Free for all? Why mobile operators fear the end of phone calls

Onlookers film and photograph a burning car during the riots in London. They might have then circulated it for free. Photograph: Michael Bowles/Rex Features

The August riots pushed the popularity of BlackBerry Messenger into the public consciousness, with the teenagers' mobile (or "mobe") of choice revealing itself as the perfect tool for organising spontaneous – er – mobbing.

Until the chaos erupted, I suspect most of BlackBerry's suit-wearing users, who rely on the phones for their office email, had little idea that the gadgets had taken off with such a different demographic.

But those without companies to pay their phone bills have found a way to get something for almost nothing – and legally. Armed with an unlocked, secondhand BlackBerry and a SIM-only contract from T-Mobile costing just over £10 a month, BBM (BlackBerry Messenger) messages are free and unlimited. If all your friends are messaging, there is no need to spend any money at all on calls and texts.

The way we use our phones is a neat example of a two-tier society, and BBM is just the tip of the second tier. In the jungle of applications now available to smartphone users, those that use the internet to offer free voice calls or messaging are emerging from the undergrowth.

Mobile phone networks have been worrying for some time about how these "free" services would eat into their profits once they became mass market. A quick look at the numbers now using them suggests the threat is no longer theoretical.

WhatsApp, based down the road from Google in Mountain View, California, is a text message alternative that works on most handsets, including BlackBerrys, iPhones, Android and Windows Phone devices. Launched in 2009, it uses 3G or Wi-Fi, has been downloaded onto more than 10m phones, and now carries over 1 billion messages a day. (That compares to about 6bn SMS messages sent daily in the US alone.) It can carry text, but also photos and videos, saving a packet on the extortionate fees charged by operators to send a picture message.

Viber, which offers free international calls and text messages, has been downloaded 30m times. Rebtel, with a similar service, has 14m users, and video calling application Tango 20m followers.

"Over-the-top" services (so-called because they piggyback on the mobile phone networks without bringing them any revenue) have come out of the trenches and are rushing headlong towards us.

There are stumbling blocks. Because they are free, these over-the-top services do not yet make big money for their creators. There are exceptions: Rebtel, which can connect you to a phone not on its network and charges for that, has revenues of $60m a year. With a swathe of rival brands competing for our attention alongside similar products from big beasts like Google and Facebook, many will fall by the wayside.

And of course using WhatsApp or Viber is only free if the person at the other end subscribes. Like Skype, which also has a mobile offering, they are only useful for communicating with people you are likely to speak to on a regular basis.

Whatever the hurdles, the numbers are growing. Downloading WhatsApp this week, I found that out of over 900 work and personal contacts on my phone, some 70 are already signed up. Less than 10%, but more than I expected.

At the Telco2.0 conference in November, senior executives from the telecoms industry were polled and predicted text messaging revenues would decline by 37% in three years, and voice revenues by 21% over the same period. They blamed cuts imposed by the European Commission on the price of calling a mobile, as well as competition from rival operators. But the biggest factor, they believed, would be responding to price pressure from over-the-top alternatives.

In fact, 2011 has been a year of mobile phone tariff inflation, as the likes of Vodafone, OrangeO2 try to mitigate the impact of the price cuts imposed by European regulators. and

Working out how to maintain revenues at their current levels is a multi-billion dollar question. But price increases in cash-strapped times may simply drive more consumers into the arms of free alternatives. The two-tier mobile culture is here to stay.

Windows Phone or Windows 8 on tablets? Only one will sell. Guess which

A business traveller using a tablet. Now, is that Office on there? Should it be on there? Will it ever be on there? Photograph: Ariel Skelley/Getty Images

Last week, I popped into a branch of Phones4U and picked up a SIM-free Lumia. The suspense was starting to kill me - was this a device that was going to make Microsoft relevant the smartphone space or not?

(Spoiler: I'm not sure. I've given myself until January 1st to decide whether to keep it, or trade it in for an iPhone 4S.)

But here's something - why on earth is Microsoft insisting that a tablet form factor has to be based on Windows 8? The Windows Phone OS would do the job just fine. Apart from one thing. Money.

Mood music

It's coincidental that I bought a Windows Phone smartphone around the same time that there was some chatter about Windows 8 being 'largely irrelevant' to traditional PC users and Windows 8 tablets being too late to hold consumer interest. The "mood music" on Twitter is not good in this regard … a good number of Microsoft specialists that I follow particularly closely are really starting to talk down Windows 8 tablets. In fact, it feels a little like the knives coming out for RIM around the time that people started to twig that PlayBook was not really all that. Here's a taster between James Kendrick and Mary-Jo Foley: @maryjofoley Windows 8 is increasingly seeming not like a work in progress, but a work in question.

