces usage, every increase in the availability on cell phones or reduction in the cost of a cellular call meant that some potential users of the airphone would opt out. As users opted out, the projected revenues shrank. This in turn postponed the date at which the original investment in the airphone system could be paid back. The delay in paying back the investment delayed the date at which the cost of a call could be reduced, making the airphone an even less attractive offer as the number of cell phones increased and prices shrank still further.

66 Tears

This is the general pattern of the defeat of permanet by nearlynet. In the context of any given system, permanet is the pattern that makes communication ubiquitous. For a plane ride, the airphone is permanet, always available but always expensive, while the cell phone is nearlynet, only intermittently connected but cheap and under the user’s control.

The characteristics of the permanet scenario — big upfront investment by few enough companies that they get something like monopoly pricing power — is usually justified by the assumption that users will accept nothing less than total connectivity, and will pay a significant premium to get it. This may be true in scenarios where there is no alternative, but in scenarios where users can displace even some use from high- to low-priced communications tools, they will.

This marginal displacement matters because a permanet network doesn’t have to be unused to fail. It simply has to be underused enough to be unprofitable. Builders of large networks typically overestimate the degree to which high cost deflects use, and underestimate the number of alternatives users have in the ways they communicate. And in the really long haul, the inability to pay off the initial investment in a timely fashion stifles later investment in upgrading the network.

This was the pattern of Iridium, Motorola’s famously disastrous network of 66 satellites that would allow the owner of an Iridium phone to make a phone call from literally anywhere in the world. This was permanet on a global scale. Building and launching the satellites cost billions of dollars, the handsets cost hundreds, the service cost dollars a minute, all so the busy executive could make a call from the veldt.

Unfortunately, busy executives don’t work in the veldt. They work in Pasedena, or Manchester, or Caracas. This is the SUV pattern — most SUV ads feature empty mountain roads but most actual SUVs are stuck in traffic. Iridium was a bet on a single phone that could be used anywhere, but its high cost eroded any reason use an Iridium phone in most of the perfectly prosaic places phone calls actually get made.

3G: Going, Going, Gone

The biggest and most expensive permanet effort right now is wireless data services, principally 3G, the so-called 3rd generation wireless service, and GPRS, the General Packet Radio Service (though the two services are frequently lumped together under the 3G label.) 3G data services provide always on connections and much higher data rates to mobile devices than the widely deployed GSM networks do, and the wireless carriers have spent tens of billions worldwide to own and operate such services. Because 3G requires licensed spectrum, the artificial scarcity created by treating the airwaves like physical property guarantees limited competition among 3G providers.

The idea here is that users want to be able to access data any time anywhere. This is of course true in the abstract, but there are two caveats: the first is that they do not want it at any cost, and the second and more worrying one is that if they won’t use 3G in environments where they have other ways of connecting more cheaply.

The nearlynet to 3G’s permanet is Wifi (and, to a lesser extent, flat-rate priced services like email on the Blackberry.) 3G partisans will tell you that there is no competition between 3G and Wifi, because the services do different things, but of course that is exactly the problem. If they did the same thing, the costs and use patterns would also be similar. It’s precisely the ways in which Wifi differs from 3G that makes it so damaging.

The 3G model is based on two permanetish assumptions — one, that users have an unlimited demand for data while traveling, and two, that once they get used to using data on their phone, they will use it everywhere. Both assumptions are wrong.

First, users don’t have an unlimited demand for data while traveling, just as they didn’t have an unlimited demand for talking on the phone while flying. While the mobile industry has been telling us for years that internet-accessible cellphones will soon outnumber PCs, they fail to note that for internet use, measured in either hours or megabytes, the PC dwarfs the phone as a tool. Furthermore, in the cases where users do demonstrate high demand for mobile data services by getting 3G cards for their laptops, the network operators have been forced to raise their prices, the opposite of the strategy that would drive use. Charging more for laptop use makes 3G worse relative to Wifi, whose prices are constantly falling (access points and Wifi cards are now both around $60.)

