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The Coming Death Of Wireless Contracts

I’ve recently been in the market for new wireless service given the exorbitant costs of my current contract for 4 lines with Verizon. While researching  plans, it’s occurred to me that wireless contracts in the US are headed toward extinction, but not for the simple reasons widely discussed.  Instead, we are at a unique intersection of heated competition by service providers, diminishing BOM costs for phones and commoditization of multi-band chipsets.

Heated Carrier Competition

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The failed bid by AT&T to acquire T-Mobile has initiated a period of fierce competition amongst the four major carriers. Armed with additional spectrum and cash from the breakup fee structure, T-Mobile has eliminated contracts and device subsidies while creating simpler plans for consumers to evaluate. This has applied pressure for the other 3 carriers to follow suit in offering non-contract plans that are free of subsidies as well.

Eliminating the quid pro quo of a contract agreement in exchange for a device subsidy has allowed T-Mobile to advertise lower monthly charges. To create stickiness with the customer without a service contract, T-Mobile provides an installment payment plan option to diffuse the upfront cost of a new phone. This creates a similar effect to a service contract but without the negative associations customers have with them. An interesting byproduct of this approach is the creation of a compelling option for subscribers to bring their own phone.

As an example, looking at AT&T’s plan for a family of 4 shows that non-contract plans without device subsidies are $60 to $100 cheaper per month or $1440 to $2400 cheaper over the life of the contract. Spending less than $360 per phone over a 2 year period guarantees that you will come ahead financially and not have the obligation of a contract. As it turns out, now is a great time to find a smartphone at an affordable price due to dropping BOM costs.

Diminishing BOM Costs For Smartphones

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One of the key promises of Android as an open source mobile operating system was its ability to dramatically reduce the cost of bringing a smartphone to market. The past couple of years have borne this out with Android hoarding in excess of 70% market share with phones at nearly every price point imaginable. This is a direct reflection of the drop in BOM (bill of materials) cost for developing and manufacturing smartphones. Part of this is attributable to Android and its growth and part of this is attributable to the volume in which common components are being manufactured for mobile devices.

There are a few great examples of how the drop in these costs are reflecting savings passed along to the consumer. I was at T-Mobile when we launched the first free after contract Android smartphone in 2011, implying an unsubsidized cost of $200-$350. This was a low spec phone with a barely passable user experience but it was a key milestone. Google soon followed with the development of their Nexus line of devices, establishing a pattern of high spec offerings sold off contract at a cost that just covers the BOM. In other words, Google is selling the devices at cost and not making any material profit on device sales. Other manufacturers like OnePlus are following suit. The result is a series of competitive devices selling for nearly half the price of their unsubsidized competitors without the obligation of a wireless contract.

My favorite, more recent example of diminishing BOM costs is the introduction of 3 Motorola devices in the past year: the Moto X, Moto G and Moto E. By segmenting the market into 3 tiers, Motorola offers a device for each tier that hits the value sweet spot by balancing cost and capabilities.

The Moto X is a high spec phone with a unique and innovative feature not previously seen on a smartphone: an always on microphone associated with a dedicated to capture hands-free voice commands at any time. The device is priced at $399 for the 16GB version without a contract and arguably competes well with other top tier Android devices selling for $200 more around the time of its introduction. Motorola is targeting the enthusiast demographic that is interested in having a hot and trendy phone. There’s a good 5-way comparison at digitaltrends.com showcasing the strengths and weaknesses of the Moto X compared to top tier smartphones. It’s important to note that the off-contract prices for the S4, G2, and HTC One were $550, $600 and $600 respectively at the time of the comparison, which the article fails to list.

The Moto G is a mid spec phone priced at $179 that targets budget-conscious smartphone switchers. These are consumers that have previously owned a smartphone and are looking for an economical option that still delivers a great device experience. I was surprised when my co-founder opted for a Moto G when he was shopping for a contract-free phone as I was expecting him to go for a Nexus 5 or Moto X.

Lastly, the Moto E is a low spec phone priced at $129 that targets budget-conscious first-time smartphone users. It may seem like everyone you know has a smartphone but penetration in the US is just over 50%. Nearly every phone offered by the big four carriers is a smartphone now so that penetration rate will steadily increase over time. As it does, late adopters that have relented on switching to a smartphone will be looking for budget options like the Moto E to switch.