The iPad's not a Mac

Do you remember that there was a time before iPad? I just about do … one thing I dimly remember was that no one proposed putting OS X on the thing. When it was launched, people tended to assume it would be a big iPhone and run the iPhone OS accordingly. Sensible move - small device, small OS.

Last week I wrote a piece on running a Windows-based development environment in the cloud. One standout thing from that experiment is that I only need a proper, full-on personal computer to do development - anything else I do with a computer I could happily write this on an iPad with a decent keyboard. I could happily do most things on an iPad. (Today, Harry MacCracken ran a much-tweeted piece on how the iPad 2 became his favourite computer, which reflects this idea.)

And now I own a Lumia. If I switch it on and play with it, it's pretty obvious that if this had a bigger screen and a Bluetooth keyboard, I wouldn't need a Windows PC in exactly the same way that having an iPad means that I don't need a Mac. If Windows Phone can do (generally) everything that an iPhone can do, a Windows Phone with a 10" screen should be able to do everything that an iPad can do.

So far though the message has been that as well as "immersive", Metro-style apps the big win for Windows 8 on ARM processors (the chip architecture that driving the smartphone revolution) is that you'll be able to run "normal" (what some call "legacy") Windows apps. That's a massive deal, the biggest of all the big deals. If you can by something that looks and feels iPad-esque but which runs Windows apps, that's really something. And it's worth the market waiting for. It's a strong differentiator to the iPad, and like all good differentiators its not easy to emulate.

But what's this? Mary-Jo Foley, the experienced Microsoft reporter, suggests that legacy apps won't be supported on Windows 8.

Oh.

What does that leave us with?

What do you call a tablet that's not an iPad, costs as much as an iPad, has less available software that the iPad, offers about the same user experience (UX) as the iPad, doesn't run normal Windows apps, can run Office apps, and reaches the market in Q4 2012 or Q1 2013? I think they call that a Windows 8 tablet. If I run the "punditry" app on my Lumia, I can see future headlines like "lacklustre sales" and "iPad storms the corporate world".

OK. So what do you call a tablet that's all those things, which runs Windows Phone rather than Windows 8, and is the hands of consumers in Q1 2012? I think you call that a decent competitor to iPad. Refresh my "punditry" app and I see headlines like "iPad sales challenged by Microsoft's tablet play" and "huge increase in MSFT stock price".

Moreover, without native apps, what on earth is the point of a Windows 8 tablet? There's only one differentiator that I can think of: Xbox. Hardly relevant to business.

Microsoft's entrenched thinking that a tablet has to be Windows 8-based is part philosophical, part commercial. Microsoft likes the idea of Windows Everywhere and wants to converge on a point of common engagement.

Commercially though, life is much bleaker. Microsoft makes most of its money from Windows and Office licenses. In fact the Windows division last quarter generated 28% of revenues and 57% of its profits, and the Office division generated 32% of revenues and 65% of its profits.
Yes, I know - that's 122% of profits. The reason it's 122%, not 100%, is because Bing burns money nearly twice as fast as it collects it, and because of other internal financing adjustments, which all subtract from the bottom line. (Here's a breakdown from October.) Here's the point: Windows and Office are the twin pillars of Microsoft's income. You - or Steve Ballmer - mess with them at your (his) peril.

Now, Microsoft charges OEMs far less for Windows Phone licenses (about $15 per unit) than for full-on Windows licenses (on average, working out to about $56 per unit).

Although there isn't much room in the bill of materials for a full-on Windows license in an iPad-competing tablet play in any case, iSuppli suggests it costs around $330 to build an iPad 2; adding a $56 Windows license would up the cost to around $386.

Now send your OEMs out to compete with Apple, selling iPads at retail for $499 (assuming Apple doesn't lower the price next year before Windows 8 tablets come out.) Apple has $169 of headroom to play with in its wholesale pricing to the retailer; the Windows 8 tablet OEM has $113. So Apple starts with an advantage: in a price war, it can make the first move.

That $113 now has to be split with the retailer. Assume that our OEM splits it 50-50 with the retailer, and retains $65 profit on a device sold at retail for $450. Not bad - except that $65 has to cover the logistics, marketing (why is yours better than BigOEM's Windows 8 tablet?), sales, and any variation in component prices. If you want to know how it will probably pan out, look at HP, the world's biggest PC OEM, which makes about $40 per $800 PC (average price) it sells, or 5% profit. (Notice that Microsoft makes about $37 profit per Windows licence - almost the same as HP.)

