Boom times for prepaid cell phone operators

repaid wireless providers are scooping up subscribers as cash strapped consumers downgrade to lower cost cell phone service.

First quarter earnings reports from MetroPCS Communications and Leap Wireless on Thursday provided further evidence that consumers are flocking toward no-contract, unlimited prepaid services. These carriers, which operate primarily in smaller urban areas, each reported they had nearly doubled their subscription rate compared to a year ago.

MetroPCS said its new subscriber additions increase 51 percent compared to the same quarter a year earlier. In total it added 684,000 new subscribers, bringing its customer base to 6 million. This was the third quarter in a row in which the company had a record breaking increase in subscribers.

Leap Wireless, which sells its service under the Cricket brand, also had a big quarter, increasing subscribership by 40 percent compared to the same quarter a year earlier. In total, the company added 493,000 new customers, ending the quarter with 4.3 million wireless subscribers. A year ago, Leap ended the first quarter with 3.1 million customers.

MetroPCS increased revenue 20 percent to $795.3 million and posted earnings of $44 million.

Leap actually posted a wider first quarter loss, mostly due to the company's expansion into new markets, such as Chicago and Philadelphia. The company lost $47.4 million, or 74 cents a share, compared a loss of $16.9 million, or 28 cents a share, in the first quarter of 2008. Revenue increased 25 percent to $587 million.

All of this news comes just days after Sprint Nextel reported huge subscriber gains in its prepaid service from its subsidiary Boost Mobile. Boost added about 764,000 customers to its service.

What all three services have in common is that they offer low-cost, prepaid plans with all-you-can-eat voice, text messaging, and Web browsing. The Boost Unlimited service, which launched in January, costs only $50 a month. And MetroPCs's and Leap's services are in the same neighborhood.

Based on these strong subscriber numbers, it appears that consumers are looking for more affordable cell phone plans. This is likely a direct result of the ailing economy, which has resulted in high unemployment throughout the country.

While it's true that cell phone service has become essential for most Americans, that doesn't mean consumers are willing to pay a lot of money for it. And as finances tighten, people are looking to reduce their monthly expenses by finding cheaper options for phone service. Prepaid service plans, which allow customers to pay in advance for service without signing a contract, provide a good alternative. And now the low-cost unlimited plans make it an easy choice even for wireless subscribers that talk and text a lot.

MetroPCS and Leap Wireless have each been offering their low-cost prepaid unlimited plans for quite some time, but as these carriers move into bigger markets, such as Chicago, Philadelphia, and New York, they are putting pressure on other wireless operators to match or beat their prices.

Sprint's Boost was the first to answer that challenge with its $50 unlimited plan. Virgin Mobile followed with its own all-you-can-eat plan for $50 a month. And T-Mobile USA, owned by Deutsche Telekom, is also getting more aggressive with its prepaid cell phone plans.

The question now is whether the two biggest cell phone companies, AT&T and Verizon Wireless, which make millions of dollars in profits from postpaid subscribers, will also go after the prepaid market. And if they don't, will they slash prices on their postpaid contract service plans? AT&T is already rumored to be considering lowering the price of its iPhone service plan by $10 when the new iPhone comes out this summer.

Is Lala's DRM new way to lock up music?

Michael Robertson, the gadfly of digital music, is once again pestering rivals about their business practices.

Robertson--the controversial founder of MP3.com, Linspire, andMP3tunes.com--has accused Lala, of attempting to transfer control of its users music to the recording labels.

Robertson claimed last month on his personal blog that Lala had developed an "insidious new plot" to entice music fans to upload music to the company's servers, and then trap the music there by embedding digital rights management into the servers. This would enable Lala and the big music labels to exercise greater control over the tunes. He compared Lala's digital-locker service to a "roach motel," where songs check in but they can't check out.

