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Stratagem
 
GOOGLE INC.: THE NEXT FRONTIER – TELECOM
Google’s Telecom Power Grab Gambit
Google is Huge. Its m-cap of $201 Billion Proves it. And it can Easily Grow Bigger by Conquering The Communications Industry, in toto, by Becoming a Telecom Operator. Question is – should it take The Chance?
Issue Date - 03/02/2011
 
It was Google’s listing day at NASDAQ. The date – August 19, 2004. Google co-founder Larry Page & CEO Eric Schmidt were nervously busy in conversation, and most around them were more than pleased to allow the elaborately laid-out breakfast (with poached eggs perched on shiny pedestals, deliciously placed canapés and flatwares full of crème fraiche, besides others) help ease their anxiousness. The time: 9:24 am. The plan – in few minutes, the Macy’s suit-clad Page would Chair the opening of the market, then drive a few blocks north to Morgan Stanley Building on 1585 Broadway and watch investors play with the Google stock. The bell gonged and for those brief moments, nothing looked more glorious than the $100-valued stock, coded “GOOG”. “Congratulations, congratulations. It’s going to be a great success,” shouted NASDAQ President Rob Greifeld. Everything for Google, seemed to go as per plan. However, 10 minutes later, a commotion broke out. Two women wearing black skirts cried out for water & napkins. Reason: Page had landed himself on a plate full of Crème fraiche! Then flew a remark from Schmidt: “These things happen. We’ve seen worse.” It was as if he was expecting such a Page-act. But even he knew that this one, was not planned.

Not everybody agrees, but Page & Sergey Brin did not have their “Google” all planned out from day 1. And this has served them well. One day it was, in early 1999, when the two co-founders’ offer to sell their brainchild for $750,000 was turned down. Today, Google is worth $201.35 billion (as on Jan 18, 2011). And from investing millions on self-driven Robot cars, to risking $5 billion in a project in late-2010, to put in place a 350-mile-long undersea line to harness wind energy along the Atlantic seaboard, of late, the company has started laying wagers on strange cards. Trouble is – most of these plans appear “over-ambitious” and too futuristic. Question is – can it therefore move away from adventure, and invest in something more “planned”?

The answer – an obvious yes. After giving to the world the most successful mobile OS in recent times – the Android (with 25.6% of global share, powering 0.25 million new devices per day; says Goldman Sachs Analyst Fred Krom to B&E, “Google’s Android climbed from powering 5% of global handsets in 2009 to a high-teens percentage in 2010, outstripping Apple’s iPhone”), and having proved that it can manufacture handsets as well (the Nexus), Google could well be on its way to disrupting dynamics in the mobile industry, thereby becoming your next wireless carrier, and even bigger than the likes of Verizon & AT&T.

Google already has a low-cost voice telephony service in place in US – the Google Voice, where users are given their own unique telephone numbers. The very successful service was launched in May 2009. It spread like wildfire. Five months later, it had 1.4 million users, with 0.57 million using it every day. Experts claim that though the base has already moved into the 10 million plus zone (as of end-2010), only a small fraction of users actually pay for it (for ISD calls to telephones). So does this make for a profitable undertaking? The fact that the profitable Skype (bottomline of +$13.1 million in H1, 2010) has only 6% of “paid users” makes Google Voice’s case strong.

 
There are however some challenges. First, infrastructure, which it lacks. Explaining one disadvantage, New York-based Jordan Monahan, Analyst, Goldman Sachs, tells B&E, “Google could use Android to encourage the concept of a single portable contact which could shift from cellphone to fixed-line phone to PC, depending on one’s accessibility. But Google does not own last-mile connections, so the telecos could drive up the cost of last-mile access to render a Google calling-plan unattractive.” Even 4G spectrum is not something with which Google is operationally familiar. If Google is to match investments in infrastructure made by US’ #1 carrier Verizon (with 93.2 mn subscribers), which has spent more than $98.1 billion on it over the past decade (including $10 billion for 4G spectrum), Google will have to invest 41.5% of its revenues each year, on stitching together just the skeleton for providing mobile services. Expensive, but not out of reach, considering that at present the company has $30 billion in cash balance. Also, if required, it can easily raise billions by dilution of shares, considering that at current level of m-cap, the company has to dilute only 1% to raise $2.01 billion!

But there is the dark side as well. Currently, Google’s Android OS is a craze amongst mobile manufacturers. Being an open source software stack, it does not have the liberty to anger the likes of Verizon and AT&T. In short there could be an attack on Google’s popularity if it decides to rise in the telecom services market. The Federal Communications Commission still does not have “appropriate” net-neutrality rules in place for telecom operators, that can prevent them from blocking Google from their subscribers. Quite possible therefore, that a repeat of Verizon making Bing the default search platform on its new Android launches (instead of Google) and of Apple blocking Google Voice from iPhone users for 18 long months (post launch), can occur, if Google tries to become an all-integrated player. So what’s the way out for Google, for whom a new dream could well threaten much of the very present?

With millions across the world already familiar with Google, what the company could do to live its mobile carrier dream, is to take the middle path – become a mobile virtual network operator (MVNO; similar to Virgin Mobile which was acquired by Sprint). While speaking to B&E from Massachusetts, Charles King, President of Mindspring & Pund-IT Services adds, “At this point, with the market changing so quickly – via the rapid growth of smart phones and emerging tablets – I think Google is best served by remaining as it is and not becoming a Mobile Network Operator (MNO). It is a trusted OS/services partner, which is an enviable position to have in such a market. It could however try its hands at the MNVO model.”

Google should not apply for a mobile licence, not bid for spectrum or bother about infrastructure. All it has to ensure is to work on a retail format to connect directly with end users, strike roaming deals with current operators, distribute voice minutes and data traffic and tie-up with third-party app-providers. Given that Google has been a master at handling marketing and dealing with end-users in the past, it could live its mobile carrier dream as a “virtual” operator. Not that Google cannot anger competition and become the largest US telecom operator. Cash it has and time too. But it has to realise that the power of possessing nuclear weapons is in “not” detonating them. For now, Google should let the Android magic work wonders and according to plan.

Steven Philip Warner           

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