Google Strides To Disrupt Wireless Market

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Google Talks Principles But Strides To Disrupt Wireless Market
July 20, 2007

NEW YORK -(Dow Jones)- Google Inc. (GOOG) on Friday portrayed itself as a champion of consumers' unfettered access to the Internet, but demonstrated with a $4.6 billion promise that it sees profit in disrupting the telecommunications companies' hold on the wireless market.

The Mountain View, Calif., Internet giant stepped up its effort to persuade federal regulators to bust open competition in wireless services by promising to be a multibillion-dollar bidder in an important upcoming auction of wireless spectrum. But Google said it will participate only if the Federal Communications Commission embraces the network-openness principles it has advocated - and that incumbent U.S. wireless carriers like AT&T Inc. (T) and Verizon Communications Inc. (VZ) have fought.

In Washington and to the public, Google couched its move as part of its longtime effort to find and remove "obstacles that prevent the Internet from being available to everyone on the planet," as Chris Sacca, head of special initiatives at Google, put it in an official blog post early Friday. In the case of mobile access, he identified the problem as control of the airwaves by a handful of wireless carriers, resulting in limited consumer choice.

"Today, we're putting consumers' interests first, and putting our money where our principles are - to the tune of $4.6 billion," Sacca said. The sum is equal to the reserve price the FCC has proposed for the auction. Google said it thinks the auction under the terms it hopes for "will likely produce much higher bids."

What Sacca didn't say is that wireless carriers have steadfastly resisted efforts by Google, Yahoo Inc. (YHOO) and other Internet companies to offer consumers services on mobile phones. Internet companies see big growth opportunities in mobile advertising and have developed applications like Web search and email tailored for cellphones and their smaller screens.

But wireless carriers have maintained an iron grip over their customers, essentially dictating what content they can view, services they can enjoy and mobile handsets they can use. The model has kept carriers in control, stymied Internet companies' expansion plans and made handset makers beholden.

"Companies like Google may be frustrated by their inability to replicate the openness of the broadband environment in the wireless environment," says Rory Altman, a partner at consulting firm Altman Vilandrie & Co.

Google's answer has been to enlist Washington to help it circumvent the carriers' "Walled Gardens." The Web giant wants regulators to stipulate that the winner of the new spectrum give consumers the freedom to use whatever mobile applications they desire on any handset they want. It also wants the winner to sell wireless services to resellers on a wholesale basis and let Internet- service providers interconnect with the network.

Without device and application restrictions, Google would be able to push its products directly to customers without any interference and serve up lucrative advertising, a potentially significant future revenue stream that's also coveted by the carriers. The other two provisions "would ensure that entrepreneurs starting new networks and services will have a fair shot at success," Sacca said.

Verizon on Thursday said in a statement that "to rig the auction in any way ... would be a huge disservice to the nation. Corporate welfare for Google is bad public policy."

On a conference call with Wall Street analysts late Thursday, Google Chief Executive Eric Schmidt indicated that distributing Google products and getting advertising revenue in return is foremost in the company's mind.

"From a Google perspective, the most important thing is that there be an open network," Schmidt said. "There's really a direct connection between the open, interoperable network that we are now arguing for in [Securities and Exchange Commission] filings and so forth and the ultimate usage of Google services and applications, and of course, advertiser satisfaction."

Google Phone?

Google may also be interested in bringing its own handset to market, a subject of much rumor recently. The company is reportedly developing software for mobile phones that goes well beyond the applications it already offers in areas like search and maps. Schmidt on Thursday declined to comment on the rumors and said only, "We have looked pretty carefully at wireless, and we are sort of thinking about what we want to do there."

It isn't clear whether Google would be willing to run a network itself, a move that would be a huge departure from its business strategy to date. It could, of course, form a joint venture with one or more other companies, perhaps including an independent network operator, to ease its entrance into the carrier business.

If Google wants to offer its own wireless service, it will have to be patient. Even if it wins the auction, it wouldn't receive the spectrum until 2009, when the cable television providers have to give it up. It will likely take another two years to build a reliable enough network with enough geographic coverage to start running a service.

"There's nothing fast about this," Altman said, predicting Google wouldn't be able to launch a service until perhaps 2011.

Google would be aided, however, by the fact that the 700 megahertz spectrum being auctioned travels long distances. That would cut down on the number of cellular towers and radios that would have to be strung up and, thus, the time needed to build a network.

Mature Market

Though Google would presumably hit the ground running with innovative services for its mobile customers, it would enter a crowded, maturing market. The wireless industry is already experiencing slowing customer growth as cellphones have become a near-ubiquitous sight on the streets. And even as saturation nears, niche players like Walt Disney Co.'s (DIS) Disney Mobile and SK Telecom Co. (SKM) and EarthLink Inc.'s (ELNK) Helio have jumped into the fray.

"It is a very mature market," Altman said. "The wireless penetration growth is starting to slow, which is causing concern everywhere. It's hitting the weakest carriers the hardest."

Google's entry would most certainly spur action on the part of incumbents, forcing the telecom companies to better utilize their assets and innovate in ways Google couldn't. For instance, AT&T and Verizon could better integrate their wireless services with their fixed-line telephone and even television services.

Rival Yahoo, which has been mum about the spectrum auction, might also have a role to play. Google might be resistant to letting Yahoo on its network, even though that would run contrary to Google's openness "principles." However, Yahoo has strong partnerships with AT&T and Verizon, and could find ways to deepen those alliances, or even become an attractive acquisition for one of them.

For now anyway, "Yahoo benefits by drafting behind Google without upsetting any of its network partners," Altman says.

- Riva Richmond, Dow Jones Newswires; 201-938-5670; riva.richmond@dowjones.com

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com