Robertson's accusations generated little attention, possibly because he operates a competing site, MP3tunes.com. Both companies enable customers to store their music in digital lockers, and one competitor badmouthing another won't stop the presses. But with regard to his accusations about Lala and DRM, the best support for the claims comes from Lala.

Robertson directed CNET News to a patent owned by Lala called Network Based Digital Rights Management System. In the document, Lala describes the invention it patented.

"The system also allows for the 'revoking' of ownership of digital media. For example, if a user is known to have illegally shared a file, the copyright owner may choose to revoke their ownership."--Lala said in a patent document

"A network-based DRM system manages digital media assets stored in the network," Lala wrote. "The system provides consumers with access to the digital media from any device connected to an electronic network such as the Internet, while enforcing the intended uses by the copyright owners.

"The Web restricted nature of the offering," Lala wrote elsewhere in the filing, "means that the digital assets are at all times controlled by the system and thus result in minimal piracy."

The patent proves Lala is trying to develop a new type of DRM, according to Robertson. Instead of wrapping individual songs in DRM, Lala's plan calls for a network to act as a fortress that surrounds an entire music ecosystem. Lala CEO Geoff Ralston confirmed that Lala filed the patent but denied the company is trying to wrest control away from users.

"It's a patent around Web Songs," Ralston said.

Web Songs are one of the cornerstones of the company's latest business model. Lala, which scrapped two prior models, now offers three main features: MP3s unprotected by DRM can be purchased and download for rates comparable to iTunes. A second option offers users unlimited, ad-free streaming access to music they already own. The way this works is users allow Lala to scan their hard drives and preserve a list of the songs the person owns. Lala's system will then stream it's own copies of the songs to the user.This way users don't have to worry about losing their music to hard-drive meltdowns or misplaced music players.

Lala's last feature allows users to listen to streaming music--they don't already own--for 10 cents per song. Lala calls these Web Songs. One of the ways Web Songs are different than MP3s is they can't be downloaded to a portable device.

"A Web song by definition has a limited set of rights associated with it," Ralston said. "One right you don't have is the right to take it with you. It's not a portable song. Another right you don't have is to copy it. Everything has limited rights, even an MP3. You're not allowed to take an MP3, copy it and sell it."

Does DRM have some value?
Lala says Web songs offer users a chance to obtain streaming access to a song for the price of a grocery store gum drop. If customers later want to upgrade and buy an MP3 version of the tune, the dime is counted against the price of the download. To offer inexpensive Web songs in such a way, Ralston said that Lala had to promise the major recording companies to protect their music from piracy.

Michael Robertson found Lala's DRM patent and says it proves company is taking orders from record labels.

(Credit: Michael Robertson)

That makes sense. The problem is, however, the patent isn't restricted to Web songs, as Ralston said. In Lala's patent, under a section titled Overview of Present Invention, the company lists the many applications of its invention. Here, Lala describes the company's digital locker system exactly.

The patent indicates that Lala's DRM invention is designed to lock down music that its users already own. Lala's system doesn't allow users to listen to their own music via anything but a Web browser and the songs cannot be downloaded. Ralston argues that people can do all these things with the original music files they own.

But if Lala's users own music the company stores, why does Lala restrict it this way? Are these restrictions rooted in some technology limitation or do the major labels require them?

"We're trying to provide a way so that users can have more access to their music than they had in the past," Ralston said. "Look at the iPhone. I can't easily throw brand-new graphic cards into it. It's all closed up. But it's a much better consumer proposition. We're not acting as an agent of the record companies in any way except that we resell their goods. There's nothing nefarious there at all. We repackaged some stuff that we think provides a better consumer proposition."

Music sales have been falling for years and piracy is at least one of the main causes. Nonetheless, the four top record labels over the past year have appeared to give up on DRM as a piracy-busting strategy. This trend culminated in January when Apple announced it would strip DRM from the entire iTunes library. So, why then is Lala attempting to come up with a new DRM scheme?

In the patent, the company offers some clues.