If the OEM can keep those costs down, say to $20 per tablet, then it's looking at $45 profit on a tablet sold wholesale for $450. And praying Apple doesn't lower iPad prices. Or that a bigger competitor doesn't undercut it. If all this sounds like "Mr Micawber's Tablet Business", well, that's because selling tablets turns out to be as easy as taking sweets from a baby. A baby tiger, being guarded by its mother.

Meanwhile, in this scenario, Microsoft's executives are back in Redmond, happily counting the $37 profit per tablet. For Microsoft, it's the classic "innovator's dilemma" - should you ruin income from one market on the hope of making it big in another? This scenario says: it probably won't.

Yet if Microsoft were to allow OEMs to use the cheaper Windows Phone licence, then the device price before wholesale is $345, and the headroom to the $499 retail price is $154 - much closer to Apple's. That difference gives far more wriggle room in every department - price, components, advertising. What's more, Windows Phone could look rather good on a tablet. It could sell - at least as well as a pricey Windows 8 ARM one. After all, Windows Phone includes Office and Office 365 in ways that tie people in to their existing Office licences.

But for Ballmer and the team, this is the bad news scenario. Only $15 per licence? And even less in profit? Compared to $37 in profit? It's a money-loser, people.

In Microsoft's case, though, there's another reason to wonder about tablets. It's this: will customers stump up for full-on Office licenses for a tablet? We have heard murmurs that Microsoft is apparently developing an Office version for the iPad, but how much will it cost? Apple's kinda-sorta-Office-competitor for iPad - the iWork suite of Keynote, Pages and Numbers - costs £7 a pop. Documents To Go, a popular Office-compatible productivity app for for Android and iOS, goes at £7 for the whole set. Not that businesses buy at retail, but a one-off Office Professional 2010 license from PC World costs £215. So that $499 becomes more than $600, even with a business licence.

Yes, but don't people need Office on tablets? Actually, look at it this way: the iPad has alreadyanything if Microsoft can't sell an Office license to go with it. There's little net gain. Soi maybe there'll be no Office for iPad. Perhaps that will be the differentiator between Windows 8 tablets and the iPad. done pretty well in business without Office, so perhaps there's an argument that it doesn't need Office at all, and won't get it. A device where Microsoft can't make the same per-install profit as it can with Office on a PC also kills off one of the pillars of the business. The device might as well run Android, or iOS, or webOS, or

I'm looking forward however to Microsoft explaining how ARM tablets won't support legacy apps and yet will run Office. That implies a port of Office to WinRT, or a port of the web-based Office 365 to run locally. Neither of those options sound doable in the timescale - I suspect we'll see a Windows 8 on ARM launch without Office. [Then again, Steve Sinofsky showed off Microsoft Word running on an ARM chip at CES in January 2011, so perhaps it will - Tech.Ed].)

Conclusion

Can anyone think of a previously dominant tech company that allowed the market to change under its feet while it thought its way was the right way? If you answered "RIM", we're on the same page. Microsoft's behaviour – the steadfast insistence on cramming Windows 8 onto the iPad-clone – is bleeding time and market share. And the hilarious (well, OK, tragic) thing is that it's unnecessary.

Microsoft could throw rocks out of any building on the Redmond campus and hit ten OEM partners falling over themselves to build as-good-as-the-iPad hardware on which the Windows Phone OS could be run. A little bit of development, a lot of testing and they're off and running. At least that's the (easy) technical side to the problem. Commercially, well, it's easy to say "jump over that cliff, you'll be fine". But having the guts to do it is another thing entirely.

So my Lumia is probably going to remain alone in having Windows Phone. No tablet to match. Oh well.

PlayBook writeoff means RIM's tablet has been a $1.5bn mistake

RIM's PlayBook: people have been sizing it up and finding it wanting, with fewer than a million shipped in three quarters. Photograph: Action Press/Rex Features

The PlayBook is beginning to look like the worst and most expensive decision that RIM, the maker of the BlackBerry smartphone, ever made.

Not only that: preliminary results issued by the company on Friday indicate that it is struggling to maintain pricing of its flagship phones, even though the new devices introduced last quarter were meant to push that pricing up.

The company announced on Friday that it is writing down the value of unsold PlayBook tablets in its warehouses by $485m, which will be taken as a charge against its pre-tax profits for the third quarter which ended in November.

That announcement indicates that RIM has now given up hope of charging the original price - which began at $399 for the 7in version, the same price as Apple's 10in iPad.

