Real disruption is here in mobile. And it’s growing

Slate’s Matthew Iglesias caught my attention last week with a provocative post claiming “someone needs to smash AT&T and Verizon” for real innovation to occur in wireless. Yglesias’s piece leads with the fact that Verizon charged him a $30 upgrade fee when he bought the iPhone 5S last week one year into his two-year contract. And, he estimates, his monthly payments over the course of those two years cover the initial cost of his subsidized handset plus 30 percent a year. Leaving Verizon to buy a new phone from a competing carrier, of course, would incur a hefty termination fee.

That kind of price-gouging is nothing new for carriers, of course. For years they have charged outrageous fees for SMS despite the fact text messaging barely taxes their data networks, and operators’ early termination fees have been so onerous they’ve drawn the attention of federal regulators.

They can get away with that stuff because the massive price of building and operating a mobile network is high enough to stifle almost any new competition, as Yglesias rightly notes. Apple and Google wrested some control from the carriers by building wildly popular app ecosystems, but after an initial disruption the OS providers have settled comfortably into their roles. So Yglesias calls for government intervention but opines that handset manufacturers must take on their carrier partners “to really fix these problems.”

The power of IP-based communications

Interestingly, Yglesias’s piece was published just a few days before FreedomPop launched a $99 smartphone that comes with a free basic monthly voice and data plan. As my colleague Kevin Fitchard reported, users can by the HTC Evo Design and receive 200 voice minutes, 500 texts and 500 MBs of data each month free, paying extra for any usage that exceeds those allotments.

FreedomPop can leverage the freemium model because it eschews the traditional cellular MVNO model in favor of an all-IP model. It buys 3G and 4G data in bulk from Sprint, then uses the modified handsets to route voice calls over data connections to drastically reduce its costs. FreedomPop uses Sprint’s WiMAX network whenever possible, falling back to CDMA when necessary. And it was founded by Skype co-founder Niklas Zennstrum, who understands how to build a hugely disruptive business using a freemium model.

As Fitchard noted, FreedomPop is the second U.S. business to launch an all-IP mobile voice and data service. TextNow launched a $19-a-month voice and data plan on two refurbished Samsung smartphones in August and, like FreedomPop, routes all its activity over Sprint’s 3G and WiMAX data networks. TextNow also provides free calls between its users.

Innovation is already benefiting consumers 

And there are other innovative new strategies and services emerging that could threaten the huge carriers that have long dominated mobile. T-Mobile is challenging the subsidized handset model, as Yglesias notes, in an effort to show consumers how much they truly pay for their devices over the course of a pricey two-year contract. The rise of third-party, over-the-top messaging apps is forcing carriers to rethink their ridiculous pricing strategies for SMS. And companies such as Open Garden are developing offerings that allow users to share connectivity, providing access to the best and most efficient networks and potentially lowering prices in a big way.

Neither FreedomPop nor TextNow offers the kind of sexy new handsets that will appeal to an iPhone owner, say, and their coverage areas and connection quality surely pale compared those enjoyed by most AT&T or Verizon customers. But France’s Free Mobile has demonstrated that an innovative upstart can use non-cellular technologies combined with cell networks to disrupt the mobile market and force prices down. That doesn’t necessarily mean federal regulators shouldn’t foster competition where they can – I’m inclined to think the Federal Communications Commission should do what it can to give Sprint and T-Mobile a bit of an advantage at next year’s incentive spectrum auction, for example – but it demonstrates that consumer-friendly innovation is occurring in mobile. Users who look just a little bit harder are already benefiting.