Lala notes that DRM produced by Microsoft and Apple "suffered from lack of interoperability caused by competitive and licensing issues." Most DRM, Lala points out, can also be cracked or broken. Lala says in the patent that its DRM approach avoids these issues.

"A network-based approach protects against rampant piracy," Lala wrote. "By delivering the product directly from the network, only authorized users and devices can access the media. Access by users and devices is controlled on the Web and can be constantly adapted to changing technologies and market pressures."

Robertson claims that network DRM is simply the latest attempt by the recording industry to jerk control of music away from consumers. He said what may be most alarming about Lala's system is its potential to snatch away someone's songs.

"The system also allows for the 'revoking' of ownership of digital media," Lala wrote in the patent. "For example, if a user is known to have illegally shared a file, the copyright owner may choose to revoke their ownership of the digital media in the system, limiting the rights of such user to the media."

When asked about this, Lala's CEO was unapologetic.

"Is it controversial that a store has the right to terminate someone that steals from them?" he asked.

Intel and Novell take aim at Android with Moblin

Google's still-nascent efforts to dominate the mobile market, already reeling from Apple's surging iPhoneplatform, were dealt another blow on Thursday when Intel and Novell announced that they will collaborate to promote Intel's Moblin operating system, a rival Linux distribution for mobile devices.

Whereas Google is initially targeting smartphones with Android (though an Android-based Netbook has apparently been released), Intel is targeting Moblin at Netbooks.

Additionally, Android and Moblin aren't simply two different Linux distributions, in the way that Red Hat Enterprise Linux and SUSE Linux Enterprise Server are. Android and Moblin use Linux in different ways, as Dirk Hohndel, Intel's chief Linux and open source technologist, suggested to me:

Moblin is Linux for mobile devices, (and its) first focus is on Netbooks. Android is an (operating system) for phones that uses a Linux kernel...very different.

Novell's Justin Steinman, vice president of solution and product marketing, said in a follow-up conversation:

Moblin 2.0 is the first open-source Linux software stack and technology framework designed from the ground up for the Netbook device type. Essentially, Moblin plans to start at the Netbook layer of the stack, and then work its way down to the smaller mobile devices. Given Novell's strength in delivering desktops based on Linux, it made sense for us to collaborate closely with Intel to deliver the optimal user experience on Netbooks.

Given Apple's rising dominance in smartphones and Symbian's lingering power in other mobile devices, this seems like a smart, strategic move. The Netbook market is still wide open, with Apple currently disdaining to enter it and Microsoft bleeding cash to hold its ground against Linux.

Though Ubuntu made the first forays for Linux in the Netbook market, could it be Novell and Intel that end up dominating it?

Maybe. Maybe not. The one sure thing, at least for now, is that Microsoft may win the short-term Netbook war, but it still needs a long-term, winning game plan for mobile.

The mobile market is fascinating because it is uprooting long-held beliefs about how and where to compete in software. Intel, Google, and Apple, each fiercely contending for dominance, share a common strategy: they're investing in the operating system but planning to make their money elsewhere (Atom chips, in Intel's case; advertising and revenue-sharing with application vendors, in Google's; hardware and revenue-sharing with application vendors, in Apple's).

Such strategies stand in stark contrast to Microsoft, which persists in trying to monetize its mobile Windows platform.

Small wonder, then, that Microsoft is losing the mobile battle. It's fighting with the wrong ammunition.

Back to Google. While it seems clear that Intel's Moblin initiative is an attempt to fend off Google's looming Android threat, there's probably enough time for Intel and Novell to stake out a strong position in Netbooks that Google will struggle to overcome.

Regardless, the one player left out in the cold in all this activity is Microsoft. Google, Novell, Intel, and Apple are each putting hefty resources into winning the mobile market, but doing so in a way that undermines Microsoft's traditional approach of licensing only the software. Microsoft's Xbox experience suggests that it can do hardware right, but will it be able to catch up if it starts chasing its competition?