The second problem is that 3G services don’t just have the wrong prices, they have the wrong kind of prices — metered — while Wifi is flat-rate. Metered data gives the user an incentive to wait out the cab ride or commute and save their data intensive applications for home or office, where sending or receiving large files creates no additional cost. The more data intensive a users needs are, the greater the price advantage of Wifi, and the greater their incentive to buy Wifi equipment. At current prices, a user can buy a Wifi access point for the cost of receiving a few PDF files over a 3G network, and the access point, once paid for, will allow for unlimited use at much higher speeds.

The Vicious Circle

In airline terms, 3G is like the airphone, an expensive bet that users in transit, captive to their 3G provider, will be happy to pay a premium for data communications. Wifi is like the cell phone, only useful at either end of travel, but providing better connectivity at a fraction of the price. This matches the negative feedback loop of the airphone — the cheaper Wifi gets, both in real dollars and in comparison to 3G, the greater the displacement away from 3G, the longer it will take to pay back the hardware investment (and, in countries that auctioned 3G licenses, the stupefying purchase price), and the later the day the operators can lower their prices.

More worryingly for the operators, the hardware manufacturers are only now starting to toy with Wifi in mobile devices. While the picture phone is a huge success as a data capture device, the most common use is “Take picture. Show friends. Delete.” Only a fraction of the photos that are taken are sent over 3G now, and if the device manufacturers start making either digital cameras or picture phones with Wifi, the willingness to save a picture for free upload later will increase.

Not all permanets end in total failure, of course. Unlike Iridium, 3G is seeing some use, and that use will grow. The displacement of use to cheaper means of connecting, however, means that 3G will not grow as fast as predicted, raising the risk of being too little used to be profitable.

Partial Results from Partial Implementation

In any given situation, the builders of permanet and nearlynet both intend to give the customers what they want, but since what customers want is good cheap service, it is usually impossible to get there right away. Permanet and nearlynet are alternate strategies for evolving over time.

The permanet strategy is to start with a service that is good but expensive, and to make it cheaper. The nearlynet strategy is to start with a service that is lousy but cheap, and to make it better. The permanet strategy assumes that quality is the key driver of a new service, and permanet has the advantage of being good at every iteration. Nearlynet assumes that cheapness is the essential characteristic, and that users will forgo quality for a sufficient break in price.

What the permanet people have going for them is that good vs. lousy is not a hard choice to make, and if things stayed that way, permanet would win every time. What they have going against them, however, is incentive. The operator of a cheap but lousy service has more incentive to improve quality than the operator of a good but expensive service does to cut prices. And incremental improvements to quality can produce disproportionate returns on investment when a cheap but lousy service becomes cheap but adequate. The good enough is the enemy of the good, giving an edge over time to systems that produce partial results when partially implemented.

Permanet is as Permanet Does

The reason the nearlynet strategy is so effective is that coverage over cost is often an exponential curve — as the coverage you want rises, the cost rises far faster. It’s easier to connect homes and offices than roads and streets, easier to connect cities than suburbs, suburbs than rural areas, and so forth. Thus permanet as a technological condition is tough to get to, since it involves biting off a whole problem at once. Permanet as a personal condition, however, is a different story. From the user’s point of view, a kind of permanet exists when they can get to the internet whenever they like.

For many people in the laptop tribe, permanet is almost a reality now, with home and office wired, and any hotel or conference they attend Wifi- or ethernet-enabled, at speeds that far outstrip 3G. And since these are the people who reliably adopt new technology first, their ability to send a spreadsheet or receive a web page faster and at no incremental cost erodes the early use the 3G operators imagined building their data services on.

In fact, for many business people who are the logical customers for 3G data services, there is only one environment where there is significant long-term disconnection from the network: on an airplane. As with the airphone itself, the sky may be a connection-poor environment for some time to come, not because it isn’t possible to connect it, but because the environment on the plane isn’t nearly nearlynet enough, which is to say it is not amenable to inexpensive and partial solutions. The lesson of nearlynet is that connectivity is rarely an all or nothing proposition, much as would-be monopolists might like it to be. Instead, small improvements in connectivity can generally be accomplished at much less cost than large improvements, and so we continue growing towards permanet one nearlynet at a time. First published March 28, 2003 on the “Networks, Economics, and Culture” mailing list. Subscribe to the mailing list.