Told you so

The Guardian drew attention to the enormous growth in RIM's inventory at the end of the previous quarter, pointing to the way that it had begun to balloon as soon as RIM began receiving finished PlayBooks from Far Eastern factories. Here's the graph:

RIM inventory by value from Dec 2002 - August 2011. Source: RIM accounts

Now RIM has had to recognise the reality: it's not going to get its money back on them. It's unclear whether the writedown effectively takes the value of the tablets in inventory down to zero, so that they can now be sold at a profit. But that would probably be the smart thing.

The big question is, how many PlayBooks are there sitting around that haven't even been shipped to retailers in RIM's warehouses? ISuppli put the device's BOM (bill of materials) cost at $271. Assuming that the PlayBooks it has were valued at that price, and have now been valued at zero, RIM is sitting on 1.79m unsold and unshipped PlayBooks.

That comes after it says it shipped 150,000 in the just-finished quarter, to add to the 200,000 in the previous quarter and the 500,000 in its inaugural quarter.

In other words, RIM seems to have ordered something like 2.65m PlayBooks. For the sake of simplicity, and because some of them won't have been the cheapest model with the $271 BOM, let's assume the real figure is actually 2.5m.

Not shipping, not selling

Of which it has only managed to ship (not sell) about one-third. Of which it has managed to sell… well, the company says in that announcement that more than the 150,000 shipped in the quarter were activated, so the swingeing price cuts must be kicking in at last. (Crackberry.com suggests that actually the figure is more like 5m units sitting in inventory. It all depends what value you take for the per-unit device.)

But the impact on RIM's cash position has been dire. Its second-quarter results (PDF) (to the end of August) show that its cash on hand dropped from $1.99bn at the end of May to $851m at the end of August. That's $1.14bn spent on something; most likely the PlayBook. (In its statement, RIM says that "The Company's cash balance at the end of the quarter increased by approximately $80 million to approximately $1.5 billion." It must be tweaking that by including long-term investments in its "cash balance". We don't think of long-term investments as cash, so it will be interesting, again, to see if RIM has simply revised the value of its long-term investments, even while its cash on hand has fallen.)

And now it says it will have to "increase promotional activity" - in other words, subsidise sales of - the PlayBook "to drive sell-through to end customers". That means more cash paid to retailers to artificially lower the price of the PlayBook.

The company also gave preliminary details of its third-quarter results, indicating that it shipped 14.1m BlackBerrys - a figure that represents a slight fall compared to the 14.2m of a year ago, but a substantial sequential increase from the 10.1m of the previous quarter. Those shipments would have been bolstered by the introduction of new phones.

But RIM also indicated that revenues for the quarter will be below its initial guidance of $5.3bn-$5.6bn. That would be a fall from the year-ago quarter, when revenues were $5.5bn. That, in turn, suggests that average selling prices for BlackBerrys has fallen from the year-ago period. We'll get more when the company reports its full results on 15 December.

So if we assign a sale price (to the channel) of $400 per device - impossible, because that was the retail price - then the PlayBook has contributed, over its life, about $340m to RIM's revenues. That's for a company which has brought in around $14.6bn in reeves in its past three quarters. Even if you price the PlayBook at $500 (which is above its selling price) the number shipped would mean it has only generated $425m, or around 3% of RIM's revenues in the past three quarters.

The PlayBook, in short, has been a flop from start to finish. It has so far cost the company around $1.6bn (the fall in cash plus the write-off) and it hasn't finished.

How did RIM get it so wrong? That's an interesting question. Announced just over a year ago, and the subject of a great deal of hype (RIM's co-CEO Jim Balsillie insisted in January that companies were so excited by the prospect they were delaying iPad purchases), the only thing that the PlayBook seemed to have going for it was that RIM had a great name for security and for accessibility. There was the promise made in February, even before the first one had launched, of an update in the summer - two 4G versions of the PlayBook - also never materialised. (It said in February that they would feature "support for LTE and HSPA+ high speed wide area wireless networks.")

But the software has been late, and RIM's reputation for solidity came unstuck after a series of outages in October, for which it is taking another charge of $50m.

Why, RIM, why?

My own guess? RIM was stampeded by the launch of the iPad into doing its own tablet, because it lost out so badly to the iPhone when that was launched (even though its business thrived on the back of the smartphone boom). In 2007, Balsillie was all but instructed by Vodafone (which had missed out on selling the iPhone in Europe to Telefonica) to build a touchscreen BlackBerry. Voila! The Storm, released in late 2008. It was awful, and left RIM behind in the game.