AMD reorg merges microprocessor, graphics units

Advanced Micro Devices has launched a reorganization that will see the chipmaker's microprocessor and graphics units merged into a single group.

The products group--one of four new groups announced Wednesday--will be headed by graphics chip executive Rick Bergman, who joined AMD after its $5.4 billion acquisition of graphics chip company ATI in 2006. The chipmaker said the other three groups would focus on technology, marketing, and customers.

"The next generation of innovation in the computing industry will be grounded in the fusion of microprocessor and graphics technologies," AMD CEO Dirk Meyer said in a statement. "With these changes, we are putting the right organization in place to help enable the future of computing."

The company also announced that Randy Allen, who oversaw processor and chipset development as senior vice president of AMD's Computing Solutions Group, is leaving the company. His departure comes one year after being elevated to that position in another companywide reorganization.

There was no indication of what Allen's plans are, but Meyer called Allen "an important engineering and business leader who has played a key role in many of AMD's most significant achievements in recent years."

The changes come as AMD tries to compete better with chip giant Intel in the aftermath of the botched roll-out of Barcelona, its first quad-core server processor. Hector Ruiz, then CEO of AMD, in 2007 blamed the chip's "complicated" design for the delay of more than six months before the chip was ready for release, causing AMD to lose market share and revenue to Intel.

In November, the troubled chipmaker announced its second round of layoffs in 12 months, part of plan announced in April 2008 to reduce its workforce by 10 percent.

Microsoft to defend its IE policies in closed-door antitrust hearing

The antitrust case involving Microsoft’s browser-bundling policies is continuing to wind its way through the European courts — with a closed-door hearing on the matter now slated for early June.

Microsoft officials are slated to present orally between June 3 and June 5 the arguments the company submitted in written form on April 28 to the European Commission (EC) regarding Opera Software’s complaint filed in December 2007 over Microsoft’s browser-bundling policies.

Here’s a quick recap of what’s going on.

Opera’s antitrust complaint had two parts: Opera charged that Microsoft’s policy of bundling IE with Windows hurt consumer choice. It also argued that Microsoft’s failure to comply with Web standards with IE resulted in a lack of browser interoperability.

The EC released its preliminary findings, charging Microsoft with abusing its dominant monopoly position, earlier this year. So far, the EC has not said what kinds of financial or other remedial actions it intends to require if it rules in Opera’s favor. As part of a previous antitrust case in the EU, via which Microsoft was found guilty of abusing its Windows monopoly, Microsoft was required to offer versions of Windows with Media Player removed and to pay billions of dollars in fines.

Since Opera filed its complaint, Mozilla, Google and members of the European Committee for Interoperable Systems have joined in to help back Opera’s case. Microsoft, for its part, added a new “remove Internet Explorer” option to the latest build of Windows 7 — a move that many industry watchers see as an attempt to blunt the potential impact of any kind of antitrust-related ruling.

Opera execs said last year that Opera is in favor of seeing Microsoft be required to distribute its competitors’ browsers via its Automatic Update mechanism and/or to bundle its compeitors’ browsers with Windows.

Microsoft currently has close to 68 percent of the worldwide browser marketshare, according to Net Applications. Microsoft’s biggest competitor for IE 8 is older versions of IE, rather than Firefox, Chrome, Safari, Opera or any other third-party browser.

What’s your guess as to what’s going to happen next in this case?  As I’ve said before, I think there is a case to be made that Microsoft’s browser-bundling policies have hurt competition. But I think it’s harder to prove Microsoft’s policies have hurt consumers.

Microsoft’s failure to keep IE up-to-date and release newer/better/faster versions in a timely manner has resulted in it losing a hefty chunk of marketshare in recent years. Would the market continue to “right” itself even if the courts don’t intervene? Perhaps….. I think the EC is going to intervene, however, given its past track record, and the result is not likely to be to Microsoft’s liking. What do you think?