We Built The Wrong Cellular Model

by Colin Berkshire

Colin here.

Oops. We built the wrong business model for the cellular industry.

When cellular was invented by the Bell System 35 years ago it was simply taken for granted that cellular service would be run by the Bell System as an extension of their “Natural Monopoly.” When regulatory pressure for competition became the rage in the 1980s the frequencies were split into an “A side” and a “B side” (regulated and unregulated.) Well, two competitors do not make for much competition.

Over time, new frequencies were added in direct ways such as PCS and in indirect ways (such as Nextel Paging Service.) Eventually we ended up with some competition, but not much. Mostly we ended up with a mess.

This mess was because we didn’t quite figure out how to create competition in the cellular business. We created something modeled after the wireline business monopoly.

What we should have done is create tower competition. That is, the towers should have been disconnected from the PSTN and the retail side. Here is how it would have worked.

Imagine a world where anybody could set up a cell tower. They just needed some land and a tower kit. The tower would be professionally installed and would be certified that it didn’t interfere with other towers.

Cellular service companies like Verizon would retail phones and “service” (which is basically just a phone number and billing). Any phone would be able to roam onto any tower. The tower operators would be paid for the tower capacity used. The more users, the more usage and hence the more income a tower operator would get.

As cellular service grew, more and more towers would appear and they would aggressively compete to be in the best locations to serve the most customers. There would be a plethora of competition.

Cellular service companies would pay the tower operators a usage fee which would be regulated to be fair, uniform, and equitable.

So what we would have are cellular service companies competing for retail customers and servicing them. And, tower operators would compete to be the best located and most available tower. The result: excellent service, low prices, and a free marketplace.

You know, come to think of it we could still move to this model. Why not require cellular companies to connect to micro-towers. Businesses could install micro towers in their windows, malls, and wherever. They could be paid by the gigabyte for traffic offloaded.

This is not entirely different from what happens in some Asian countries. There, your phone can have access to a hundred towers at any moment in time. The cell companies go to businesses on every block and offer the business free Internet service in exchange for installing a small window facing micro-tower (in a small plastic box). The cell company gets coverage and off-loading of their bigger towers for merely the price of an Internet connection. The business is happy to get a free Internet line. It’s a cheap win-win.