Talk, Talk, Talk: So who needs streaming video on a phone? The killer app for 3G may turn out to be--surprise--voice calls Andrew Odlyzko Digital Technology Center University of Minnesota odlyzko@umn.edu http://www.dtc.umn.edu/~odlyzko Those third-generation services, combining Internet and wireless technologies, were to ring in a new era of communications. Instead, rising skepticism about their prospects, together with the staggering sums paid by carriers in spectrum auctions, helped precipitate the telecom crash. But the story may have an accidentally happy ending. The unanticipated killer application of 3G is likely to be voice, the killer app of first- and second-generation systems. This will please both investors and those eager to see effective competition to the local phone monopolies. 3G was sold by its promoters as a way to provide mobile Internet access. But the market has figured out that not only will streaming video not be feasible with 3G, it is doubtful whether it would bring in much revenue even if it could be offered. People don't want to be entertained by their cell phones. They want to be connected. Note the success of simple text messaging and the failure of content-providing Wireless Access Protocol. The good news is that 3G's higher bandwidth can be used to make room for more calls and maybe make those connections more reliable. But wait--wasn't the industry hoping to expand beyond what was seen as a nearly saturated market for voice? True, when over 70% of the population has cell phones (as in Finland today, and probably in the U.S. in a couple of years), subscriber growth will slow. However, penetration ratios ignore intensity of usage. Fact is, we've hardly begun to talk. This may seem surprising, given how often we see people using cell phones in public. However, in the U.S. the total volume of wired voice calls is still more than six times as high as that of mobile calls. This explains why cell phones are still far from providing effective competition for wired phones. And yet Americans use their cell phones more than most foreigners: more than 8 minutes per day, versus less than 5 minutes in Britain, for example. This lead stems from AT&T's introduction in 1998 of block pricing (in which, say, subscribers pay a flat fee for 500 minutes of use in a given month). Such offerings doubled the average daily minutes of use in the U.S. between 1997 and 2000. In contrast, Europe's usage per subscriber is declining. This is where 3G's enhanced bandwidth comes in. Although operators can boost the capacity of current 2G systems even without new spectrum by building more cell towers, these are infamously hard to get approved and ultimately expensive. The investments being made in 3G may not be necessary, as 2.5G would have been sufficient, but they will provide much greater voice capacity. After all the billions invested, the industry naturally is leery of price erosion. Instead it should be aiming to stimulate a quantum change in customer behavior. If prices go down by half, but usage quadruples, your revenue doubles. U.S. carriers may fret that their price per minute is down by half in the last four years, yet minutes of use are up just enough to keep average monthly bills flat. Contrast Britain, where revenue per retail user was down 20% over the past year. The essential point is that breakthrough pricing strategies, such as block deals, are needed to bring about the kind of changed social convention that transforms an industry. One logical extension would be toll-free numbers for wireless customer contacts. The biggest gains, though, are to come from encouraging more nonbusiness use. In a fascinating book, "America Calling," Claude Fischer showed that the phone industry entered a new high-growth phase in the 1920s when it abandoned the attitude that phones were for important commercial purposes only and instead started encouraging "frivolous" social uses. These served to make telephones an indispensable part of people's lives, and raised usage (and total spending) far beyond the levels envisaged by the industry's pioneers.