It’s interesting to note that the differentiation in features, capabilities and experience between top tier devices (Galaxy, iPhone) and mid-tier devices (Moto X, Nexus 5) is rapidly diminishing, calling into question the value received for an additional $200-300 premium. This is driven by the commoditization and decreasing price of previously differentiated components of a device (CPU, screen, storage) and mobile operating system and app resource needs.

Commoditization of Multi-band Chipsets

Just a few years ago, the market offered few truly global phones that would work across most GSM and CDMA service providers. Nokia had the first pentaband UMTS phone in the Nokia N8 in late 2010. Since then, there has been a rapid commoditization of multi-band chipsets and the iPhone 5S is perhaps the best example. The Verizon version supports a wide variety of LTE and GSM bands making it compatible with all major US carriers and the vast majority of overseas markets. It turns out there is tremendous complexity for a universal phone that supports all GSM, CDMA and LTE bands given legacy networks and protocols, but these new multi-band chipsets go a long way to ensuring wide coverage support along with access to top speeds and low latency.

The key customer benefit of this multi-network compatibility is the ability to more easily switch carriers. Combined with lower cost phones and non-contract plans, this is positioning the subscriber with great flexibility to move to the carrier that services them best.

Conclusion

We are nearing a plateau where dollars going into additional hardware will not result in a stair step difference in features, capabilities and user experience for smartphones. It’s unclear how long this plateau will last as software consistently pushes the boundaries of hardware to realize new features and performance. Until we see the next escalation in hardware demands by the OS and apps, this plateau will help drive mid-tier phone sales and the erosion of service contracts.

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The Best Thing I Read In 2013: Going To Seed

A friend recently shared with me an incredibly moving essay. I read a lot and this is by far the best thing I read in 2013. The essay is written by John Gardner, a rather interesting and impressive individual in his own right.

“It is a puzzle why some men and women go to seed, while others remain vital to the very end of their days.  And why some people stop learning and growing.  One must be compassionate in assessing the reasons: Perhaps life just presented them with tougher problems than they could solve.  Perhaps something inflicted a major wound on their confidence or their self-esteem.  Perhaps they were pulled down by the hidden resentments and grievances that grow in adult life, sometimes so luxuriantly that, like tangled vines, they immobilize the victim.

I’m talking about people who—no matter how busy they seem to be—have stopped learning or trying.  Many of them are just going through the motions.  I don’t deride that.  Life is hard.  Just to keep on going is sometimes an act of courage.  But I do worry about men and women at whatever age functioning below the level of their potential.

We can’t write off the danger of complacency, of growing rigidity or of imprisonment by our own comfortable habits and opinions.  Look around you.  How many people whom you know well—people even younger than yourselves—are already trapped in fixed attitudes and habits?  The famous French literary historian Charles Augustin Sainte-Beuve said, “There are people whose clocks stop at a certain point in their lives.”

If we are conscious of the danger of going to seed, we can resort to countervailing measures.  You don’t need to run down like an unwound clock.  And if your clock is unwound, you can wind it up again.  You can stay alive in every sense of the word until you fail physically.  I know some people who feel that that just isn’t possible for them, that life has trapped them.  But they don’t really know that.  Life takes unexpected turns.

We build our own prisons and serve as our jail keepers, but I’ve concluded that our parents and the society at large have a hand in building our prisons.  They create roles for us—and self images—that hold us captive for a long time.  The individual who is intent on self-renewal will have to deal with ghosts of the past—the memory of earlier failures, the remnants of childhood dramas and rebellions, accumulated grievances and resentments that have long outlived their cause.  Sometimes people cling to the ghosts with something almost approaching pleasure, but the hampering effect on growth is inescapable.  As Jim Whitaker, who climbed Mount Everest, said, “You never conquer the mountain.  You only conquer yourself.”

The more I see of human lives, the more I believe that the business of growing up is much longer drawn out than we pretend.  If we achieve it in our 30s, even our 40s, we’re doing well.

There’s a myth that learning is for young people.  But as the proverb says, “It’s what you learn after you know it all that counts.”  The middle years are great, great learning years.  Even the years past the middle years.  I took on a new job after my 76th birthday and I’m still learning.