So when the iPad came out, RIM decided to get ahead of the game. Unfortunately, it didn't get ahead in the right part - the "persuading people to buy your product rather than someone else's" part. (Not to mention the "building your product on a just-in-time basis rather than optimistic three-month forecast" part.) The PlayBook isn't substantially worse than many of the 7in Android tablets out there, apart from having even fewer apps. But there's no reason to buy it ahead of an iPad, if a tablet is what you want.

And there goes another $1.5bn, tossed on the tablet pile, to go with HP's $2bn burnt on the TouchPad. Tablets are turning out to be money-munching monsters for some companies. At least when companies went into making would-be iPod killers it didn't murder them like this.

Woe is the stock

The stock market has completely lost patience with, and faith in, RIM. Its stock has fallen to $16.72 - the same level as May 2004, when it was selling fewer than a million handsets per quarter, though it was at least profitable; when you include the write-offs from inventory and the service outage, the one just past will be a loss-making quarter.

We'll remind you of what Horace Dediu uses as his rule of thumb for the mobile business: if you make a loss, even for one quarter, then you never come back to your former position in terms of market share or profit. So far it has held true across more than a dozen companies which have either exited the phone market or lost their independence after falling into loss.

The prognosis for RIM, therefore, isn't happy. Stock price on its own doesn't mean anything to the company; it doesn't affect how much money it has in the bank, nor in the short term how easy it is to get money, nor how good or bad its products are. The stock price is just a guess at how much money the company will make in the long term.

Right now, the market says that RIM's market capitalisation - its total profits in its future life - is $8.71bn. Subtract the $1.5bn of cash, and you have profits for its life forecast at $7.2bn. That's somewhere between 21 quarters (based on the profits in June-August) and eight quarters (based on the profits in December-February).

Either way, the numbers say RIM isn't long for this world if it doesn't shape up. The PlayBook? It's harmed the company enough. Time to let it go and focus on the smartphones, RIM's oldest, and best, business.

Protect Kids’ Health, Bees and Clean Water in 2012

(Beyond Pesticides, December 6, 2011) After three decades, we are in deep gratitude to our members for their continued support, as well as individuals who enjoy our online resources, like the Daily News Blog, or those who have joined us through online efforts to defend clean water from pesticides, get the antibacterial triclosan out of consumer products, or fight for strong organic standards as an alternative to pesticide-intensive and genetically engineered food.
That’s why we’re reaching out to ask you, as we do twice a year, to support our work and make a donation this holiday season.
Please consider a tax-deductible donation to Beyond Pesticides to help support work in these areas:
– Children’s Health. Children are even more vulnerable to pesticides than adults. Studies link exposure to ADHD, lower IQ and more. We fight to protect kids from pesticides at schools, in the community, and on the food they eat.
– Organic Food. Pesticides pose a hazard to your family, as well as farmworkers and the environment. Our work, including the online Eating with a Conscience guide, pushes for an end to chemical-intensive farming.
– Protecting Pollinators. We need pollinators to grow many of the foods we eat. The disappearance of honey bees identifies a serious flaw in our approach to the use of pesticides.
– Lawns and Landscapes. Huge quantities of toxic pesticides are being applied to lawns and parks for purely aesthetic purposes. Our work supports a nationwide transition from unnecessary chemical use to proven organic methods.
– Public Education. We provide support to grassroots activists, policy makers, and others by phone, online and in person. We also publish the quarterly magazine, Pesticides and You, and maintain an information-rich website.
For a donation of $150, we will send you a copy of the award-winning film Vanishing of the Bees. Thank you for your support. Donate here.

Stop South Korean Company from Helping Iran’s Nuclear Ambition!

A civic advocacy group called the United Against Nuclear Iran (UANI) has released an urgent request to the Daelim conglomerate of South Korea to stop continuing business with Iran. Daelim undergoes oil and gas projects with the Shiite regime of Iran that sponsors terrorism and proliferates nuclear weapons.

US Government Accountability Office raised a critical concern that Daelim made profits through illegal commercial activities with Iran. Energy business with Iran is violation of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), whose explicit goal is “to stop businesses from helping Iran develop its natural gas and petroleum sectors given the control exercised over those sectors by the Islamic Revolutionary Guard Corps (IRGC).” The IRGC is the Iranian government's branch in direct control of Iran's weapons of mass destruction programs, including its nuclear and ballistic missile programs. Daelim'snullifying Western sanctions against Iran's nuclear ambition. Iran constitutes the Axis of Evil along with North Korea. Therefore, Daelim ruins national security of South Korea itself.

In order to stop Iran’s dangerous project, sign the letter of protest from this link that will be sent to Daelim executives and US government officials. Thank you very much in advance for your kind cooperation commercialism is an act of .