Learn all your life.  Learn from your failures.  Learn from your successes.  When you hit a spell of trouble ask, “What is it trying to teach me?”  The lessons aren’t always happy ones, but they keep coming.

We learn from our jobs, from our friends and families.  We learn by accepting the commitments of life, by playing the roles that life hands us (not necessarily the roles we would have chosen).  We learn by growing older, by suffering, by loving, by taking risks, by bearing with the things we can’t change.

The things you learn in maturity aren’t simple things such as acquiring information and skills.  You learn not to engage in self-destructive behavior.  You learn not to burn up energy in anxiety.  You discover how to manage your tensions.  You learn that self-pity and resentment are among the most toxic of drugs.  You find that the world loves talent, but pays off on character.

You come to understand that most people are neither for you nor against you; they are thinking about themselves.  You learn that no matter how hard you try to please, some people in this world are not going to love you, a lesson that is at first troubling and then really quite relaxing.

Those are things that are hard to learn early in life.  As a rule you have to have picked up some mileage and some dents in your fenders before you understand.  As writer Norman Douglas said, “There are some things you can’t learn from others.  You have to pass through the fire.”  You come to terms with yourself.  You finally grasp what playwright S.N. Berhman meant when he said, “At the end of every road you meet yourself.”

You learn the arts of mutual dependence, meeting the needs of loved ones and letting yourself need them.  You can even be unaffected—a quality that often takes years to acquire.  You can achieve the simplicity that lies beyond sophistication.

Of course failures are a part of the story, too.  Everyone fails.  When Joe Louis was world heavyweight boxing champion, he said, “Everyone has to figure to get beat some time.”  The question isn’t did you fail, but did you pick yourself up and move ahead.  And there is one other little question: “Did you collaborate in your own defeat?”  A lot of people do.  Learn not to.

One of the enemies of sound, lifelong motivation is a rather childish conception that we have of the kind of concrete, describable goal toward which all of our efforts drive us.  We want to believe that there is a point at which we can feel that we have arrived.  We want a scoring system that tells us when we’ve piled up enough points to count ourselves successful.

So you scramble and sweat and climb to reach what you thought was the goal.  When you get to the top you stand up and look around, and chances are you feel a little empty.  You may wonder whether you climbed the wrong mountain.

But the metaphor is all wrong.  Life isn’t a mountain that has a summit.  Nor is it, as some suppose, a riddle that has an answer.  Nor a game that has a final score.

Life is an endless unfolding and, if we wish it to be, and endless process of self-discovery, an endless and unpredictable dialogue between our own potentialities and the life situations in which we find ourselves.  By potentialities I mean not just successes as the world measures success, but the full range of one’s capacities for learning, sensing, wondering, understanding, loving and aspiring.

Perhaps you imagine that by age 45 or even 55 you have explored those potentialities.  Don’t kid yourself!

There’s something I know about you that you may or may not know about yourself.  You have within you more resources of energy that have ever been tapped, more talent than has ever been exploited, more strength than has ever been tested, more to give than you have ever given.

You know about some of the gifts that you have left underdeveloped.  Would you believe that you have gifts and possibilities you don’t even know about?

It isn’t possible to talk about renewal without touching on the subject of motivation.  Someone defined horse sense as the good judgment horses have that prevents them from betting on people.  But we have to bet on people, and I place my bets more often on high motivation than on any other quality except judgment.  There is no perfection of techniques that will substitute for the lift of spirit and heightened performance that comes from strong motivation.  The world is moved by highly motivated people, by enthusiasts, by men and women who want something very much or believe very much.

I’m not talking about anything as narrow as ambition.  After all, ambition eventually wears out and probably should.  But you can keep your zest until the day you die.  If I may offer you a simple maxim, “Be interested.”  Everyone wants to be interesting but the vitalizing thing is to be interested.  Keep a sense of curiosity.  Discover new things.  Care.  Risk failure.  Reach out.

For many, this life is a vale of tears; for no one is it free of pain.  But we are so designed that we can cope with it if we can live in some context of meaning.  In the stable periods of history, meaning was supplied in the context of a coherent community and traditionally prescribed patterns of culture.  Today you can’t count on any such heritage.  You have to build meaning into your life, and you build it through your commitments, whether to your religion, to an ethical order as you conceive it, to your life’s work, to loved ones, to your fellow humans.  Young people run around searching for identity, but it isn’t handed out free anymore—not in this transient, rootless, pluralistic society.  Your identity is what you’ve committed yourself to.

It may just mean doing a better job at whatever you’re doing.  There are men and women who make the world better just by being the kind of people they are.  It matters very little whether they’re behind the wheel of a truck or running a country store or bringing up a family.

We tend to think of youth and the active middle years as the years of commitment.  As you get a little older, you’re told you’ve earned the right to think about yourself.  But that’s a deadly prescription!  People of every age need commitments beyond the self, need the meaning that commitments provide.  Self-preoccupation is a prison, as every self-absorbed person finally knows.  Commitments beyond the self can get you out of prison.

For renewal, tough-minded optimism is best.  The future is not shaped by people who don’t really believe in the future.  Men and women of vitality have always been prepared to bet their futures, even their lives, on ventures of unknown outcome.  If they had all looked before they leaped, we would still be crouched in caves sketching animal pictures on the wall.

But I did say tough-minded optimism.  High hopes that are dashed by the first failure are precisely what we don’t need.  We have to believe in ourselves, be we mustn’t suppose that the path will be easy.  It’s tough.  Life is painful, and rain falls on the just.  Mr. Churchill was not being a pessimist when he said, “I have nothing to offer, but blood, toil, tears and sweat.”  He had a great deal more to offer, but as a good leader he was saying it isn’t going to be easy, and he was also saying something that all great leaders say confidently—that failure is simply a reason to strengthen resolve.

We cannot dream of a Utopia in which all arrangements are ideal and everyone is flawless.  Life is tumultuous—an endless losing and regaining of balance, a continuous struggle, never an assured victory.  Nothing is ever finally safe.  Every important battle is fought and refought.  You may wonder if such a struggle, endless and of uncertain outcome, isn’t more than humans can bear.  But all of history suggests that the human spirit is well fitted to cope with just that kind of world.

I mentioned earlier the myth that learning is for young people.  I want to give you an example.  In a piece I wrote for Reader’s Digest not long ago I gave what seemed to me a particularly interesting true example of renewal.  The man in question was 53 years old.  Most of his adult life had been a losing struggle against debt and misfortune.  In military service he received a battlefield injury that denied him the use of his left arm.  He was seized and held in captivity for five years.  Later he held two government jobs, succeeding at neither.  At 53 he was in prison—and not for the first time.  There in prison, he decided to write a book, driven by heaven knows what motive.  The book turned out to be one of the greatest ever written, a book that has enthralled the world for more than 350 years.  The prisoner was Miguel de Cervantes; the book, Don Quixote.

I hope it’s clear that the door of opportunity doesn’t really close as long as you’re reasonably healthy.  And I don’t just mean opportunity for high status but opportunity to grow and enrich your life in every dimension.

Many years ago I concluded a speech with paragraph on the meaning of life.  The speech was reprinted over the years, and 15 years later that final paragraph came back to me in a rather dramatic way—really, a heartbreaking way.

A man wrote to me from Colorado saying that his 20-year-old daughter had been killed in an automobile accident some weeks before and that she was carrying in her billfold a paragraph from a speech of mine.  He said he was grateful, because the paragraph and the fact that she kept it close to her told him something he might not otherwise have known about her values and concerns.  I can’t imagine where or how she came across the paragraph, but here it is:

Meaning is not something you stumble across, like the answer to a riddle or the prize in a treasure hunt.  Meaning is something you build into your life.  You build it out of your own past, out of your affections and loyalties, out of the experience of humankind as it is passed on to you, out of your own talent and understanding, out of the things you believe in, out of the things and people you love, out of the values for which you are willing to sacrifice something.  The ingredients are there.  You are the only one who can put them together into that unique pattern that will be your life.  Let it be a life that has dignity and meaning for you.  If it does, then the particular balance of success or failure is of less account.”

Macklemore: Restoring My Faith In Hip Hop

Macklemore and Ryan Lewis are quadruple platinum with Thrift Shop and counting – I love to see the success of a local (Seattle) artist who was down and out and is now on the rebound in a big way. Conscious hip hop by this duo is a return to to music with a greater purpose for this genre. Can Sasha Frere-Jones over at The New Yorker do a piece on him already?